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,  2003

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

     For  the  transition  period  from _________________ to ___________________

                        Commission file number 000-28947

                                 SPACEDEV, INC.
                 (Name of small business issuer in its charter)

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

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

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

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

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

                                 None.     None.
Securities  to  be  registered  under  Section  12(g)  of  the  Act:

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

Check  whether  the Issuer (1) filed all reports required to be filed by Section
13  or  15(d)  of  the  Securities  Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the Registrant was required to file such
reports),  and  (2) has been subject to such filing requirements for the past 90
days.

     Yes  [X]          No  [  ]

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

State  issuer's  revenues  for  its  most  recent  fiscal  year:  $2,956,322

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 4, 2004 was $1.10, based on the last sale
price  of  $1.14  as  reported  by  the  NASD  Over  the Counter Bulletin Board.

As  of  March  4,  2004,  Registrant had outstanding 17,023,704 shares of common
stock,  its  only  class  of  common  equity  outstanding.

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


                                TABLE OF CONTENTS

PART  I                                                                        1
     ITEM  1.     DESCRIPTION  OF  BUSINESS                                    1
          Forward  Looking  Statements                                         1
          General                                                              1
          Business  Strategy                                                   4
          Products  and  Services;  Market                                     5
          Components  and  Raw  Materials                                      8
          Competition                                                          8
          Regulation                                                           9
          Employees                                                           10
          Intellectual  Property                                              10
     ITEM  2.     DESCRIPTION  OF  PROPERTY                                   11
     ITEM  3.     LEGAL  PROCEEDINGS                                          11
     ITEM  4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS         12
PART  II     13
     ITEM  5.     MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS    13
          Market  Information                                                 13
          Holders                                                             13
          Dividends                                                           14
          Equity  Compensation  Plan  Information                             14
     ITEM  6.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                  CONDITION AND RESULTS  OF  OPERATIONS                       15
          Overview                                                            15
          Selection  of  Significant  Contracts                               16
          Results  of  Operations                                             20
          Liquidity  and  Capital  Resources                                  28
          Critical  Accounting  Standards                                     29
          Cash  Position  and  Removal  of  Going  Concern                    30
          Recent  Accounting  Pronouncements                                  32
          Forward-Looking  Statements  and  Risk  Analysis                    34
     ITEM  7.     FINANCIAL  STATEMENTS                                       37
     ITEM  8.     CHANGES  IN  AND  DISAGREEMENTS  WITH  ACCOUNTANTS          37
     ITEM  8A.    CONTROLS  AND  PROCEDURES                                   38
PART  III                                                                     39
     ITEM  9.     DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS
                  AND CONTROL PERSONS; COMPLIANCE  WITH  SECTION
                  16(a)  OF  THE  EXCHANGE  ACT                               39
          Significant  Employees                                              43
          Committees Of The Board Of Directors And Meeting Attendance         43
     ITEM  10.     EXECUTIVE  COMPENSATION                                    44
          Executive  Officer  Compensation                                    44
          Director  Compensation                                              45
          Employment  Agreements                                              46
          Employee  Benefits                                                  47
          Section  16(A)  Beneficial  Ownership  Reporting  Compliance        47
     ITEM  11.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
                   AND MANAGEMENT                                             49
     ITEM  12.     CERTAIN  RELATIONSHIPS  AND  RELATED  TRANSACTIONS         51
     ITEM  13.     EXHIBITS  AND  REPORTS  ON  FORM  8-K                      52
     ITEM  14.     PRINCIPAL  ACCOUNTANT  FEES  AND  SERVICES                 54
     SIGNATURES                                                               55
     CERTIFICATION  OF  CHIEF  EXECUTIVE  OFFICER                             57
     CERTIFICATION  OF  CHIEF  FINANCIAL  OFFICER                             59
     CONSOLIDATED  FINANCIAL  STATEMENTS                                     F-1

                                     PART I

ITEM  1.     DESCRIPTION  OF  BUSINESS

FORWARD  LOOKING  STATEMENTS

The  following  discussion  should  be  read  in  conjunction with the Company's
consolidated  financial statements and the notes thereto and the other financial
information  appearing  elsewhere  in  this document.  Readers are also urged to
carefully  review  and consider the various disclosures made by us which attempt
to advise interested parties of the factors which affect our business, including
without  limitation  the  disclosures  made  under  the  caption   "Management's
Discussion  and  Analysis  of Financial Condition and Results of Operations", in
our  General Registration Statement on Form 10SB12G/A filed January 28, 2000 and
in  our  other  periodic  reports (e.g., Form 10-KSB, Form 10-QSB and Form 8-K).

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

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

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

GENERAL

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

                                   1
<PAGE>

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

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

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

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

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

                                   2
<PAGE>

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

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

In  November  1999, we won a $4.9 million mission contract by the Space Sciences
Laboratory  ("SSL")  at  UCB.  We  were competitively selected to design, build,
integrate,  test  and  operate, for one year, a small NASA-sponsored scientific,
Earth-orbiting  spacecraft  called  CHIPSat.  CHIPSat  is  the  first  and  only
successful  mission of NASA's low-cost University-Class Explorer ("UNEX") series
to  date.  Due  to  additional  NASA  and  customer reviews, additional work and
schedule  extensions,  the  CHIPSat  contract award was increased by $600,000 on
June 15, 2001 and again by $1.2 million on November 28, 2001, bringing the total
contract  value for design and build to approximately $6.8 million. An extension
of  the original contract based on our successful launch and orbit status in the
amount  of  approximately  $400,000  was awarded to us for one year of satellite
operations.  CHIPSat  launched  as  a  secondary payload on a Delta-II rocket on
January  12,  2003.  The  satellite,  the  world's first orbiting Internet node,
achieved  3-axis  stabilization,  meaning it was pointing and tracking properly,
with  all  individual  components  and  systems  successfully  operating, and is
continuing  to  work  well in orbit after more than a year.  The CHIPSat program
generated  approximately  $2.1  million,  $3.2  million,  $1.7  million and $0.4
million  of  revenue  in  2000,  2001,  2002  and  2003,  respectively.

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

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

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

Both  of  those  contracts  were  successfully  completed.

                                   3
<PAGE>

In  September  2001,  Scaled  Composites awarded us a contract for a proprietary
hybrid  propulsion  development  program  for Scaled's "SpaceShipOne," valued in
excess of $1 million.  As a part of that program, we competed with another party
to  design  a  space  propulsion  system.  The entire contract, awarded upon the
submitted  designs,  was valued at approximately $2.2 million.  The contract was
indicative  of an increased demand for our hybrid motor technology and expertise
in  the  space  industry.  Work  on  this  project  generated approximately $1.2
million and $397,000 of revenue in 2002 and 2003, respectively.  In September of
2003,  SpaceDev was selected by Scaled Composites as the sole supplier of hybrid
propulsions  systems,  and  was  awarded  the  follow-on SpaceShipOne propulsion
contract.  We  generated approximately $115,000 of revenue in 2003 from this new
contract  and  related  engineering  change orders.  On December 17, 2003, which
corresponded  with  the  100th  anniversary  of  the Wright Brothers flight, our
hybrid  propulsion  system, which we believe is the world's largest of its kind,
aboard  SpaceShipOne,  successfully powered a pilot toward space on its historic
first  powered  supersonic flight.   After being released by the White Knight, a
carrier  aircraft,  the  SpaceShipOne Test Pilot flew the ship to a stable, 0.55
mach  gliding  flight  condition, started a pull-up, and fired our hybrid rocket
motor.  Nine  seconds  later, SpaceShipOne broke the sound barrier and continued
its  steep  powered ascent.  The climb was very aggressive, accelerating forward
at more than 3-g while pulling upward at more than 2.5-g.  At motor shutdown, 15
seconds  after  ignition,  SpaceShipOne  was  climbing  at a 60-degree angle and
flying near 1.2 Mach (930 mph).  The test pilot then continued the maneuver to a
vertical  climb,  achieving  zero  speed at an altitude of 68,000 feet.  This is
important because we are showing that the private sector can perform human space
flight  in  a  rapid,  safe  and inexpensive manner.  In addition, this historic
flight  is  the first human flight ever powered by hybrid rocket technology, and
we  provided  the  critical  hybrid  motor  components and technology to make it
happen.

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

On  April  30,  2002, the Company was awarded Phase I of a contract to develop a
Shuttle-compatible propulsion module for AFRL. We received an award for Phase II
of  the  contract on March 28, 2003.  We are using the project to further expand
our  MoTV technology and product line to satisfy government space transportation
requirements.  The  first  two phases of the contract have an estimated value of
approximately  $2.5  million,  of  which  $100,000  was awarded for Phase I.  In
addition,  Phase  II  can be expanded with an option, at the discretion of AFRL,
for  an  additional  $1  million, which we expect may be awarded by spring 2004.
Congress  has  already  appropriated  money  for  this  project.

BUSINESS  STRATEGY

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

Our  business  strategy  is  to:

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

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

-     Bid,  win  and  leverage  government  programs  to  fund  our Research and
Development  ("R&D")  and  product  development  efforts;

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

                                   4
<PAGE>

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

-     Produce  and  fly  commercial  missions,  in conjunction with partners and
investors,  throughout  the  inner  solar  system in the commercial beyond earth
orbit  "space";  and

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

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

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

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

-     Creates  barriers  to  entry  by  and  competition  from  competitors.

PRODUCTS  AND  SERVICES;  MARKET

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

-     Our  Products  -  Microsatellites  & Nanosatellites, BD-II Spacecraft Bus,
MoTV (Maneuvering and orbital Transfer Vehicle) and Hybrid Propulsion and Launch
Vehicle  Systems;

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

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

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

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

OUR  PRODUCTS
-------------

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

                                   5
<PAGE>

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

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

Hybrid  Rocket  Propulsion and Launch Vehicle System - We provide a wide variety
of  safe,  clean,  simple, reliable, cost-effective hybrid propulsion systems to
safely  and  inexpensively  enable  satellites  and on-orbit delivery systems to
rendezvous  and maneuver on-orbit and deliver payloads to sub-orbital altitudes.
Hybrid  rocket  propulsion is a safe and low-cost technology that has tremendous
benefits  for  current  and  future space missions. Our hybrid rocket propulsion
technology features a simple design, is restartable, is throttleable and is easy
to  transport,  handle  and  store.  We acquired some of our expertise in hybrid
propulsion  technology  from AMROC.  We are using this technology to develop the
responsive,  affordable  SpaceDev Streaker(TM) small launch vehicle under an Air
Force  contract.

OUR  SUBSYSTEM  PRODUCTS
------------------------

Miniature  Flight  Computer  ("MFC") - Our MFC is a high performance 300 million
instructions per second ("MIPS") general-purpose space-qualified flight computer
for  a wide variety of space vehicles. It is cost-effective, has about ten times
the  performance-to-power ratio of current flight computers and only uses 0.5 to
6  watts  of  power,  depending  on  its  tasks. Our MFC has successfully passed
manufacturing  and  environmental  testing  and  over  14  months  of   reliable
operations  in  low  earth  orbit  ("LEO"), and is ready for civil, military and
commercial  spacecraft  and  launch  vehicle  applications.

                                   6
<PAGE>

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

Mission Control and Operations Software ("MC-OS") - Our MC-OS performs satellite
command and control and data acquisition.  This general purpose software permits
direct command, control and data operations from any laptop computer anywhere in
the  world.  The  MC-OS  satellite  command  and  control  is  managed  via user
commands,  batched  command scripts and timed command scripts.  MC-OS components
include  direct, real-time interactive Telnet communications with the satellite,
file  transfer protocol ("FTP") for file transfer between the ground station and
satellite,  a  system  security  module  which assigns users a password, command
level  and  logs  all  user commands to disk, and a status window for monitoring
MC-OS  status.

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

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

OUR  SERVICES
-------------

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

                                   7
<PAGE>

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

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

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

COMPONENTS  AND  RAW  MATERIALS

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

COMPETITION

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

                                   8
<PAGE>

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

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

REGULATION

Our business activities are regulated by various agencies and departments of the
U.S.  government  and,  in  certain  circumstances,  the  governments  of  other
countries.  Several  government agencies, including NASA and the U.S. Air Force,
maintain  Export Control Offices to ensure that any disclosure of scientific and
technical  information  complies  with the Export Administration Regulations and
the International Traffic in Arms Regulations ("ITAR"). Exports of the Company's
products,  services  and  technical  data  require  either  Technical Assistance
Agreements  ("TAAs") or licenses from the U.S. Department of State, depending on
the  level  of  technology  being  transferred. This includes recently published
regulations restricting the ability of U.S.-based companies to complete offshore
launches,  or  to  export certain satellite components and technical data to any
country  outside  the  United  States. The export of information with respect to
ground-based sensors, detectors, high-speed computers, and national security and
missile  technology  items  are  controlled  by  the Department of Commerce. The
government  is very strict with respect to compliance and has served notice that
failure  to  comply with the ITAR and/or the Commerce Department regulations may
subject  guilty  parties  to  fines  of  up  to $1 million and/or up to 10 years
imprisonment per violation. The failure of the Company to comply with any of the
foregoing  regulations  could  have  serious  adverse effects as dictated by the
rules  associated  with compliance to the ITAR regulations. Also, our ability to
successfully market and sell into international markets may be severely hampered
due  to  ITAR  regulation requirements. Our conservative position is to consider
any  material  beyond  standard  marketing  material  to  be  regulated  by ITAR
regulations.  This  year  we  began  an  active  and  comprehensive internal and
external  ITAR  training  program  provided by our regulatory consulting firm, Q
International  Group,  and  the  Society for International Affairs, both for our
employees and our Empowered Official, Mr. Slansky. We also introduced in 2003 an
Internal  Export  Compliance  Control  Program  for defense articles and defense
services  controlled  by  the  U.S.  Department  of  State  under  ITAR.

                                   9
<PAGE>

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

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

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

EMPLOYEES

At  December  31,  2003,  we employed approximately thirty (30) persons full and
part-time,  most of whom are aerospace, mechanical and electrical engineers.  We
expect  to hire other personnel as necessary for completion of projects, product
development, quality assurance, sales and marketing, finance and administration.
In addition, due to the nature of our business, we anticipate that it may become
necessary  to  lay  off  employees  whose work is no longer required to maintain
operations  in  order  to  prevent cost overruns.  We do not have any collective
bargaining  agreements with our employees, and we believe our employee-relations
are  good.

INTELLECTUAL  PROPERTY

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

                                  10
<PAGE>

In  August  1998,  we acquired a license to intellectual property (including two
patents  and  trade  secrets)  from an individual who had acquired them from the
former  AMROC,  which specialized in hybrid rocket technology.  We are obligated
to  issue  warrants  to  this  individual to purchase a minimum of 100,000 and a
maximum  of 3,000,000 shares of our common stock over ten years beginning at the
inception of the agreement, depending on our annual revenues directly related to
sales  of  hybrid  technology-based   products  from  the   original  technology
acquisition.  To  date,  we  have issued warrants to purchase a total of 100,000
shares  of  our  common  stock  under  the  agreement.

ITEM  2.     DESCRIPTION  OF  PROPERTY

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

We  originally purchased our headquarter facility in December 1998, and as noted
above  we  sold  the facility and entered into a sale-leaseback in January 2003.
The  rent is approximately $25,700 per month with a 3.5% COLA increase annually.
We are responsible for property tax and liability insurance on the facility.  We
were  required  to  make an advance payment in the form of a security deposit of
approximately  $25,700,  which  we  carry as an asset on our balance sheet.  Our
Chief  Executive  Officer,  Mr.  Benson, provided a guarantee for the leaseback.
[See  Notes  2  and 9(c) to our consolidated financial statements for additional
information.]  The original purchase price of the facility was $1.1 million, and
the  selling  price  of the facility was $3.2 million.  The total debt repayment
from the transaction was approximately $2,407,000.  The approximate net proceeds
to  us  for  working  capital  purposes  was  $636,000.

ITEM  3.     LEGAL  PROCEEDINGS

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

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

                                  11
<PAGE>

Because collection of the attorney and arbitration fees award is not assured, we
expensed  all  of our fees related to this matter.  Any recovery of fees will be
recorded  as  income in the period they are received.  The return of the 500,000
shares,  as  provided in the interim award issued on July 17, 2002, was recorded
in  the  third  quarter  of 2002 as a reversal of the original expense recorded.
See  "Results  of Operations" below.  In June 2003, we ceased efforts to recover
the  awarded  fees,  as  it  was  determined  that the cost to pursue collection
exceeded  the  likelihood  of  collection.

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

No  matters  were  submitted  to  a  vote  of our shareholders during the fourth
quarter  of  our  fiscal  year  ended  December  31,  2003.


                                  12
<PAGE>

                                     PART II

ITEM  5.     MARKET  FOR  COMMON  EQUITY  AND  RELATED  STOCKHOLDER  MATTERS

MARKET  INFORMATION

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

                                           QUARTERLY     QUARTERLY
                        QUARTER ENDING      HIGH         LOW
                          ---------         -----       -----
                          3/31/2002         $0.65       $0.48
                          6/30/2002         $0.64       $0.43
                          9/30/2002         $0.52       $0.30
                         12/31/2002         $0.50       $0.29
                          3/31/2003         $0.55       $0.41
                          6/30/2003         $0.75       $0.33
                          9/30/2003         $1.80       $0.55
                         12/31/2003         $1.15       $0.81
                          3/31/2004         $1.85       $0.92


HOLDERS

As  of March 4, 2004, there were over 200 holders of record of our common stock.
We  estimate  the total number of beneficial owners of our common stock to be in
excess  of  2,500  holders.  We  believe that the number of beneficial owners is
substantially  greater  than  the number of record holders because a significant
portion of our outstanding common stock is held in broker "street names" for the
benefit  of  individual  investors.

                                  13
<PAGE>

DIVIDENDS

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

EQUITY  COMPENSATION  PLAN  INFORMATION


<TABLE>
<CAPTION>



EQUITY COMPENSATION PLAN INFORMATION


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

Plan category. . . . . . . . . . . .  Number of securities         Weighted-average     Number of securities
                                      to be issued upon            exercise price of    remaining available for
                                      exercise of outstanding      outstanding          future issuance under
                                      issuance options, warrants   options, warrants    equity compensation plans
                                      and rights                   and rights           (excluding securities
                                      reflected in column (a))
Equity
compensation plans . . . . . . . . .                    3,124,807  $              0.93                   1,022,891
approved by
security holders
Equity . . . . . . . . . . . . . . .                    2,500,000  $              2.00                           0
compensation plans
not approved by
security holders
Total. . . . . . . . . . . . . . . .                    5,624,807  $              1.47                   1,022,891
------------------------------------  ---------------------------  -------------------  --------------------------
</TABLE>

                                  14
<PAGE>

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

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

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

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

OVERVIEW

We  are engaged in the conception, design, development, manufacture, integration
and  operations  of  space  technology  systems,  products and services.  We are
currently  focused  on  the  commercial  and  military  development  of low-cost
micro-satellites,  nano-satellites  and  related   subsystems,   hybrid   rocket
propulsion  for  space,  launch  and human flight vehicles as well as associated
engineering  and  technical  services  primarily  to  government  agencies,  and
specifically  the  Department  of  Defense. Our products and solutions are sold,
mainly on a project-basis, directly to these customers and include sophisticated
micro- and nano-satellites, hybrid rocket-based launch vehicles, Maneuvering and
orbital  Transfer  Vehicles  ("MoTVs")  as  well as safe sub-orbital and orbital
hybrid  rocket-based  propulsion  systems.  Although  we believe there will be a
commercial  market  for  our  micro-satellite  and  nano-satellite  products and
services  in  the long-term, the early adopters of this technology appears to be
the  military  and  our  "products" are considered to be the outcome of specific
projects.  We  are  also developing commercial hybrid rocket motors for possible
use  in  small  launch  vehicles,  targets  and  sounding rockets and small high
performance  space  vehicles  and  subsystems  for  commercial  customers.

                                  15
<PAGE>

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

SELECTION  OF  SIGNIFICANT  CONTRACTS

On March 31, 2004, we were awarded a $43,362,271, five-year, cost-plus-fixed fee
indefinite  delivery/indefinite  quantity  contract to conduct a micro satellite
distributed sensing experiment, an option for a laser communications experiment,
and  other micro satellite studies and experiments as required in support of the
Advanced  Systems  Deputate  of the Missile Defense Agency.  This effort will be
accomplished  in  a phased approach.  The total five-year contract has a ceiling
amount  of  $43,362,271.  The  principal  place  of  performance  will be Poway,
California.  We  expect  to complete the work under the contract before February
2009.  Government  contract  funds  will  not  expire  at the end of the current
government  fiscal  year.  The micro satellite distributed sensing experiment is
intended  to design and build up to six responsive, affordable, high performance
micro  satellites  to  support  national  missile defense.  The milestone-based,
multiyear,  multiphase  contract  has  an effective start date of March 1, 2004.
The  first  phase  is  expected  to  be  completed  this year and will result in
detailed  mission  and  microsat  designs.  The estimated first phase revenue is
$1.1  million.  The  overall  contract calls for us to analyze, design, develop,
fabricate,  integrate,  test,  operate  and support a networked cluster of three
formation-flying  boost  phase  and  midcourse tracking microsatellites, with an
option  to  design,  develop,  fabricate, integrate, test, operate and support a
second cluster of three formation flying microsats to be networked on-orbit with
high  speed laser communications technology.  The second phase is anticipated to
begin  September  1,  2004  and  run  through  2005.

On  October 2, 2003, we were awarded an exclusive, follow-on contract to provide
the hybrid rocket motor systems and components for SpaceShipOne.  We provide our
facilities,  resources  and  a  team  of  launch  vehicle  and hybrid propulsion
engineers  &  technical  personnel  in  continued  support  of  the SpaceShipOne
program.  The  contract  called  for  us  to use our best efforts to satisfy the
requirements of the SpaceShipOne program, based on our experience with the prior
phases.  We are to provide two sets of re-usable flight test hardware, including
a  bulkhead,  commonly  known  as  the SpaceDev bulkhead, machined in the flight
configuration,  a  main  oxidizer  valve  of  the  current design and associated
interfaces  and  plumbing  to  the  SpaceDev  bulkhead,  a motor control system,
igniter  housings, pressure transducers, and thermocouples as required for input
to  the  motor control system.  In addition, we are to produce and assemble test
motors,  including but not limited to, all expendable or semi-reusable materials
as  defined  by  our  baseline  design  motor.  We  are  also to provide on-site
engineering  test  support  and  post-test analysis.  Provisions are made in the
contract for minimum monthly payments in the event of customer schedule slippage
as  well  as  additional  levels  of  support  via engineering change orders, if
required.  The  total  contract  value  is estimated at $429,000.  Approximately
$115,000  of  revenue  was  realized  in the year ending December 31, 2003, with
approximately  $35,000  from engineering change orders and the remaining $80,000
from  the  contract.

                                  16
<PAGE>

On  July  24, 2003, we were awarded a contract by Lunar Enterprise of California
("LEC")  for  a first phase project to begin developing a conceptual mission and
spacecraft  design  for  a  lunar  lander program.  The unmanned mission will be
designed to put a small dish antenna near the south pole of the Moon.  From that
location  it  will  be in near-constant sunlight for solar power generation, and
should  be  able  to perform multi-wavelength astronomy while communicating with
ground  stations on Earth.  The contract value was $100,000 and was completed by
November  2003.  We believe that there is a possibility for a follow-on phase of
$140,000  to further analyze launch opportunities, spacecraft design, trajectory
possibilities, potential landing areas, available technologies for a small radio
astronomy  system,  and  communications  and  data  handling requirements.  This
phase,  if  awarded, would be targeted for a mid-2004 completion.  Although this
project  is currently unfunded, if the project were to proceed past the analysis
stage,  the total mission cost could exceed $50-$75 million.  Again, we can give
no  assurance  that  the  contract will be awarded to us.  Revenues for the year
ending  December  31,  2003  were  approximately  $70,000.

Also  on  July 9, 2003, we were awarded a second contract by the Missile Defense
Agency  ("MDA") to explore the use of micro-satellites ("microsats") in national
missile  defense.  Our  microsats are operated over the Internet and are capable
of pointing and tracking targets in space or on the ground.  This study explored
fast  response  microsat  launch  and  commissioning;  small,  low-power passive
sensors;  target  acquisition  and  tracking;  formation  flying  and local area
networking  within a cluster of microsats; and an extension of our proven use of
the  Internet for on-orbit command, control and data handling.  The contract was
successfully  concluded  on  February  27,  2004.  The  total contract value was
$800,000  with  approximately  $481,000  of  revenue realized in the year ending
December  31,  2003  and approximately $319,000 of revenue realized in the first
quarter of 2004.  The total value of our microsatellite studies for MDA was over
$1  million  in 2003.  This second contract is being considered an investigatory
phase  by  MDA.  (See  Note 11.  Subsequent Events to the Consolidated Financial
Statements.)

On  July  9,  2003, we were awarded a Phase I Small Business Innovation Research
("SBIR")  contract  by  Air  Force Research Lab ("AFRL") to design and begin the
development of the SpaceDev Streaker(TM) small launch vehicle ("SLV").  SpaceDev
Streaker(TM)  will  be  designed to responsively and affordably lift up to 1,000
pounds  to  Low  Earth  Orbit ("LEO").  The SpaceDev Streaker(TM) SLV concept is
based  on  a proprietary combination of technologies to increase the performance
of  hybrid  rocket  motor technology.  Hybrid rocket motors are a combination of
solid  fuel  and  liquid  oxidizer,  and  can   be   relatively   safe,   clean,
non-explosive,  and  storable,  and  can  be throttled, shut down and restarted.
This  contract  is  valued  at  approximately  $100,000,  is  a   fixed   price,
milestone-based agreement, which should be completed within one year. We believe
that  this  SBIR  will  move  into  Phase II valued at approximately $750,000 of
carry-forward  work  for  us,  plus  an additional $750,000 of funds provided by
Congress.  This  money  will  be  used to develop and test fire our large Common
Core  Booster  for  the  SpaceDev  Streaker(TM) launch vehicle.  We believe that
there  may be some interest by Congress in providing additional matching funding
to  expand  and  accelerate  the  scope  of  the  work; however, there can be no
assurance  that  such  work will be awarded to us.  Revenues for the year ending
December  31,  2003  were  approximately  $50,000.

                                  17
<PAGE>

On  July  9,  2003,  we  were  awarded  a Phase I contract to develop micro- and
nano-satellite  bus  and  subsystem designs.  This AFRL SBIR contract, valued at
approximately $100,000, will enable us to explore the further miniaturization of
our  unique  and  innovative  microsat  subsystems.  It  will  also enable us to
explore  ways  to  reduce  the  time  and cost to build small satellites through
further  standardization  in order to help define de facto standards for payload
hardware  and software interfaces.  The contract is fixed price, milestone-based
and  should  be  completed within one year.  We believe that this SBIR will move
into  Phase  II  valued  at approximately $750,000 of carry-forward work for us;
however,  there  can  be  no  assurance  that  such  work will be awarded to us.
Revenues  for  the  year  ending  December  31, 2003 were approximately $40,000.

On  April  30,  2002,  we  were  awarded  Phase  I  of  a  contract to develop a
Shuttle-compatible  propulsion  module  for  the AFRL.  We received an award for
Phase  II of the contract on March 28, 2003, and will use the project to further
expand  our  product  line  to   satisfy   commercial   and   government   space
transportation requirements.  The first two phases of the contract (including an
additional  add-on  option) are worth up to approximately $2.5 million, of which
$100,000 was awarded for Phase I, and approximately $1.4 million was awarded for
Phase  II.  AFRL  Phase  II  is  a  cost-plus  contract.  We  anticipate that to
complete  AFRL  Phase  II, additional time and funding will be required.  We are
currently  negotiating  with the AFRL for a small extension of Phase II in order
to  complete the work, which we anticipate will be granted in the second quarter
of  2004.  In  addition  to  the Phase I and Phase II awards, there is an option
worth  approximately $1 million pending initiation.  The option has been awarded
and  work  will begin once certain milestones are met to the satisfaction of the
AFRL  project manager. The additional funding to complete AFRL Phase II may come
from the $1 million option; thereby, requiring a reduction in the original scope
of  the  option.  We  anticipate a successful resolution to the AFRL II contract
extension.  Revenues  for  the  year ending December 31, 2003 were approximately
$29,600  for  Phase  I  and  $997,000  for  Phase  II.

On  June  18,  2001,  we entered into a relationship with two individuals (doing
business as EMC Holdings Corporation ("EMC")) whereby EMC was to provide certain
consulting  and  advisory services to us.  EMC received the first installment of
500,000  shares  of  our  common  stock on June 26, 2001.  Total expense for the
initial  stock  issuance  through September 30, 2001 was approximately $455,000.
Pursuant  to a demand for arbitration filed by us on November 7, 2001, we sought
the  return  of  all  or  a  portion  of  the  shares issued to EMC. Following a
three-day  arbitration  in May and June 2002, on July 17, 2002, an interim award
was  issued  in  favor  of  us  against  EMC, ordering the return of the initial
installment  of our 500,000 shares and denying EMC's own claim for $118,000.  On
October  22,  2002, a tentative final award was issued in our favor including an
award  of  approximately  $83,000  in  attorney and arbitration fees to us.  The
tentative  final  ruling  became  effective  on  October  29, 2002, and has been
submitted  to  the  Superior  Court  of  California, Orange County, for entry of
judgment.  Because  collection of the attorney and arbitration fees award is not
assured,  we  expensed  all of our fees related to this matter.  Any recovery of
the fees will be recorded as income in the period they are received; however, at
this  time, we do not expect any recovery and in June 2003, we ceased efforts to
recover  the  awarded  fees,  as  it  was  determined  that  the  cost to pursue
collection  exceeded  the  likelihood  of collection.  The return of our 500,000
shares,  as  provided in the interim award issued on July 17, 2002, was recorded
in  the  third  quarter  of 2002 as a reversal of the original expense recorded.
Because  the  original  expense  was  not recorded as an extraordinary item, the
reversal  of  the  expense  did  not  qualify  as  an  extraordinary  item.

                                  18
<PAGE>

In  September  2001,  we  were  awarded  a contract for a proprietary propulsion
research program (for what is now called Scaled Composites' SpaceShipOne) valued
at  approximately  $1.6  million.  Total revenue was extended to $1.8 million in
April 2002 and the contract expired on July 31, 2003, after all work on Phase II
was  completed.  As  a  part  of this commercial propulsion program, we competed
with  another  vendor  to  design  a hybrid propulsion system.  On September 19,
2003,  we  won  the  competition  and were awarded an exclusive contract for the
proprietary components and technology to power the hybrid rocket motor.  The new
total  contract  value is estimated to be approximately $650,000.  Revenues from
this  contract  during  the  year  ending  December  31, 2003 were approximately
$80,000  and  we  anticipate  that  the contract will continue providing revenue
opportunity  for us through 2004.  In addition, there have been several time and
materials  engineering work orders issued to support the ongoing program, during
2003  we  received  approximately  $35,000 in revenue from these work orders and
expect  continuation  of  this  work  during  2004.

In  April  2001,  we were awarded one of four $1.0 million contracts from NASA's
Jet Propulsion Laboratory in Pasadena, California. As part of a Boeing-led team,
we  participated  in  a  study of the options for a potential Mars sample return
mission  in  2011. The contract ran from April through October 2001. Our revenue
from  this  contract  in  2002 was approximately $7,000 and there was no revenue
from  this  contract  in  2003.

In  November  1999,  we won a $4.9 million turnkey mission contract by the Space
Sciences  Laboratory  ("SSL") at UCB.  We were competitively selected by UCB/SSL
to  design,  build,  integrate,  test  and  operate,  for  one  year,   a  small
NASA-sponsored scientific, Earth-orbiting spacecraft called CHIPSat.  CHIPSat is
the  first  and  only  successful  mission  of  NASA's low-cost University-Class
Explorer  ("UNEX") series to date.  CHIPSat launched as a secondary payload on a
Delta-II  rocket  on  January   12,   2003.  The   satellite   achieved   3-axis
stabilization,  meaning  it  was  pointing  and  tracking  properly,  with   all
individual  components  and  systems successfully operating and is continuing to
work  well in orbit after one year.  In 2000, we reviewed the contract status at
year-end and determined that the total estimated costs at the end of the program
would  exceed  the  likely  revenue.  As  a  result,  we  accrued   a  loss   of
approximately  $860,000 based on the expected contract modification of $600,000,
which  was  approved  on June 15, 2001.  On November 28, 2001, a second contract
modification  was signed with UCB, which added approximately $1.2 million to the
contract  as  well  as  an increase in contract scope.  This increased the total
contract  revenue  to  approximately $6.8 million and reduced the total expected
loss  on  the  contract  to  approximately $460,000.  During 2002, an additional
contract  modification  for  approximately  $400,000  was  signed,  which   also
increased  the  contract  value  and  increased the scope of the contract to the
current  value  of  the  CHIPSat  project of approximately $7.4 million, thereby
increasing  the  total  expected loss to approximately $514,000.  In retrospect,
some  of  the  CHIPSat  expenses  creating  the loss could have been recorded as
research  and development costs associated with our ongoing satellite design and
development  programs.  As  of  December 31, 2003, the total contract costs were
expended.  Revenues  for  the  years  ending  2003  and  2002 were approximately
$356,000  and $1.7 million, respectively.  The original support contract expired
on December 31, 2003.  CHIPSat is still operating successfully and providing UCB
with  new  and  interesting  data.  UCB  requested  to extend the program and we
recently  negotiated a new time and materials contract in the form of a purchase
order  with  UCB  for  continuing  support  of  this  project.

                                  19
<PAGE>

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

RESULTS  OF  OPERATIONS

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

         YEAR ENDED DECEMBER 31, 2003 -VS.- YEAR ENDED DECEMBER 31, 2002

During  the  year  ending  December  31, 2003, we had net sales of approximately
$2,960,000  as  compared  to  net sales of approximately $3,370,000 for the same
period in 2002.  Sales declined primarily due to government delays in finalizing
the follow-on contracts for AFRL and MDA and to customer delays on SpaceShipOne.
Sales in 2003 reflected the substantial completion of CHIPSat and the completion
of the original SpaceShipOne contract, AFRL Phase I and MDA Phase I, while a new
exclusive  proprietary  propulsion  contract (SpaceShipOne), began on October 2,
2003,  a  new  contract with MDA began on July 9, 2003, a new contract with AFRL
began  on  July  9, 2003 and a new contract with Lunar Enterprises began on July
24, 2003.  The total value of the MDA, AFRL and Lunar Enterprises contracts were
$800,000, $1.4 million and $100,000, respectively.  Revenues for the year ending
December 31, 2003 were comprised of approximately $29,600 and $997,000 from AFRL
Phase  I  and  II, respectively, $397,000 and $115,000 from the original and new
exclusive  proprietary  propulsion   contracts   (SpaceShipOne),   respectively,
$250,000  and  $481,000 from MDA Phase I and II, respectively, $356,000 from the
CHIPSat  program,  $100,000 from the contract by Lunar Enterprises of California
and  approximately  $220,400 from all other programs.  During the same period of
2002,  sales  were  comprised  of  approximately  $1.7  million from the CHIPSat
program,  approximately  $1.2  million from the original SpaceShipOne propulsion
development  program,  approximately  $300,000  from  the  completion   of   our
outstanding  government  grants,  approximately $70,000 from Phase I of the AFRL
project  and  approximately  $130,000  from  all  other  programs.

                                  20
<PAGE>

For  the  year  ending  December  31,  2003,  we  had costs of sales (direct and
allocated  costs  associated  with   individual  contracts)   of   approximately
$2,415,000,  or 82% of net sales, as compared to approximately $3,348,000 or 99%
of net sales, during the same period in 2002.  The decrease in cost of sales was
primarily  due  to  a   lower  overall   cost  structure,  combined   with   the
implementation  of  stronger  cost  controls  and  project monitoring.  Also, we
altered our cost allocation method in the second quarter of 2003 as we completed
CHIPSat,  our  main  fixed price contract at the time, and began work on our new
AFRL  and  MDA  cost plus contracts.  We continue to focus efforts on developing
project  management  skills and reports to assist in the efficient and effective
management  of  our  projects.  The  gross margin percentage for the year ending
December  31,  2003  was  18%  of net sales, an increase of 16% of net sales, as
compared  to  2%  of  net  sales  for  the  period  in  2002.

We  experienced  an  increase  of approximately $1,364,000 in operating expenses
from  approximately $66,000, or 2% of net sales, in the year ending December 31,
2002  to  approximately  $1,430,000,  or  48%  of net sales, for the year ending
December  31,  2003.  Operating  expenses  include  general  and  administrative
expenses  ("G&A"),  marketing  and  sales  expenses and research and development
expenses  as  well  as  stock  and stock option based compensation expenses.  In
2002,  we  experienced  a  one-time  reversal  for  the EMC transaction (see EMC
Holdings  Corporation transaction in MD&A Overview Section above).  The increase
in  operating  expenses  for  the  year  ending  would  have  been approximately
$905,000,  rather  than the stated $1,360,000 increase, without the one-time EMC
reversal.  The  following  comparisons  are  based  on  total operating expenses
excluding  the  effects  of  the  one-time  EMC  reversal.

-     Marketing  and  sales  expenses  accounted  for  approximately  15% of the
increase in operating expenses, from approximately $258,000, or 8% of net sales,
for  the year ending December 31, 2002, to approximately $395,000, or 13% of net
sales,  during the same period in 2003, mainly due to our decision to expand our
marketing and sales department and add a Vice President of Marketing and Product
Development.  Although  our  Vice President of Marketing and Product Development
is  no  longer  with  us,  our  CEO, Mr. Benson is leading our marketing & sales
efforts  and  most  of  his  expenses  are  being  charged  to  this department.

-     Research  and development ("R&D") expenses accounted for approximately 31%
of  the  increase  in  operating  expenses.  We  began incurring R&D expenses of
approximately $281,000, or 10% of net sales, during the year ending December 31,
2003.  Approximately  $192,000  of  R&D was in connection with our hybrid rocket
propulsion  design system and technologies and the remaining $89,000 was part of
our  satellite  bus  design  and  development.

-     Approximately 1% of the increase in operating expenses came from stock and
stock  option  based  compensation expense.  During the year ending December 31,
2003,  we  had  an increase in stock and stock option based compensation expense
from  approximately  ($452,000), or (14%) of net sales, in 2002 to approximately
$9,000  or  0%  of  net sales during the same period in 2003.  This increase was
mainly due to the reversal of stock compensation from the EMC arbitration ruling
as  noted  above.

-     G&A  expenses accounted for approximately 53% of the increase in operating
expenses.  The increase in G&A expenses from approximately $261,000 for the year
ending  December  31, 2002 to approximately $746,000 for the same period in 2003
was  primarily  due  to new rent charges of approximately $291,000 (we owned the
building in 2002 and incurred interest expense on loans but not rental payments)
plus one-time revolving credit facility expenses of approximately $42,000 and an
increase  in  G&A  labor expense with the hiring of our Chief Financial Officer,
offset  by a reduction in G&A labor expense of $92,000 primarily due to the loss
of  our  Vice  President  of  Operations.

                                  21
<PAGE>

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

-     Interest  expense  for  the  year  ending  December  31, 2003 and 2002 was
approximately  $91,000,  or  3%  of net sales, and $263,000, or 8% of net sales,
respectively.  The  decrease  was  due to the building sale on January 31, 2003,
which  eliminated  building  debt  and  reduced  overall  interest  on the notes
associated  with  the  building.  We continue to pay interest expense on certain
capital  leases  and settlement notes.  In addition, we accrued interest expense
related  to  our  related  party  note, convertible debentures and our revolving
credit  facility.  In  the  years ending December 31, 2003 and 2002, the accrued
interest  on  our  related  party  note  was  approximately  $47,000 and $45,000
respectively.  We also accrued and paid approximately $18,000 of interest on our
convertible notes and accrued approximately $14,000 of interest, $42,000 of fees
and $126,000 of non-cash loan fees on our revolving credit facility for the year
ending  December  31,  2003.

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

-     We  recognized  approximately $107,500 of the deferred gain on the sale of
the  building  during  the year ending December 31, 2003 and we will continue to
amortize  the  remaining  deferred  gain  of   approximately   $1,065,000   into
non-operating  income  over the remainder of the lease.  In relation to the gain
we  received  on  the building, we also accrued an income tax payable expense of
$40,000  at  March  31,  2003  of which none remained at December 31, 2003.  The
reduction of the income tax payable was due to a change in estimate based on the
loss  we  experienced  during  the  year.

-     We  realized  loan  fees  related  to  our  revolving  credit facility and
expenses  related  to  the conversion of notes to common stock below fair market
value  of  approximately  $258,000  for  the  year ending December 31, 2003.  We
anticipate  additional expenses related to similar note to equity conversions in
the  quarters  ahead.

During  the  year  ending  December  31,  2003,  we  incurred  a  net   loss  of
approximately  $1,246,000,  or  42%  of  net  sales,  compared  to a net loss of
approximately  $376,000,  or  11%  of  net  sales,  for the same period in 2002.
During the year ending December 31, 2003, we incurred an EBITDA (earnings before
interest  taxes  depreciation  and amortization) of approximately <$723,000>, or
<24 %> of net sales, compared to an EBITDA of approximately $372,000, or 10 % of
net  sales,  for  the  year  ending  in  2002.

                                  22
<PAGE>

The  following  table reconciles EBITDA to net loss for the twelve-months ending
December  31,  2003  and  2002,  respectively:

<TABLE>
<CAPTION>



FOR THE TWLEVE-MONTHS ENDING            DECEMBER 31, 2003   DECEMBER  31, 2002
<S>                                     <C>                 <C>
                                               (UNAUDITED)         (UNAUDITED)
                                        ------------------  ------------------
NET LOSS (INCOME). . . . . . . . . . .         (1,246,067)           (376,160)
--------------------------------------  ------------------  ------------------

Interest Expense . . . . . . . . . . .             91,493             263,480
Non-Cash Interest exp. (Debt Discount)            112,500             125,000
Gain on Building Sale. . . . . . . . .           (107,498)                  0
 Loan Fee - Equity Compensation. . . .            257,882                   0
Provision for income taxes . . . . . .              1,600               1,600
Depreciation and Amortization. . . . .            166,971             357,692
--------------------------------------  ------------------  ------------------
EBITDA . . . . . . . . . . . . . . . .           (723,119)            371,612
--------------------------------------  ------------------  ------------------
</TABLE>


EBITDA should not be considered as an alternative to net income (as an indicator
of  operating  performance)  or  as an alternative to cash flow (as a measure of
liquidity  or  ability  to  service  debt  obligations).  We believe that EBITDA
provides  an  important  additional  perspective  on  our operating results, our
ability  to  service  our  long-term obligations, our ability to fund continuing
growth, and our ability to continue as a going concern.  The increase in the net
loss  was mainly due to our quarterly losses in the first and second quarters of
2003  and less depreciation on our building, which we sold in January 2003.  The
first  two  quarterly  losses  were spurred by reductions in revenues due to the
substantial completion of CHIPSat and the delay in starting our new AFRL and MDA
projects;  however,  revenues  for  the  four  quarters in 2003 showed continued
progress,  as  did  the  loss  by  quarter.


                                  23
<PAGE>


                               [GRAPHIC  OMITED]


                                  24
<PAGE>

      QUARTER ENDED DECEMBER 31, 2003 -VS.- QUARTER ENDED DECEMBER 31, 2002

<TABLE>
<CAPTION>


                                                                                                SPACEDEV, INC.
                                                                                              AND SUBSIDIARIES

                                                                         CONSOLIDATED STATEMENTS OF OPERATIONS




                                                                                 THREE-MONTHS ENDING
                                                                                     (UNAUDITED)
<S>                                                     <C>                    <C>           <C>          <C>
 THREE-MONTHS ENDING DECEMBER 31,. . . . . . . . . . .                  2003   %             2002         %
--------------------------------------------------------------------------------------------------------------

 NET SALES . . . . . . . . . . . . . . . . . . . . . .  $            901,746           100%  $  800,594   100%
--------------------------------------------------------------------------------------------------------------

 Cost of sales . . . . . . . . . . . . . . . . . . . .               732,573            81%   1,197,675   150%
 Anticipated loss on uncompleted contract (Note 10(c))                     -                   (58,941)    -7%
--------------------------------------------------------------------------------------------------------------

 TOTAL COST OF SALES . . . . . . . . . . . . . . . . .               732,573            81%   1,138,734   142%

 GROSS MARGIN. . . . . . . . . . . . . . . . . . . . .               169,173            19%    (338,140)  -42%

 OPERATING EXPENSES
    Marketing and sales expense. . . . . . . . . . . .                83,606             9%      99,114    12%
    Research and development . . . . . . . . . . . . .                 8,743             1%           -     0%
    Stock and stock option based compensation. . . . .                 4,485             0%     457,000    57%
    General and administrative . . . . . . . . . . . .                84,050             9%    (285,813)  -36%
    EMC - stock based compensation (Note 8(b)) . . . .                     -             0%    (455,000)  -57%
--------------------------------------------------------------------------------------------------------------

 TOTAL OPERATING EXPENSES. . . . . . . . . . . . . . .               180,884            20%    (184,699)  -23%


 INCOME/(LOSS) FROM OPERATIONS . . . . . . . . . . . .               (11,711)           -1%    (153,441)  -19%


 NON-OPERATING EXPENSE/(INCOME)
    Interest expense . . . . . . . . . . . . . . . . .                26,809             3%      78,375    10%
    Non-cash interest expense debt discount (Note 5) .                     -             0%     125,000    16%
    Gain on Building Sale (Note 4(a)). . . . . . . . .               (29,318)           -3%           -     0%
    Loan Fee - Equity Compensation (Note 4(c) & 5) . .               109,470            12%           -     0%
--------------------------------------------------------------------------------------------------------------

 TOTAL NON-OPERATING EXPENSE/(INCOME). . . . . . . . .               106,961            12%     203,375    25%


 LOSS BEFORE INCOME TAXES. . . . . . . . . . . . . . .              (118,672)          -13%    (356,816)  -45%
 Income tax provision (Notes 1(j) and 6) . . . . . . .                 1,600             0%       1,600     0%
--------------------------------------------------------------------------------------------------------------

 NET LOSS. . . . . . . . . . . . . . . . . . . . . . .  $           (120,272)          -13%  $ (358,416)  -45%

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

 NET LOSS PER SHARE:
   Net loss. . . . . . . . . . . . . . . . . . . . . .  $              (0.01)               $     (0.03)
--------------------------------------------------------------------------------------------------------------

   Weighted-Average Shares Outstanding . . . . . . . .            16,282,485                  14,394,183
--------------------------------------------------------------------------------------------------------------

</TABLE>

NOTE:  THE NUMBERS PRESENTED IN THE CHART ABOVE WERE NOT AUDITED OR REVIEWED FOR
THE  THREE-MONTH  PERIODS  ENDING DECEMBER 31, 2003 AND 2002, RESPECTIVELY.  WE,
AND  NOT OUR AUDITORS, ARE RESPONSIBLE FOR THEIR FAIR PRESENTATION IN CONFORMITY
WITH  GENERALLY  ACCEPTED  ACCOUNTING  PRINCIPLES.

                                  25
<PAGE>

During  the  three-months  ending  December  31,  2003,  we  had  net  sales  of
approximately  $902,000  as  compared to net sales of approximately $801,000 for
the  same  three-month  period  in  2002.  Sales  increased primarily due to the
follow-on contracts for AFRL, MDA and SpaceShipOne being implemented during this
period.  Sales  in  the  fourth  quarter  2003  reflected the next phases of the
exclusive  proprietary propulsion contract (SpaceShipOne), as well as, MDA, AFRL
and  the  completion  of  the  Lunar  Enterprises  project.  Revenues  for   the
three-months  ending  December 31, 2003 were comprised of approximately $336,000
from  MDA  Phase  II,  $321,000  from  AFRL  Phase  II,  $102,000  from  our new
SpaceShipOne  contract,  approximately  $54,000  from  two  AFRL  SBIR projects,
approximately  $30,000  form  the  contract  by Lunar Enterprises of California,
approximately  $24,000  from  the  completion  of  the   CHIPSat   program   and
approximately  $35,000  from  all  other  programs.  In  the  three-months ended
December  31,  2002,  sales  were  comprised  of approximately $490,000 from the
CHIPSat  program,  approximately  $145,000   from  the   original   SpaceShipOne
propulsion  development  program,  approximately $129,000 from the completion of
our  outstanding  government  grants,  approximately $30,000 from Phase I of the
AFRL  project  and  approximately  $7,000  from  all  other  programs.

For the three-months ending December 31, 2003, we had costs of sales (direct and
allocated costs associated with individual contracts) of approximately $723,000,
or  80%  of  net  sales,  as compared to approximately $1,139,000 or 142% of net
sales,  during  the  same  three-month period in 2002.  The reduction in cost of
sales  was  primarily  attributable to the completion of contracts with recorded
losses  and  the improvement in project monitoring and management.   In 2002, we
recorded  certain  costs in the fourth quarter related to project cost overruns.
We  recorded  a  corresponding  increase  in the gross margin percentage for the
three-months  ending  December 31, 2003, which increased to 19.8% as compared to
(42%)  for  the same three-month period in 2002.  We also experienced a shift in
business  from  firm fixed price to cost-plus fixed fee projects, with the award
of  AFRL  Phase II in the second quarter and the start of our newest MDA project
during  the  third  quarter of 2003.  AFRL Phase II and the MDA project are both
cost-plus  fixed  fee  programs, which lower the risk to us but limit the upside
potential.  We  believe  most of our revenue will continue to come from projects
over  the  next three to five years.  In the long-term, i.e., five to ten years,
we  intend  to  develop a healthy mix of cost plus fixed fee projects as a solid
base  and  firm  fixed  price  projects  to  generate  additional  margin  while
transitioning  us from a project-oriented company to a product-oriented company.

We  experienced an increase of approximately $364,000 in operating expenses from
approximately  ($183,000),  or  (22%)  of  net sales, in the three-months ending
December  31,  2002 to approximately $181,000, or 20% of net sales, for the same
three-months  period  in  2003.  Operating   expenses   include    general   and
administrative  expenses  and  marketing and sales expenses, as well as research
and  development  expenses.  The  following  comparisons  are  based  on   total
operating  expenses  excluding  the  effects  of  the  one-time  EMC   reversal.

                                  26
<PAGE>

-     Marketing  and  sales  expenses accounted for an increase of approximately
17%  in  operating expenses, from approximately $21,000, or 2% of net sales, for
the three-months ending December 31, 2002, to approximately $84,000 or 9% of net
sales,  during the same period in 2003, mainly due to the decision to expand our
marketing  and  sales  department including having our CEO, Mr. Benson, lead our
marketing  &  sales  efforts  with  most  of  his expenses being charged to this
department.

-     Research  and  development  expenses  accounted   for   an   increase   of
approximately  3% in operating expenses from no recorded R&D expenses during the
three-months  ending  December  31, 2002 to approximately $9,000 during the same
three-month  period  in  2003.  We  are  beginning  to  separate  investments in
technology  development  (i.e.,  general  R&D  for the future advancement of our
technology) from direct costs on current projects (i.e., specific R&D related to
the  current  contract  and  projects  at  hand).

-     G&A  expenses  accounted  for  an  approximately 80% increase in operating
expenses.  G&A  expenses  consist  primarily  of  salaries  for   administrative
personnel,  fees  for outside consultants, rent, insurance, legal and accounting
fees  and  other overhead expenses.  We experienced an increase of approximately
$292,000  in  G&A  expenses  from  approximately ($204,000) for the three-months
ending  December  31,  2002  to  approximately  $88,500 for the same three-month
period  in  2003.  This  increase  was  due  to a number of factors, including a
one-time  re-classification  and allocation of certain overhead costs into costs
of  goods  sold  in  order  to move more toward full absorption costing and more
accurately  reflect costs in excess of billing during the final quarter of 2002.

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

-     Interest  expense  for  the three-months ending December 31, 2003 and 2002
was  approximately $27,000, or 2% of net sales, and $78,000, or 9% of net sales,
respectively.  The  decrease  was  due to the building sale on January 31, 2003,
which  eliminated  building  debt  and  reduced  overall  interest  on the notes
associated  with  the  building.  We continue to pay interest expense on certain
capital  leases and settlement notes.  In addition, we accrued and paid interest
expense  related  to  our related party note and convertible debentures.  In the
three-month  period  ending  December 31, 2003 and 2002, the accrued interest on
our  related  party  note  was  $19,000  and $11,000 respectively.  We also paid
approximately  $18,000 in interest on our convertible notes for the three-months
ending  December 31, 2003.  We also accrued approximately $7,000 of interest and
$109,000  of  non-cash  loan  fees  on  our  revolving  credit  facility for the
three-month  period  ending  December  31,  2003.

-     In  conjunction with our convertible notes, we recorded a convertible note
debt  discount  of $475,000 related to warrants that accompanied the convertible
debt  issue  in  2002;  however,  since we made a partial repayment and the note
holders  converted  the  remaining balance and forfeited half of their warrants,
the  debt  discount  was  reduced  to  $237,500.  The  reduction  is exclusively
attributable  to  forfeiture  of  half  of  the  original  warrants.  During the
three-month  period  ending  December  31, 2002, a debt discount of $125,000 was
recorded  where  no  debt  discount  remained  for the three-month period ending
December  31,  2003.

-     We  recognized  approximately  $29,000 of the deferred gain on the sale of
the  building  during  the  three-months  ending  December  31, 2003 and we will
continue  to  amortize  the  remaining deferred gain of approximately $1,065,000
into  non-operating  income  over  the remainder of the lease.  We realized loan
fees  related  to  our  revolving  credit  facility  and expenses related to the
conversion  of  notes  to  common stock below fair market value of approximately
$109,000  for  the  three-month  period ending December 31, 2003.  We anticipate
additional  expenses  related  to  similar  note  to  equity  conversions in the
quarters  ahead.

                                  27
<PAGE>

During  the  three-month period ending December 31, 2003, we incurred a net loss
of  approximately  $120,000,  or  12%  of  net  sales,  compared  to  a  loss of
approximately $358,000, or 44% of net sales, for the same three-months ending in
2002.  During  the  three-month  period ending December 31, 2003, we incurred an
EBITDA  (earnings  before  interest  taxes  depreciation  and  amortization)  of
approximately $2,200, or 1% of net sales, compared to an EBITDA of approximately
<$14,000>,  or  2%  of net sales, for the same three-months ending in 2002.  The
following  table  reconciles  EBITDA  to  net  loss  for the three-months ending
December  31,  2003  and  2002,  respectively:

<TABLE>
<CAPTION>



FOR THE THREE-MONTHS ENDING             DECEMBER 31, 2003   DECEMBER  31, 2002
--------------------------------------  ------------------  ------------------
                                           (UNAUDITED)         (UNAUDITED)
                                        ------------------  ------------------
NET LOSS (INCOME)                           (120,272)           (358,417)
--------------------------------------  ------------------  ------------------
<S>                                     <C>                 <C>
Interest Expense . . . . . . . . . . .             26,809              78,375
Non-Cash Interest exp. (Debt Discount)                 (0)            125,000
Gain on Building Sale. . . . . . . . .            (29,318)                  0
 Loan Fee - Equity Compensation. . . .            109,470                   0
Provision for income taxes . . . . . .              1,600               1,600
Depreciation and Amortization. . . . .             13,948             139,488
--------------------------------------  ------------------  ------------------
EBITDA . . . . . . . . . . . . . . . .              2,237             (13,954)
--------------------------------------  ------------------  ------------------
</TABLE>

EBITDA should not be considered as an alternative to net income (as an indicator
of  operating  performance)  or  as an alternative to cash flow (as a measure of
liquidity  or  ability  to  service  debt  obligations.  We  believe that EBITDA
provides  an  important  additional  perspective  on  our operating results, our
ability  to  service  our  long-term obligations, our ability to fund continuing
growth,  and  our  ability  to  continue  as  a  going concern.  The significant
improvement  in  bottom  line performance from quarter to quarter in 2003 can be
attributed  to: 1) the financial controls implemented by our new CFO; 2) tighter
management  of  projects, project schedules, project costs and project issues by
the  management  team;  3)  greater technological experience as we move down the
development  pathway; and, 4) growing revenues as new projects and contracts are
acquired.

LIQUIDITY  AND  CAPITAL  RESOURCES

   CASH POSITION FOR YEAR ENDED DECEMBER 31, 2003 -VS.- YEAR ENDED DECEMBER 31,
                                      2002

Net  increase in cash during the year ending December 31, 2003 was approximately
$565,000,  compared  to  a  net  decrease of approximately $184,000 for the same
period  in  2002.  Net  cash  used in operating activities totaled approximately
$1,029,000  for  the year ending December 31, 2003, an increase of approximately
$323,000  as  compared  to  approximately  $707,000 used in operating activities
during  the  same  period  in  2002, mainly due to the increase in our net loss.

Net  cash  provided by investing activities totaled approximately $3,111,000 for
the  year  ending  December  31, 2003, compared to $48,000 provided by investing
activities  during  the  same  period in 2002.  The increase in cash provided by
investing  activities is attributable to the sale of the building on January 31,
2003.

                                  28
<PAGE>

Net  cash  used in financing activities totaled approximately $1,517,000 for the
year  ending  December 31, 2003, which is a decrease of approximately $1,992,000
from the approximately $475,000 provided by financing activities during the same
period  in  2002.  This  is  primarily  attributable  to  the repayment of notes
payable  associated  with  the  building  sale and advances on our new revolving
credit  facility.

At  December 31, 2003, our cash, which includes cash reserves and cash available
for investment, was approximately $592,000, as compared to approximately $28,000
at  December  31,  2002,  an  increase  of approximately $564,000, mainly due to
advances  on  our  revolving  credit  facility.

As  of  December  31,  2003,  our  backlog of funded and non-funded business was
approximately  $2.0  million,  as  opposed  to  approximately $4.0 million as of
December  31,  2002.  As of March 31, 2004, our backlog of funded and non-funded
business  grew  to  approximately  $45  million  due to the follow-on, five-year
contract  from MDA for up to $43,362,271.  We expect approximately $2 million in
revenue  from the MDA program in 2004.  Although the MDA contract was awarded to
us,  there  can  be no assurance that the contract will be continued through all
phases,  and  if  continued,  that  it  will  generate  the amounts anticipated.

During  the  year  ending  December  31, 2003, we won the AFRL Phase II contract
worth  approximately  $1.4  million,  negotiated increases of approximately $1.0
million to the AFRL Phase II Contract as a deferred option still open, completed
our  first  proprietary propulsion contract (SpaceShipOne) and was awarded a new
exclusive  proprietary   propulsion   contract   for   SpaceShipOne,   completed
significant  milestones on CHIPSat, completed MDA's Phase I project and obtained
a new contract for a new $800,000 project, obtained two AFRL SBIR Phase I grants
and  were  awarded  a  $100,000  contract  by  Lunar  Enterprises.

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  $2,190,000  and $1,372,000 as of December 31, 2003 and
2002,  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
$818,000  in 2003 from $1,372,000 at December 31, 2002 to $2,190,000 at December
31,  2003.

At  December  31, 2003, the Company has federal and state tax net operating loss
and  capital  loss  carryforwards  of  approximately  $4,230,000 and $1,847,000,
respectively.  The  federal and state tax loss carryforwards will expire in 2023
and 2013, respectively, unless previously utilized.  The State of California has
suspended  the  utilization  of  net  operating  loss  for  2002  and  2003.

CRITICAL  ACCOUNTING  STANDARDS

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

                                  29
<PAGE>

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

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

Fixed  assets are depreciated over their estimated useful lives of three-to-five
years  using  the straight-line method of accounting in accordance with SFAS No.
144.  Goodwill  and other intangible assets were created upon the acquisition of
our  subsidiaries.  Intangible assets are amortized over their assets' estimated
future useful lives on a straight-line basis over three-to-five years.  Goodwill
and  other  intangibles  are  periodically  reviewed  for impairment based on an
assessment  of  future  operations  to  ensure  they are appropriately valued in
accordance  with  SFAS  No.  142.  Since  November  2001,  there  has  been   no
amortization of goodwill.  (See Notes to the Consolidated Financial Statements.)

CASH  POSITION  AND  REMOVAL  OF  GOING  CONCERN

Our auditors expressed in their formal auditors' opinion dated February 11, 2004
(except  for  Note  11  as  to  which  the  date is April 2, 2004) that in their
opinion, based on their audit, our consolidated financial statements referred to
herein  present  fairly,  in  all  material respects, the consolidated financial
position  of  SPACEDEV,  INC.  AND SUBSIDIARIES as of December 31, 2003, and the
consolidated  results  of  our  operations  and our cash flows for the year then
ended, in conformity with accounting principles generally accepted in the United
States  of  America.  In  previous  years, including the opinion of Nation Smith
dated  February  13,  2003  herein,  our  auditors expressed an opinion that our
financial  position  raised substantial doubt about our ability to continue as a
going concern.  After an analysis of our newly awarded $43,362,271 contract from
MDA,  our  projections  (including  revenue  projections)  for  the next several
quarters  and  other relevant factors, our auditors concluded there is no longer
substantial  doubt  as  to the Company's ability to continue as a going concern,
and  has, therefore, not included the going concern language in its report dated
February 11, 2004 (except for Note 11 as to which the date is April 2, 2004) for
the year ended December 31, 2003.  Management believes that this was appropriate
and  reflects  our  improved  financial  condition, our ability to forecast more
accurately  and  further  validation  of  customer  demand  for  our technology,
products  and services.  Our ability to continue as a going concern depends upon
our  ability  to  ultimately  implement  our  plans,  which includes (but is not
limited  to)  generating  substantial  new  revenue  from  MDA  by  successfully
performing  under  the  newly  awarded  contract  and  continuing to attract and
successfully  complete other government and commercial contracts, development of
a  project  management expertise to profitably execute on new business contracts
and  reduce  the  working capital deficit by raising additional capital.  We are
working  with  our  revolving  credit  facility  provider  and investigating the
possibility  of  raising additional capital to further support operations as new
contracts  and  business opportunities materialize.  The prospective funding, as
well,  as  new  business  opportunities,  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 or contracts as needed or,
if  such  funding  or  contracts are available, that we can obtain then on terms
favorable  to  the Company.  The likelihood of our success must be considered in
light  of  the  expenses,  difficulties  and  delays  frequently  encountered in
connection with the developing businesses, those historically encountered by us,
and  the  competitive  environment  in  which  we  operate.

                                  30
<PAGE>

On  January  31,  2003,  we  closed escrow on the sale of our facility in Poway,
California  and  entered  into  a  ten-year leaseback.  The selling price of the
facility  was  $3.2  million.  The total debt repayment from the transaction was
approximately  $2.4  million.  The  approximate  net  proceeds to us for working
capital  purposes was approximately $636,000.  However, due to delays in closing
new  business  and  previous  customer schedule slips in 2002 and early 2003, we
remain  in  a  tight  cash  position.

At  the  end  of  2002,  we  raised  $475,000  from certain of our directors and
officers  by  issuing  2.03% convertible debentures.  The convertible debentures
entitled  the  holder  to convert the principal and unpaid accrued interest into
our  common stock when the note matured.  The original maturity on the notes was
six  (6)  months  from issue date; however, on March 19, 2003, the maturity date
was  extended to twelve (12) months from issue date.  The convertible debentures
were exercisable into common shares at a conversion price that equals the 20-day
average  asking  price  less 10%, which was established when the debentures were
issued,  or  the  initial conversion price.  Concurrent with the issuance of the
convertible debentures, we issued warrants to purchase up to 1,229,705 shares of
our  common  stock to the subscribers.  These warrants are exercisable for three
(3)  years  from  the  date  of  issuance  at the initial exercise price, or the
initial  conversion  price  on  the debentures.  On September 5, 2003, we repaid
one-half  of  the  convertible  notes,  with the condition that the note holders
would  convert  the  other half.  Also, as a condition of the partial repayment,
the  note holders were required to relinquish one-half of the 1,229,705 warrants
previously  issued.  As  additional  consideration for the transaction, the note
holders  were  offered 5% interest on their notes, rather than the stated 2.03%.
All  the  note holders accepted the offer and the convertible notes were retired
in  2003.

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

                                  31
<PAGE>

We have sustained ourselves over the last few years with a mixture of government
and  commercial  contracts  and  capital  raised  in  the  private  market.   In
particular,  we anticipated and received an award for AFRL Phase II on March 28,
2003.  AFRL  Phase  II  is  a cost-plus contract, which has required us to incur
certain costs in advance of regular contract reimbursements from AFRL.  Although
we  have  needed  a  certain  amount  of  cash  to  fund advance payments on the
contract,  we  have  been  entitled, as a small business concern, to recover our
costs  on  a  weekly  basis  and we established the Laurus Master Fund revolving
credit  facility at the end of the second quarter of 2003 to support our advance
payment  needs.  In  addition,  we  anticipated   and   received   the   initial
investigatory  contract  from  the MDA to explore the use of micro-satellites in
national  missile  defense.  On  February  29,  2004,  we concluded the study to
explore a mission with a fast response microsat launch and commissioning; small,
low-power  passive  sensors; formation flying and local area networking within a
cluster  of  microsats;  and  an extension of our proven use of the Internet for
on-orbit  command,  control and data handling.  The purchase order was valued at
$800,000  and  was a cost plus fixed fee agreement.  The final retention payment
of approximately $33,000 will be made after the final report is approved by MDA.
In  anticipation  that  the  new $43,362,271 contract would be awarded to us, we
agreed  to  begin  work on the MDA program on March 1, 2004.  MDA agreed to make
the  effective date of the agreement March 1, 2004, when it was awarded.  Again,
our  newly awarded $43,362,271 MDA contract is a phased contract and we can give
no  assurance  that  the  entire contract will be realized by us, even though we
have  begun  work  on  the next phase and we currently anticipate the successful
completion  of  future  phases.

On  March  31,  2004, we negotiated an amendment to our Secured Convertible Note
dated  June  3, 2003 with the Laurus Master Fund to add a fixed conversion price
at  $0.85  per  share for the next $500,000 converted under the revolving credit
facility  after  the  initial  $1  million  conversion.  In  exchange  for   the
amendment,  Laurus  granted  us a six-month waiver to utilize the full revolving
credit  facility  in advance of eligible accounts.  At December 31, 2003, Laurus
had  converted  415,000  shares  under  the  revolving  credit  facility,  which
represented  approximately  $228,000  of  debt  converted  to  equity.

We  expect  to begin showing a positive cash flow in the first part of 2004.  We
anticipate  that with the projected increase in revenue and backorders from near
term  contracts,  combined  with  our  fiscally  responsible  budget and project
controls  for  2004,  that  net  positive  cash  flow  from  operations  will be
sufficient  to  fund both operations and capital expenditures in 2004.  There is
no assurance, however, that we will achieve or sustain any positive cash flow or
profitability  now  or  thereafter.

RECENT  ACCOUNTING  PRONOUNCEMENTS

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

                                  32
<PAGE>

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

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

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

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

                                  33
<PAGE>

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

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

FORWARD-LOOKING  STATEMENTS  AND  RISK  ANALYSIS

During  the  first  three  months of 2004, we submitted four bids for government
programs,  continued  our work with the US Congress to identify directed funding
for  our programs and are actively working to win several significant commercial
programs. We believe that we will win some of these programs, which would enable
us  to  continue to grow and broaden our business base, although there can be no
assurance  that  these  contracts  will  be  awarded  to  us.

To  date,  we  have  maintained a mix of government and commercial business.  In
2003,  we  had about 82% government or government-related work.  In 2002, we had
about  64% government and government-related work.  In 2005, we expect the ratio
to  be  about 90% government or government-related work.  We will continue to do
both  government  and  commercial  business and anticipate the mix of government
revenues  to  continue to be above 70% for the next several years as we increase
our  government  and commercial marketing efforts for both of our product lines.
Currently,  we  are  focusing  on  the domestic U.S. government market, which we
believe  is  only  about  one-half  of  the  global  government  market  for our
technology,  products  and  services.  Although  we  are interested in exploring
international  revenue  and  contract opportunities, we are restricted by export
control  regulations,  e.g., International Traffic in Arms Regulations ("ITAR"),
which  may  limit our ability to develop market opportunities outside the United
States.

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

                                  34
<PAGE>

We  believe that we will experience an accelerated growth in sales over the next
few  years.  At  this  time, over 90% of the forecasted sales for 2004 are under
contract  or  near  contract  award.  There  is no guarantee and there can be no
assurance  that  we  will win enough new business to achieve our targeted growth
projection  or to achieve a positive cash flow position.  Additionally, there is
no  guarantee  that awarded contracts will not be altered or terminated prior to
us  recognizing  our  projected  revenue  from  them.  Many contracts have "exit
ramps",  i.e., provides the customer the right to terminate the contract for any
of a variety of reasons, including but not limited to non-performance by us.  We
do  not believe that any of our contracts will be terminated; however, there can
be  no assurance that they will not be terminated in the future.  Finally, we do
not  believe  that  significant capital expenditures will be required to achieve
this  increase in sales; however, additional capital will be required to support
and  sustain  our  growth.

During  the  year  ended  December  31,  2003,  we raised approximately $654,000
through a combination of private sales of our stock (approximately $426,000) and
conversions  on  our revolving credit facility (approximately $228,000).  During
the  year  ended  December  31,  2002, we raised approximately $475,000 from our
convertible  debt  offering, of which $237,500 plus interest was repaid in 2003.
To  execute  our  strategy  of growing our Company with small, capable, low-cost
micro-  and  nano-satellites,  hybrid  propulsion  products  and  new commercial
revenue  sources,  we  require  additional  funding  and/or  the  win  of   both
significant government and commercial programs.  We believe investor or customer
funding  of  $5  to  $15  million  may  be  required,  which  could  come from a
combination  of  private  and/or  public  equity  placements  or  government and
commercial  customers.  At  this  time,  we  do  not have any ongoing private or
public  equity  offerings.

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

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

                                  35
<PAGE>

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

ITEM  7.     FINANCIAL  STATEMENTS

Please  see  our  audited financial statements for the period ended December 31,
2003  as  compared  to  the  period  ended  December  31,  2002 attached hereto.

ITEM  8.     CHANGES  IN  AND  DISAGREEMENTS  WITH  ACCOUNTANTS

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

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

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

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

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

                                  36
<PAGE>

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

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

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

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

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

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

We  engaged  PKF,  Certified  Public  Accountants,  A  Professional  Corporation
("PKF"),  as our new independent accountants on June 3, 2003 for the fiscal year
ending  December  31, 2003, and to review our quarterly financial statements for
the periods ending June 30, 2003 and September 30, 2003.  Prior to June 3, 2003,
we  had  not  consulted  with  PKF  regarding  (i) the application of accounting
principles to a specified transaction, either completed or proposed, or the type
of  audit  opinion  that  might  be rendered on our financial statements, and no
written  report or oral advice was provided to us by PKF concluding there was an
important  factor  to  be  considered  by  us  in  reaching  a decision as to an
accounting,  auditing  or financial reporting issue; or (ii) any matter that was
either  the  subject  of  a  disagreement,  as  that  term  is  defined  in Item
304(a)(1)(iv)  of  Regulation  S-B  and  the related instructions to Item 304 of
Regulation  S-B,  or  a  reportable  event,  as  that  term  is  defined in Item
304(a)(1)(iv)  of  Regulation  S-B.

ITEM  8A.     CONTROLS  AND  PROCEDURES

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

                                  37
<PAGE>

                                  38
<PAGE>

                                    PART III

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

Our  management  and directors' business activities are under the control of our
Board of Directors. Our Chief Executive Officer, James W. Benson, Vice President
of  Engineering,  Randall  K.  Simpson,  and Chief Financial Officer, Richard B.
Slansky,  manage the Company's daily operations. Our Board currently consists of
seven  directors. Stuart Schaffer and Scott McClendon were added to the Board of
Directors  in  2002.  J. Mark Grosvenor was added and resigned from the Board of
Directors  in  2003.  Below  are  our  executive  officers  and  directors.

<TABLE>
<CAPTION>



NAME                                                     POSITION HELD
--------------------------------------------  ------------------------------------
<S>                                           <C>
James W. Benson. . . . . . . . . . . . . . .  Chief Executive Officer,
13855 Stowe Drive. . . . . . . . . . . . . .  Director, Chairman of the Board
Poway, California 92064

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

Randall K. Simpson . . . . . . . . . . . . .  Vice President, Engineering
13855 Stowe Drive
Poway, California 92064

Stuart Schaffer. . . . . . . . . . . . . . .  Director
13855 Stowe Drive
Poway, CA   92064

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

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

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

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

Scott McClendon *. . . . . . . . . . . . . .  Director
13855 Stowe Drive
Poway, California 92064
</TABLE>

*     Denotes  Independent  Director

                                  39
<PAGE>

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

James  W.  Benson,  age 59, is our founder and has served as our Chief Executive
Officer  and  Chairman  of  the  Board since inception, and started the trend of
successful  computer  entrepreneurs moving into the entrepreneurial space arena.
In  1984,  Mr. Benson founded Compusearch Corporation (later renamed Compusearch
Software  Systems),  in  McLean,  Virginia.  The  company was based on the first
development  of  software algorithms and applications for personal computers and
networked  servers to create full text indexes of massive government procurement
regulations  and  to  provide instant full text searches for any word or phrase;
the  first  instance  of large scale, commercial implementation of PC-based full
text  searching,  which  later  grew  to encompass such systems as worldwide web
search  engines.  Seeing related opportunities in document and image management,
Mr.  Benson  started the award-winning ImageFast Software Systems in 1989, which
later  merged  with  Compusearch.  In  1995,  Mr.  Benson  sold  Compusearch and
ImageFast,  and  retired  at  age  fifty.  After  months of research, Mr. Benson
started  SpaceDev,  Inc.,  a  Nevada  corporation,  which  was acquired by us in
October 1997.  Mr. Benson holds a Bachelor of Science degree in Geology from the
University  of Missouri.  He founded the non-profit Space Development Institute,
and  introduced  the  $5,000  Benson  Prize  for Amateur Discovery of Near Earth
Objects.  He  is  also Vice-Chairman and private sector representative on NASA's
national  Space  Grant  Review Panel, and is a member of the American Society of
Civil  Engineers  subcommittee  on  Near  Earth  Object  Impact  Prevention  and
Mitigation.

Randall  K.  Simpson, age 57, is our Vice President of Engineering and joined us
in  January  2004.  Mr.  Simpson  has over 30 years of diversified experience in
business  development,  product  definition, engineering development and support
for  aerospace,  commercial  and  international customers.  From October 2000 to
January  2004,  Mr.  Simpson  served  as AVP of Program Management for Alvarion,
Inc.,  a  high  technology  commercial  communications firm.  From March 1997 to
September  2000, Mr. Simpson was Vice President of Engineering for Cubic Defense
Systems,  an  engineering  and  production  company  providing military training
ranges,  laser  instrumentation  products,  space   avionics   and   battlefield
communications  equipment.    From  November  1992 to February 1997, Mr. Simpson
was  Program Director for Advanced Test Systems and Engineering Director for GDE
Systems,  which  develops,  integrates  and produces test equipment for advanced
electronic  aircraft,  munitions, space launch, satellite and telecommunications
systems.  Mr. Simpson began his career at General Dynamics/Convair where he held
various  positions.  Mr.  Simpson received both his BSEE and MSEE from San Diego
State  University.

Richard  B.  Slansky,  age  47,  is  our  Chief  Financial Officer and Corporate
Secretary  and  joined  us  on February 10, 2003.  Mr. Slansky served as interim
Chief  Executive  Officer and Chief Financial Officer of Quick Strike Resources,
Inc.,  an  IT training, services and consulting firm, from July 2002 to February
2003.  Previously, Mr. Slansky served as Chief Financial Officer, Vice President
of  Finance,  Administration  and  Operations and Corporate Secretary for Path 1
Network  Technologies,  Inc.,  a  company focused on merging broadcast and cable
quality video transport with IP networks from May 2000 to July 2002.  Before his
tenure  at  Path 1, Mr. Slansky served as President, Chief Financial Officer and
member  of   the  Board   of    Directors   of  Nautronix,   Inc.,   a    marine
electronics/engineering  services company, from January 1999 to May 2000.  Prior
to  Nautronix,  Mr.  Slansky  served  as  Chief  Financial  Officer  of   Alexis
Corporation,  an  international  pharmaceutical  research  products   technology
company,  from  August  1995  to  January 1999.  He also served as President and
Chief  Financial Officer of C-N Biosciences, formerly Calbiochem, from July 1989
to July 1995.  Mr. Slansky is currently serving on the Board of Directors of two
privately  held  high  technology  companies  and one closely held, private real
estate company.  Mr. Slansky earned a bachelor's degree in economics and science
from  the University of Pennsylvania's Wharton School of Business and a master's
degree  in business administration in finance and accounting from the University
of  Arizona.

                                  40
<PAGE>

Stuart  Schaffer,  age  44,  was  appointed to our Board of Directors on May 17,
2002.  Mr.  Schaffer  is  currently  VP  Marketing,  for  Overture   Performance
Marketing  --  a  business  unit  of Overture Services, which is a subsidiary of
Yahoo!  Mr. Schaffer was our vice president of product development and marketing
from  May  2002  to  August 2003.  From 1998 to 2001, Mr. Schaffer acted as vice
president of marketing for Infocus Corporation, a fully reporting company, where
he  managed  all  aspects  of the marketing mix for market-share leading digital
projection  business  throughout  the  Americas  region.  In  that position, Mr.
Schaffer  revitalized  the  Proxima brand, managed a multi-million dollar annual
advertising,  communications  and program budgets, directed multiple outside and
in-house  agencies,  led product marketing teams in defining and delivering both
mobile  and  conference  room digital projector product lines, developed channel
strategies  and  programs  for  both  value-added and volume channels, served as
primary  press  spokesperson  for the company, established a market intelligence
structure  focused on developing customer and industry knowledge and spearheaded
merger  teams  to ensure the smooth transition of the merger between the Infocus
and  Proxima marketing organizations.  Prior to Infocus, Mr. Schaffer worked for
the  Hewlett-Packard  Company from 1985 to 1998, where he held various positions
in  Business  Development,  Marketing  and  Business  Planning. Mr. Schaffer has
worked  with  the  Leukemia  &  Lymphoma  Society,  on  a volunteer basis, as an
Assistant  Coach and Mentor. Mr. Schaffer has an MBA from Harvard University and
a  BS  degree  in  physics  from  Harvey  Mudd  College.

Wesley  T.  Huntress,  age  62,  was  elected  to  our  Board of Directors as an
independent  director at our annual shareholder meeting held June 30, 1999.  Dr.
Huntress  is  currently  Director  of the Geophysical Laboratory at the Carnegie
Institution of Washington in Washington, DC, where he leads an interdisciplinary
group  of  scientists  in  the  fields  of  high-pressure science, astrobiology,
petrology  and  biogeochemistry.   Prior  to  his  appointment  at Carnegie, Dr.
Huntress  served  the  Nation's space program as the Associate Administrator for
Space  Science  at  NASA  from  October 1993 through September 1998 where he was
responsible  for  NASA's  programs  in  astrophysics, planetary exploration, and
space  physics.  During  his  tenure, NASA space science produced numerous major
discoveries,  and  greatly  increased  the  launch  rate   of  missions.   These
discoveries  include  the discovery of possible ancient microbial life in a Mars
meteorite;  a  possible  subsurface  ocean on Jupiter's moon Europa; the finding
that  gamma  ray  bursts  originate at vast distances from the Milky Way and are
extraordinarily  powerful; discovery of massive rivers of plasma inside the Sun;
and  a wealth of announcements and images from the Hubble Space Telescope, which
have  revolutionized  astronomy  as  well  as  increased  public interest in the
cosmos.  Dr.  Huntress  also  served  as  a  Director  of  NASA's  Solar  System
Exploration  Division  from  1990  to  1993,  and as special assistant to NASA's
Director  of the Earth Science and Applications from 1988 to 1990.  Dr. Huntress
came to NASA Headquarters from Caltech's Jet Propulsion Laboratory ("JPL").  Dr.
Huntress  joined  JPL  as  a  National Research Council resident associate after
receiving  is  B.S.  in Chemistry from Brown University in 1964 and his Ph.D. in
Chemical  Physics  from  Stanford  in  1968.  He  became  a  permanent  research
scientist  at  JPL  in  1969.  He  and  his  JPL  team  gained  an international
reputation  for  their  pioneering studies of chemical evolution in interstellar
clouds,  comets  and  planetary  atmospheres.  At  JPL  Dr.  Huntress  served as
co-investigator  for the ion mass spectrometer experiment in the Giotto Halley's
Comet  mission,  and  as an interdisciplinary scientist for the Upper Atmosphere
Research  Satellite  and Cassini missions.  He also assumed a number of line and
research  program  management  assignments  while  at JPL, and spent a year as a
visiting  professor  in  the  Department  of Planetary Science and Geophysics at
Caltech.

                                  41
<PAGE>

Curt  Dean  Blake,  age  47,  was  appointed  to  our  Board  of Directors as an
independent  director on September 5, 2000.  Mr. Blake is CEO of GotVoice, Inc.,
a  startup  company in the voicemail consolidation and messaging business.  From
1999  to  2002,  Mr.  Blake  provided  consulting services to various technology
companies, including Apex Digital, Inc. and SceneIt.com.  Mr. Blake acted as the
Chief  Operating Officer of the Starwave Corporation from 1993 until 1999, where
he  managed  business  development,  finance,  legal  and  business affairs, and
operations  for  the  world's most successful collection of content sites on the
Internet.  During that time, he developed business strategies, financial models,
and  structured  and negotiated venture agreements for Starwave's flagship site,
ESPN  Sportszone,  at  that  time  the  highest  traffic destination site on the
Internet. He also developed and negotiated venture agreements with the NBA, NFL,
Outside  Magazine  and  NASCAR  to  create sites around these brands.  Mr. Blake
negotiated  sale  of controlling interest in Starwave Corporation to Disney/ABC.
Prior  to  Starwave,  Mr. Blake worked at Corbis from 1992 to 1993, where he led
the  acquisitions and licensing effort to fulfill Bill Gates' vision of creating
the  largest  taxonomic database of digital images in the world. Mr. Blake acted
as  General  Counsel  to  Aldus  Corporation  from  1989  to  1992, where he was
responsible for all legal matters of the $125 million public corporation and its
subsidiaries.  Prior  to  that,  Mr.  Blake was an attorney at Shidler, McBroom,
Gates  and  Lucas,  during  which  time he was assigned as onsite counsel to the
Microsoft  Corporation,  where  he  was  primarily  responsible for the domestic
OEM/Product  Support and Systems Software divisions. Mr. Blake has an MBA and JD
from  the  University  of  Washington.

General  Howell M. Estes, III (USAF Retired), age 63, was appointed to our Board
of Directors as an independent director on April 2, 2001.  General Estes retired
from  the  United  States  Air Force in 1998 after serving for 33 years. At that
time  he  was  the  Commander-in-Chief  of  the North American Aerospace Defense
Command ("CINCNORAD") and the United States Space Command ("CINCSPACE"), and the
Commander  of the Air Force Space Command ("COMAFSPC") headquartered at Peterson
AFB,  Colorado.  In  addition to a Bachelor of Science Degree from the Air Force
Academy,  he  holds a Master of Arts Degree in Public Administration from Auburn
University and is a graduate of the Program for Senior Managers in Government at
Harvard's JFK School of Government. Gen. Howell Estes is the President of Howell
Estes & Associates, Inc., a wholly owned consulting firm to CEOs, Presidents and
General  Managers  of  aerospace  and telecommunications companies worldwide. He
serves  as  Vice Chairman of the Board of Trustees at The Aerospace Corporation.
He  served  as  a  consultant  to  the Defense Science Board Task Force on SPACE
SUPERIORITY  and  more  recently  as  a  commissioner  on the U.S. Congressional
Commission  to  Assess  United  States  National  Security  Space Management and
Organization  (the  "Rumsfeld  Commission").

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

                                  42
<PAGE>

Scott  McClendon,  age  65,  was  appointed  to  our  Board  of  Directors as an
independent director on July 19, 2002.  McClendon currently sits on the Board of
Directors  for  Overland  Storage,  Inc.,  a  public  company,  where he acts as
chairman  of  the  Board.  He became the chairman after serving as president and
chief  executive  officer  from  October  1991  to March 2001.  Prior to joining
Overland  Storage,  Inc.,  Mr. McClendon was employed by Hewlett-Packard Company
for  over 32 years in various positions of engineering, manufacturing, sales and
marketing.  In  addition  to  SpaceDev  and  Overland  Storage, Mr. McClendon is
currently  serving on the Board of Directors of Procera Networks, Inc., a public
company,  and  Sicommnet,  Inc.,  privately  held  high technology company.  Mr.
McClendon  received  a  Bachelor  of Science degree in electrical engineering in
June 1960, and a Master of Science degree in electrical engineering in June 1962
from  Stanford  University  School  of  Engineering.

SIGNIFICANT  EMPLOYEES

Jeff  Janicik,  age  36,  is  our  director  of  engineering  and  was primarily
responsible  for  managing the success of the CHIPSat project.  He also oversees
all  flight system / component marketing and research activity.  Mr. Janicik has
over  14  years experience in program management, engineering and instruction in
aerospace.  Before  coming to us in January 2000, Mr. Janicik spent ten years as
a project manager, engineer and instructor in the field of aerospace working for
the  United  States  Air Force in designing low-cost, streamlined approaches for
the X-40A and X-37 program at Air Force SMC/TE, and set the precedent for future
space vehicle demos with extensive research of safety, technical and operational
issues.  Mr.  Janicik has an Aerospace Engineering degree from the University of
Notre  Dame  and a Master's Degree in Mechanical Engineering from the University
of  California, Davis, which he received while serving as an active duty officer
in  the  United  States  Air  Force.

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

COMMITTEES  OF  THE  BOARD  OF  DIRECTORS  AND  MEETING  ATTENDANCE

We have a standing audit committee comprised of Messrs. Blake, McClendon and Dr.
Huntress.  In  2004,  we  established  a  nominating  and  governance  committee
comprised of Messrs. Estes, Walker and Dr. Huntress and a compensation committee
comprised  of Messrs. Blake, Estes and McClendon.  The Company does not maintain
any  pension,  retirement  or  other arrangements other than as disclosed in the
following  table  for  compensating  its Directors.  Our Board of Directors took
action  eight  (8) times during the last fiscal year: seven (7) times at regular
or  special  meetings  attended  by  all  of  the  members  of  the Board either
personally or telephonically, and one (1) time by unanimous written consent. Our
Audit Committee took separate action four (4) times during the last fiscal year,
each  time at a regular or special meeting attended by all of the members of the
committee  either  personally  or  telephonically.

                                  43
<PAGE>


ITEM  10.     EXECUTIVE  COMPENSATION

EXECUTIVE  OFFICER  COMPENSATION

During  the  fiscal  years  ended  December 31, 2001, 2002 and 2003, the Company
granted  options  to  certain of its officers as compensation for their services
pursuant  to  the  Company's  Stock  Option  Plan.  Total  compensation  paid to
officers  of  the  Company  for  its past three fiscal years is set forth below:

<TABLE>
<CAPTION>


                                                                                           Long Term Compensation
                                                                                           ----------------------
                                       Annual Compensation                      Awards                    Payouts
                                    ----------------------                  ----------                  ---------

Name          Year    Salary ($)  Bonus ($)  Other Annual     Restricted    Securities   LTIP        All Other
And                                          Compensation     Stock         Underlying   Payouts     Compensation
Principal                                    ($)              Award(s)      Options ($)  ($)
Position(1)                                                   ($)           / SARs #
<S>          <C>    <C>           <C>        <C>              <C>           <C>          <C>         <C>
-----------------------------------------------------------------------------------------------------------------
James W      2001   147,923       -          -                -             -            -           -
Benson,      2002   141,325       -          -                -             10,000(2)    -           -
CEO (2)      2003   150,000       -          -                -             -            -           -
-----------------------------------------------------------------------------------------------------------------
Richard B.   2001         -       -          -                -             -            -           -
Slansky,     2002         -       -          -                -             -            -           -
CFO          2003    94,625       -            1,183          -             355,000(3)   -           -
-----------------------------------------------------------------------------------------------------------------

</TABLE>

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

(2)     Mr.  Benson  was  awarded  10,000 options in 2001 as a part of an annual
award  of  options  to  our  employees.

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

During  the  last  fiscal  year and as of December 31, 2003, the Company granted
stock  options  to  executive  officers  as  set  forth  in the following table:

                      OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>

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

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

James W. Benson                        0                          0                  0               0

Richard B. Slansky               355,000                        29%               0.51       2/10/2009
------------------  --------------------    ----------------------    ----------------    -----------

</TABLE>

                                  44
<PAGE>

As  of  December  31,  2003,  the  Company  had  vested  and unvested securities
underlying  stock  options  to  executive officers as set forth in the following
table:

                    Option/SAR Grants Ended December 31, 2003

<TABLE>
<CAPTION>

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

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

                                                                 Exercisable/                    Exercisable/
Name . . . . . . .  Shares Acquired on     Value Realized ($)   Unexercisable                    Unexercisable(1)

                    Exercise (#)
------------------  ------------------     -------------       -------------------               ------------------
James W. Benson                     0                $0                   506,666/                506,312/
------------------  ------------------     -------------       -------------------               ------------------
                                                                         2,003,334                3,157
------------------  ------------------     -------------       -------------------               ------------------
Richard B. Slansky                  0                $0                     83,000                42,330/
------------------  ------------------     -------------       -------------------               ------------------
                                                                           272,000                138,720
------------------  ------------------     -------------       -------------------               ------------------
</TABLE>


(1)     For  purposes  of  determining  whether  options  are "in-the-money," we
defined  fair market value as the five-day weighted average of the closing price
of  our common stock on the Over-The-Counter Bulletin Board as of March 4, 2004,
or  $1.05  per  share.  All  the options listed on the table are "in-the-money",
except  unvested  options  on  2,000,000  of  Mr.  Benson's  shares.

DIRECTOR  COMPENSATION

At  our  annual  meeting  on  July  16,  2000,  our Board of Directors adopted a
compensation  plan  for  independent  directors whereby they receive options for
attending  meetings of the Board as follows: each such director shall receive an
option to purchase 5,000 shares for each of two telephonic meetings attended per
year,  and an option to purchase 10,000 shares for each of two meetings attended
in  person  per  year.  These directors will not receive additional compensation
for  attending  meetings in excess of those described above.  In addition to the
above,  independent  directors  will  receive  $5,000  in options on the date of
election  or  appointment.  All such options will be issued pursuant to our 1999
Incentive  Stock  Option Plan at fair market value as of the date of the meeting
attended,  will  vest 50% on the first anniversary date of the date of grant and
50%  on  the second anniversary date of the date of grant and will expire on the
five-year  anniversary  of  the  grant date.  The following table sets forth the
remuneration  paid  to  our  directors during the fiscal year ended December 31,
2003.  We  do  not pay directors who are also officers of the Company additional
compensation  for  their  service  as  directors.

<TABLE>
<CAPTION>
                               Cash Compensation                     Security Grants


                               Annual       Meeting    Consulting    Number of       Number of
                               Retainer     Fees       Fees/Other    Shares          Securities
                               Fees                    Fees                          Underlying
                                                                                     Options/SARs

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

Name
--------------------------     --------     -------    ---------     ---------       --------------
James W. Benson . . . . .             -           -            -             -                    -
--------------------------     --------     -------    ---------     ---------       --------------
J. Mark Grosvenor (1) . . . .         -           -            -             -                    -
--------------------------     --------     -------    ---------     ---------       --------------
Stuart Schaffer . . . . . . .         -           -            -             -                    -
--------------------------     --------     -------    ---------     ---------       --------------
Wesley T. Huntress. . . . . .         -           -            -             -               30,000
--------------------------     --------     -------    ---------     ---------       --------------
Curt Dean Blake . . . . . . .         -           -            -             -               20,000
--------------------------     --------     -------    ---------     ---------       --------------
General Howell M. Estes, III.         -           -            -             -               30,000
--------------------------     --------     -------    ---------     ---------       --------------
Robert S. Walker. . . . . . .         -           -            -             -               30,000
--------------------------     --------     -------    ---------     ---------       --------------
Scott McClendon . . . . . . .         -           -            -             -               30,000
--------------------------     --------     -------    ---------     ---------       --------------
</TABLE>

                                  45
<PAGE>

(1)     Mr. Grosvenor was issued options to purchase 19,615 shares of our common
stock  upon  joining  the  Board  of  Directors  on  May 6, 2003.  Mr. Grosvenor
forfeited  the  right  to  those  options  when  he  resigned  from the Board on
September  15,  2003.  Mr.  Grosvenor continues to be an investor in the Company
with  ownership  of  665,188  shares  and  warrants  to purchase 665,188 shares.

EMPLOYMENT  AGREEMENTS

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

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

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

On February 14, 2003, we entered into an "at-will" employment agreement with Mr.
Slansky.  The  agreement  provided  for  Mr.  Slansky's  compensation of salary,
benefits  and options to purchase up to 385,000 shares of our common stock.  The
agreement  also  provided for severance under certain termination provisions and
prohibits  Mr. Slansky from soliciting our employees or competing with us, if he
were  to  leave  the  Company.

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

                                  46
<PAGE>

EMPLOYEE  BENEFITS

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

At  the  2000 Annual Stockholder Meeting, the shareholders approved an amendment
to  the  Stock Option Plan of 1999, increasing the number of shares eligible for
issuance under the Plan to 30% of the then outstanding common stock and allowing
the  Board of Directors to make annual adjustments to the Plan to maintain a 30%
ratio  to  outstanding  common  stock  at  each  annual  meeting of the Board of
Directors.  The  Board,  at  its  annual  meetings  in  2001  and  2002, made no
adjustment, as a determination was made that the number of shares then available
under  the  Plan  was sufficient to meet the Company's needs. As of December 31,
2003, 4,184,698 shares were authorized for issuance under the Plan, 3,124,807 of
which  are  currently  subject  to outstanding options and awards and options on
37,000  shares  were  exercised  in  2003.  The  Stock  Option  Plan of 1999 was
registered  with  the  U.S.  Securities  &  Exchange  Commission  on  Form  S-8.

During  2003,  we issued non-statutory options to purchase 140,000 shares to our
independent  directors  for  attendance at our 2003 Board of Directors meetings.
In  addition to the Stock Option Plan of 1999, our shareholders adopted the 1999
Employee  Stock  Purchase  Plan, which authorized our Board of Directors to make
twelve  consecutive  offerings  of  our common stock to our employees.  The 1999
Employee  Stock  Purchase  Plan  has  been  instituted  and  the first employees
enrolled  in  the  plan  in  August 2003.  The first shares of common stock were
issued  under  the  Plan  in  February 2004.  We also offer a variety of health,
dental,  vision,  401(k)  and  life  insurance  benefits  to  our  employees  in
conjunction  with  our  co-employment  partner,  Administaff.


                                  47

<PAGE>

SECTION  16(A)  BENEFICIAL  OWNERSHIP  REPORTING  COMPLIANCE

Based  upon  a  review  on the Forms 3 and 4 furnished to us with respect to our
most  recent fiscal year, each of the Directors and/or Executive Officers timely
filed  his  initial  Form 3 and Form 4 under Section 16(a) of the Securities and
Exchange  Act  of  1934  during 2003 with the following exceptions:  Mr. Slansky
filed  his  Form  3  on March 28, 2003 after the Board approved his contract and
options.  Prior to March 28, 2003, Mr. Slansky had no beneficial ownership in us
but  should  have filed a Form 3 on or before February 21, 2003.  Messrs. Blake,
Estes,  Grosvenor,  Huntress, McClendon and Walker filed their Form 4 related to
options  granted  at  the  May  Board  meeting on June 4, 2003, a few days late.
Messrs. Benson, Schaffer and Slansky filed their Form 4 related to retirement of
our  convertible  debt program on September 15, 2003, a few days late due to the
delay  in  getting  signatures  from  all parties to the transaction.  Mr. DaPra
filed  his  Form  3  on  December  22,  2003,  one  day  late.

                                  48
<PAGE>

ITEM  11.     SECURITY  OWNERSHIP  OF  CERTAIN  BENEFICIAL OWNERS AND MANAGEMENT

The  following  table  provides  information  as of March 4, 2004 concerning the
beneficial  ownership  of  the Company's common stock by (i) each director, (ii)
each  named  executive  officer,  (iii)  each  shareholder known by us to be the
beneficial  owner of more than 5% of the Company's outstanding Common Stock, and
(iv)  the directors and officers as a group.  Except as otherwise indicated, the
persons  named in the table have sole voting and investing power with respect to
all  shares  of  Common  Stock  owned  by  them.

<TABLE>
<CAPTION>




Title of                Name and Address of            Amount and                 Percent of
Class                   Beneficial Owner               Nature of                     Class(1)
                                                       Beneficial
                                                       Ownership(1)
----------              ----------------------         ------------               -----------
<S>                     <C>                            <C>                        <C>
..0001 par               James W. Benson, CEO           9,748,373(2)                    49.56%
value                   and Chairman
common                  13855 Stowe Drive
stock                   Poway, California 92064

..0001 par               Richard B. Slansky               180,357(3)                     0.92%
value                   13855 Stowe Drive
common                  Poway, California 92064
stock

..0001 par               J. Mark Grosvenor              1,330,376(4)                     6.76%
value                   13855 Stowe Drive
common                  Poway, California 92064
stock

..0001 par               Curt Dean Blake                  128,430(5)                     0.65%
value                   Director
common                  13855 Stowe Drive
stock                   Poway, California 92064

..0001 par               Wesley T. Huntress Jr.            80,515(6)                     0.41%
value                   Director
common                  13855 Stowe Drive
stock                   Poway, California 92064

..0001 par               General Howell M.                 54,167(7)                     0.28%
value                   Estes III, Director
common                  13855 Stowe Drive
stock                   Poway, California 92064

..0001 par               Robert S. Walker                  54,167(8)                     0.28%
value                   Director
common                  13855 Stowe Drive
stock                   Poway, California 92064

..0001 par               Stuart Schaffer, Director        218,206(9)                     1.11%
value                   13855 Stowe Drive
common                  Poway, California 92064
stock

..0001 par               Scott McClendon                   15,230(10)                    0.08%
value                   Director
common                  13855 Stowe Drive
stock                   Poway, California 92064

..0001 par               Officers and Directors as     11,809,821(11)                   60.04%(1)
value                   a group (10 Persons)
common
stock
------------------------------------------------------------------------------------------------

</TABLE>

                                  49
<PAGE>

(1)     Where  persons  listed on this table have the right to obtain additional
shares  of  our  common  stock  through  the  exercise of outstanding options or
warrants  or  the conversion of convertible securities within 60 days from March
4,  2004,  these  additional  shares are deemed to be beneficially owned for the
purpose  of  computing  the  amount and percentage of common stock owned by such
persons.  Percentages  are  based  on  total outstanding shares on March 4, 2004
plus  options  and warrants that will become exercisable within 60 days of March
4,  2004,  for  a  total  of  19,670,844  shares.

(2)     Represents  8,257,647  shares  held directly by Mr. Benson and his wife,
Susan  Benson,  (including  486,647  shares as part of the Company's convertible
debt  repayment  when  he  converted  $187,500 of his debt into shares in 2003);
497,413 shares transferred from SD Holdings, LLC to Space Development Institute,
a 501(c)(3) corporation; plus vested options on 506,666 shares; and, warrants on
486,647  shares  (Mr.  Benson  forgave half of his warrants on 973,294 shares as
part  of  the convertible debt repayment).  In addition, Mr. Benson has unvested
options on 2,003,334 shares.  In 2003, 8,245,000 shares were transferred from SD
Holdings,  LLC,  an  entity previously controlled by Mr. Benson, directly to Mr.
Benson  and his children.  Mr. Benson's children now hold 1,312,000 shares.  Mr.
Benson  disclaims  ownership  of  shares  held  by  his  children.

(3)     Mr.  Slansky  owns 40,895 shares of which 38,462 shares he purchased for
cash  in  a  private  transaction  with  Mr.  Skarupa, the Company's former Vice
President  of  Operations;  38,462  warrants  which were also purchased from Mr.
Skarupa;  and, vested options on 101,000 shares.  Mr. Slansky also holds 254,000
unvested  options.

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

(5)     Mr.  Blake  owns  30,612  shares  of our common stock plus 30,612 vested
warrants that he purchased in our private placement.  Mr. Blake also owns 67,206
vested  options,  which he received as compensation for his participation on our
Board  of  Directors.  In  addition,  Mr.  Blake  has unvested options on 22,500
shares.

(6)     Mr.  Huntress  owns 8,868 shares of our common stock.  Mr. Huntress also
owns  71,647  vested  options,  which  he  received  as  compensation  for   his
participation on our Board of Directors.  In addition, Mr. Huntress has unvested
options  on  30,000  shares.

(7)     General  Estes  III  owns  54,167  vested  options, which he received as
compensation  for  his  participation  on  our Board of Directors.  In addition,
General  Estes  III  has  unvested  options  on  32,500  shares.

(8)     Mr. Walker owns 54,167 vested options, which he received as compensation
for  his  participation  on our Board of Directors.  In addition, Mr. Walker has
unvested  options  on  27,500  shares.

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

(10)     Mr.  McClendon  owns  15,230  vested  options,  which  he  received  as
compensation  for his participation on our Board of Directors.  In addition, Mr.
McClendon  has  unvested  options  on  30,230  shares.

(11)     Officers  and directors as a group include our seven Board members, one
of  whom  is  also  an  officer  of  the Company, Messrs. Grosvenor, Slansky and
Simpson.  Mr.  Simpson  holds  no  beneficially  owned shares but holds unvested
options  on  250,000  shares,  which  are  not  included  in  the  calculation.

                                  50
<PAGE>


ITEM  12.     CERTAIN  RELATIONSHIPS  AND  RELATED  TRANSACTIONS

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

One  of  our independent directors, Robert S. Walker, is a principal of Wexler &
Walker  Public  Policy  Associates,  a Washington-based, full-service government
relations  firm  founded  in  1981.  Wexler  &  Walker principals have served in
Congress,  in  the  White House and federal agencies, as congressional staff, in
state  and  local  governments and in political campaigns.  Wexler & Walker is a
leader  on  the  technology issues of the twenty-first century.  During 2003 and
2002,  we incurred consulting fees with Hill and Knowlton, Inc., an affiliate of
Wexler  &  Walker,  in  an  aggregate  amount  of  approximately $0 and $56,000,
respectively.

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

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

From  October  14,  2002  through  November  14,  2002,  we sold an aggregate of
$475,000  of  2.03% convertible debentures to two of our directors, officers and
Mr.  Skarupa,  a  former  officer.  Mr.  Benson  purchased  $375,000 of Series A
Subordinated  Convertible  Notes  and  Mr. Shaffer purchased $50,000.  The total
funding was completed on November 14, 2002.  The convertible debentures entitled
the  holder to convert the principal and unpaid accrued interest into our common
stock  when  the  note matured.  The notes originally were set to mature six (6)
months from issue date and were subsequently extended to twelve (12) months from
issue  date  on  March  19,  2003.  Unless  paid, extended or re-negotiated, the
convertible  debentures  are exercisable into a number of our common shares at a
conversion price that equals the 20-day average asking price less 10%, which was
established  when  the  note  was  issued,  or  the  initial  conversion  price.
Concurrent  with  the  issuance  of the convertible debentures, we issued to the
subscribers,  warrants  to  purchase up to 1,229,705 shares of our common stock.
These  warrants are exercisable for three (3) years from the date of issuance at
the initial exercise price, which equals to the 20-day average asking price less
10%  which  was  established when the note was issued, or the initial conversion
price.  Upon  issuance, the warrants were valued using the Black-Scholes pricing
model  based on the expected fair value at issuance and the estimated fair value
was  recorded  as  debt  discount.  See  Note 8(c) to our Consolidated Financial
Statements  for  discussion of the terms of the warrants.  The debt discount was
being  amortized as additional interest expense over the term of the convertible
debentures.  On  September 5, 2003, we repaid one-half of the convertible notes,
with the condition that the note holders would convert the other half.  Also, as
a  condition  of  the  partial  repayment,  the  note  holders  were required to
relinquish  one-half  of the previously issued warrants.  Finally, as additional
consideration  for the transaction, the note holders were offered 5% interest on
their  notes,  rather  than  the stated 2.03% for a total of $18,161 of interest
expense.  All the note holders accepted the offer and the convertible notes were
retired.  As  of  December  31,  2003,  we recorded a credit of $88,408, as debt
discount  recovery;  therefore,  for the year ending December 31, 2003, the debt
discount  expense was $112,500.  The Company also expensed $131,411 for non-cash
loan  fee  expense  related  to  the convertible note.  Fair market value of the
stock  was determined by discounting the closing market price on the date of the
transaction  by  20%,  based  on  the  nature  of  the  restricted  securities.

                                  51
<PAGE>

ITEM  13.     EXHIBITS  AND  REPORTS  ON  FORM  8-K

<TABLE>
<CAPTION>



(a)                                                                                                        Exhibits:
<S>                                                                                                        <C>
ITEM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  EXH. NO.
---------------------------------------------------------------------------------------------------------  ---------
SpaceDev's Articles of Incorporation(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        3.1
SpaceDev's Articles of Amendment to Articles of Incorporation dated November 4, 1997
Authorizing Series B Preferred Stock(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        3.2
SpaceDev's Articles of Amendment to Articles of Incorporation dated December 17, 1997
Changing Name to SpaceDev, Inc. (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        3.3
SpaceDev's Bylaws(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        3.4
Form of Common Stock Certificate(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        4.1
Form of Non-Qualified Stock Option(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        4.2
Form of Incentive Stock Option(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        4.3
Form of Re-Pricing Warrant(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        4.4
Form of Warrant(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        4.5
1999 Stock Option Plan(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        4.6
First Amendment to 1999 Stock Option Plan(8). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        4.7
1999 Employee Stock Purchase Plan(8). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        4.8
Form of Warrant from November 2, 2000 Private Placement (4) . . . . . . . . . . . . . . . . . . . . . . .        4.9
Common Stock Purchase Warrant-Phillips Aerospace (4). . . . . . . . . . . . . . . . . . . . . . . . . . .       4.10
Note Purchase Agreement for Series A Subordinated Convertible Notes (6) . . . . . . . . . . . . . . . . .       4.11
Form of Series A Subordinated Convertible Note (6). . . . . . . . . . . . . . . . . . . . . . . . . . . .       4.12
Form of Warrant for Series A Subordinated Convertible Note Offering (6) . . . . . . . . . . . . . . . . .       4.13
Common Stock Exchange Agreement Between SpaceDev and SIL (1). . . . . . . . . . . . . . . . . . . . . . .       10.1
Mutual Rescission and Release of Share Acquisition Agreement (1). . . . . . . . . . . . . . . . . . . . .       10.2
Share Exchange Agreement Between SpaceDev and ISS (1) . . . . . . . . . . . . . . . . . . . . . . . . . .       10.3
Agreement of License and Purchase of Technology Between SpaceDev and AMROC (1). . . . . . . . . . . . . .       10.4
Firm Fixed Price Agreement Number 108252 Between SpaceDev and Regents of the University of California (1)       10.5
Employment Agreement of James W. Benson (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       10.6
Employment Agreement between ISS and Charles H. Lloyd (1) . . . . . . . . . . . . . . . . . . . . . . . .       10.7
Deed of Counter-Indemnity dated August 28, 1999 (3) . . . . . . . . . . . . . . . . . . . . . . . . . . .       10.8
Financial Advisory Services Agreement, dated June 18, 2001 (5). . . . . . . . . . . . . . . . . . . . . .       10.9
Consultant/Advisory Services Agreement, dated June 18, 2001 (5) . . . . . . . . . . . . . . . . . . . . .      10.10
Employment Agreement between SpaceDev, Inc. and Stuart Schaffer, dated May 17, 2002(7). . . . . . . . . .      10.11
First Amendment to Employment Agreement with Stuart Schaffer, dated May 17, 2002(7) . . . . . . . . . . .      10.12
Employment Agreement between SpaceDev, Inc. and Emery Skarupa, dated May 24, 2002(7). . . . . . . . . . .      10.13
Confidential Separation Agreement and General Release of Claims, dated May 31, 2002(7). . . . . . . . . .      10.14
Code of Business Conduct and Ethics(7). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      10.15
Employment Agreement between SpaceDev and Richard B. Slansky, dated Feb. 10, 2003(7). . . . . . . . . . .      10.16
Second Amendment to Series A Subordinated Convertible Note - Benson1, dated Mar. 25, 2003(7). . . . . . .      10.17

                                  52
<PAGE>

Second Amendment to Series A Subordinated Convertible Note - Benson2, dated Mar. 25, 2003(7). . . . . . .      10.18
Second Amendment to Series A Subordinated Convertible Note - Benson3, dated Mar. 25, 2003(7). . . . . . .      10.19
Second Amendment to Series A Subordinated Convertible Note - Benson4, dated Mar. 25, 2003(7). . . . . . .      10.20
Second Amendment to Series A Subordinated Convertible Note - Skarupa, dated Mar. 25, 2003(7). . . . . . .      10.21
Second Amendment to Series A Subordinated Convertible Note - Schaffer, dated Mar. 25, 2003(7) . . . . . .      10.22
Confidential Separation Agreement and General Release of Claims with Mr. Schaffer, dated July 2, 2003(8).      10.23
AFRL Small Vehicle Launch Technology SBIR contract(9) . . . . . . . . . . . . . . . . . . . . . . . . . .      10.24
AFRL Small Satellite Bus Technologies SBIR contract(9). . . . . . . . . . . . . . . . . . . . . . . . . .      10.25
AFRL Small Shuttle Compatible Propulsion Module contract(9) . . . . . . . . . . . . . . . . . . . . . . .      10.26
MDA Advanced Systems Deputate for the Micro Satellite Experiment(9) . . . . . . . . . . . . . . . . . . .      10.27
MDA Advanced Systems Deputate for the Micro Satellite Experiment (Modification) (9) . . . . . . . . . . .      10.28
Lunar Enterprises of California contract(9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      10.29
Hybrid Rocket Motor Systems and Components contract*(9) . . . . . . . . . . . . . . . . . . . . . . . . .      10.30
Third Amendment to Series A Subordinated Convertible Note - Benson1, dated Sept. 5,  2003(9). . . . . . .      10.31
Third Amendment to Series A Subordinated Convertible Note - Benson2, dated Sept. 5,  2003(9). . . . . . .      10.32
Third Amendment to Series A Subordinated Convertible Note - Benson3, dated Sept. 5,  2003(9). . . . . . .      10.33
Third Amendment to Series A Subordinated Convertible Note - Benson4, dated Sept. 5,  2003(9). . . . . . .      10.34
Third Amendment to Series A Subordinated Convertible Note - Skarupa, dated Sept. 5,  2003(9). . . . . . .      10.35
Third Amendment to Series A Subordinated Convertible Note - Schaffer, dated Sept. 5, 2003(9). . . . . . .      10.36
Employment Offer between SpaceDev and Dario Emanuel DaPra, dated November 17, 2003 . . . . . . . . . . .       10.37
Employment Offer between SpaceDev and Randall K. Simpson, dated Jan. 16, 2004 . . . . . . . . . . . . . .      10.38
Confidential Separation Agreement and General Release of Claims with Mr. DaPra, dated March 18, 2004. . .      10.39
Missile Defense Agency Contract with SpaceDev, dated March 31, 2004 . . . . . . . . . . . . . . . . . . .      10.40
Amendment No. 1 to Note with the Laurus Master Fund, dated March 31, 2004 . . . . . . . . . . . . . . . .      10.41
Waiver Letter from Laurus Master Fund, dated March 31, 2004 . . . . . . . . . . . . . . . . . . . . . . .      10.42
First Task Order Under Missile Defense Agency Contract with SpaceDev, dated April 1, 2004 . . . . . . . .      10.43
List of Subsidiaries of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      21
Consent of Independent Auditor - Form SB-2, dated July 21, 2003 - Nation Smith Hermes Diamond. . . . . .       23.1
Consent of Independent Auditor (2003) - Form 10-KSB, dated April 5, 2004, PKF . . . . . . . . . . . . . .      23.2
Consent of Independent Auditor (2002) - Form 10-KSB, dated April 2, 2004, Nation Smith Hermes Diamond . .      23.3
Certificate of James W. Benson Pursuant to Section 1350 of Chapter 63 of Title 18 U.S. Code . . . . . . .      99.1
Certificate of Richard B. Slansky Pursuant to Section 1350 of Chapter 63 of Title 18 U.S. Code. . . . . .      99.2
</TABLE>

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

(b)     Reports  on  Form  8-K:

We  have  filed  two  reports  on Form 8-K, since fiscal year ended December 31,
2002.  These  reports,  dated  June 4, 2003 (and subsequently amended on June 9,
2003)  and  June  18,  2003, disclosed: 1) the changes in registrants certifying
accountants;  and,  2)  the  establishment  of the registrant's revolving credit
facility  with  the  Laurus  Master  Fund,  Ltd.

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

                                  53
<PAGE>

(2)     Incorporated by reference to Exhibit 10.1 previously filed as an Exhibit
to  Registrant's  Form  10-QSB  filed  on  August  10,  2000.
(3)     Incorporated by reference to Exhibit 10.2 previously filed as an Exhibit
to  Registrant's  Form  8-K  filed  on  September  20,  2000.
(4)     Incorporated  by reference to the corresponding Exhibit previously filed
as  an  Exhibit  to  Registrant's  Form  10-KSB  filed  on  April  2,  2001.
(5)     Incorporated  by reference to Exhibits 10.1 and 10.2 previously filed as
an  Exhibit  to  Registrant's  Form  8-K  filed  on  July  19,  2001.
(6)     Incorporated  by  reference  to  Exhibits 4.11, 4.12 and 4.13 previously
filed  as  an  Exhibit  to  Registrant's Form 10-QSB filed on November 14, 2002.
(7)     Incorporated by reference to Exhibits 10.11, 10.12, 10.13, 10.14, 10.15,
10.16,  10.17,  10.18,  10.19,  10.20,  10.21  and  10.22 previously filed as an
Exhibit  to  Registrant's  Form  10-KSB  on  March  28,  2003.
(8)     Incorporated  by  reference  to  Exhibit  10.27  previously  filed as an
Exhibit  to  Registrant's  Form  SB-2  on  July  25,  2003.
(9)     Incorporated  by  reference  to  Exhibits  10.1, 10.2, 10.3, 10.4, 10.5,
10.6,  10.7,  10.8,  10.9,  10.10, 10.11, 10.12 and 10.13 previously filed as an
Exhibit  to  Registrant's  Form  10-QSB  on  November  12,  2003.

ITEM  14.     PRINCIPAL  ACCOUNTANT  FEES  AND  SERVICES

The  following  are  the  fees  billed  us by our auditors, PKF and Nation Smith
Hermes  Diamond,  P.C.  ("Nation  Smith"),  respectively,  for services rendered
thereby  during  2003  and  2002:

<TABLE>
<CAPTION>



<S>                 <C>      <C>

                       2003     2002
                    -------  -------
Audit Fees . . . .  $55,025  $54,500
------------------  -------  -------
Audit Related Fees  $     -  $     -
------------------  -------  -------
Tax Fees . . . . .  $ 7,850  $11,734
------------------  -------  -------
All Other Fees . .  $ 5,093  $12,712
------------------  -------  -------
</TABLE>

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

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

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

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


                                  54
<PAGE>

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

Before  the auditors are engaged to provide us audit or non-audit services, such
engagement  is  approved  by  the  Audit  Committee  of  our Board of Directors.

                                  55
<PAGE>


SIGNATURES

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

                                   SPACEDEV,  INC.

Date:  April  6,  2004                         By:  /s/James  W.  Benson
                                                    --------------------
                                               James  W.  Benson,  CEO


Date:  April  6,  2004                         By:  /s/Richard  B.  Slansky
                                                    -----------------------
                                               Richard  B.  Slansky,  CFO

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

Date:  April  6,  2004                         By:  /s/James  W.  Benson
                                                    --------------------
                                               James W. Benson, CEO and
                                               Chairman of the  Board  of
                                               Directors


Date:  April  6,  2004                         By:  /s/Scott  McClendon
                                                    -------------------
                                               Scott  McClendon,  Director


Date:  April  6,  2004                         By:  /s/Gen. Howell M. Estes, III
                                                    ----------------------------
                                               Gen.  Howell  M.  Estes,  III,
                                               Director


Date:  April  6,  2004                         By:  /s/Stuart  E.  Schaffer
                                                       --------------------
                                               Stuart  E.  Schaffer,  Director


Date:  April  6,  2004                         By:  /s/Robert  S.  Walker
                                                    ---------------------
                                               Robert  S.  Walker,  Director


Date:  April  6,  2004                         By:  /s/Curt  D.  Blake
                                                    ------------------
                                               Curt  D.  Blake,  Director


Date:  April  6,  2004                         By:  /s/Wesley  T.  Huntress
                                                    -----------------------
                                               Wesley  T.  Huntress,  Director

                                  56
<PAGE>
                                 SPACEDEV, INC.
                             a Colorado corporation
                  CERTIFICATION  OF  CHIEF  EXECUTIVE  OFFICER

                            Section 302 Certification

I,  James  W.  Benson,  certify  that:

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

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

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

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

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

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

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

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

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

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

                                  57
<PAGE>

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

Date:  April  6,  2004

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

                                  58
<PAGE>

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

                            Section 302 Certification

I,  Richard  B.  Slansky,  certify  that:

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

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

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

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

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

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

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

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

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

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

                                  59
<PAGE>

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

Date:  April  6,  2004

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



                                  60
<PAGE>


                                                                  SPACEDEV, INC.
                                                                AND SUBSIDIARIES
                                                                        CONTENTS



                        CONSOLIDATED FINANCIAL STATEMENTS



REPORT  OF  INDEPENDENT  AUDITORS                                   F-2  to  F-3

FINANCIAL  STATEMENTS
     Consolidated  Balance  Sheets                                  F-4  to  F-5
     Consolidated  Statements  of  Operations                                F-6
     Consolidated  Statements  of  Stockholders'  Deficit           F-7  to  F-9
     Consolidated  Statements  of  Cash  Flows                    F-10  to  F-11
     Notes  to  Consolidated  Financial  Statements               F-12  to  F-32

                                  F-1
<PAGE>


Report  of  Independent  Auditors


Board  of  Directors  and  Stockholders
SPACEDEV,  INC.

We  have  audited  the accompanying consolidated balance sheet of SPACEDEV, INC.
AND  SUBSIDIARIES (see Note 1(c) to the consolidated financial statements) as of
December  31,  2003,  and  the  related  consolidated  statements of operations,
stockholders'  deficit  and  cash  flows  for   the   year  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  audit.

We  conducted our audit 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  audit  provides  a  reasonable  basis  for  our  opinion.

In  our  opinion the consolidated financial statements referred to above present
fairly,  in  all  material  respects,  the  consolidated  financial  position of
SPACEDEV,  INC.  AND  SUBSIDIARIES as of December 31, 2003, and the consolidated
results  of  their  operations  and their cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States of
America.


/s/  PKF

San  Diego,  California
February  11,  2004  (except  for  Note  11 for which the date is April 2, 2004)

                                  F-2
<PAGE>

Report  of  Independent  Auditors


Board  of  Directors  and  Stockholders
SPACEDEV,  INC.

We  have  audited  the accompanying consolidated balance sheet of SPACEDEV, INC.
AND  SUBSIDIARIES (see Note 1(c) to the consolidated financial statements) as of
December  31,  2002,  and  the  related  consolidated  statements of operations,
stockholders'  deficit  and   cash  flows  for   the  year  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  audit.

We  conducted our audit 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  audit  provides  a  reasonable  basis  for  our  opinion.

In  our  opinion,  based  on  our  audit  the  consolidated financial statements
referred  to  above  present  fairly, in all material respects, the consolidated
financial  position  of SPACEDEV, INC. AND SUBSIDIARIES as of December 31, 2002,
and  the  consolidated  results of their operations and their cash flows for the
year  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  a net loss of
$376,160 for the year ended December 31, 2002, and had a working capital deficit
of  $197,381  as of December 31, 2002.  These conditions raise substantial doubt
about  the Company's ability to continue as a going concern.  Management's plans
in  regard  to  these matters are also described in Note 1(b).  The consolidated
financial  statements  do not include any adjustments that might result from the
outcome  of  this  uncertainty.

Nation  Smith  Hermes  Diamond  P.C.

/s/  Nation  Smith  Hermes  Diamond

San  Diego,  California
February  13,  2003


                                  F-3
<PAGE>

<TABLE>
<CAPTION>

                                                                  SPACEDEV, INC.
                                                                AND SUBSIDIARIES

                                                     CONSOLIDATED BALANCE SHEETS

<S>                                                      <C>         <C>
 December 31, . . . . . . . . . . . . . . . . . . . . .        2003        2002
-------------------------------------------------------  ----------  ----------
 ASSETS

 CURRENT ASSETS
    Cash (Note 10(a)) . . . . . . . . . . . . . . . . .  $  592,006  $   27,648
    Accounts receivable (Note 10(b)). . . . . . . . . .     187,062      82,325
    Inventory . . . . . . . . . . . . . . . . . . . . .       9,961       1,729
    Receivable for assets held for sale (Note 2). . . .           -   3,150,124
    Costs in excess of billings and estimated earnings.           -     281,175
    Work in Progress. . . . . . . . . . . . . . . . . .     110,490           -

 Total current assets . . . . . . . . . . . . . . . . .     899,519   3,543,001
-------------------------------------------------------  ----------  ----------

 FIXED ASSETs - Net (Notes 1(g) and 2). . . . . . . . .     137,532     141,488

 CAPITALIZED SOFTWARE  COSTS. . . . . . . . . . . . . .           -     103,508

 OTHER ASSETS . . . . . . . . . . . . . . . . . . . . .      47,768      23,960
-------------------------------------------------------  ----------  ----------

 TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . .  $1,084,819  $3,811,957
-------------------------------------------------------  ----------  ----------
-------------------------------------------------------  ----------  ----------


</TABLE>
     The accompanying notes are an integral part of these consolidated financial
                                                                     statements.

                                  F-4
<PAGE>

<TABLE>
<CAPTION>

                                                                                     SPACEDEV, INC.
                                                                                   AND SUBSIDIARIES

                                                                        CONSOLIDATED BALANCE SHEETS

<S>                                                                    <C>            <C>
 December 31, . . . . . . . . . . . . . . . . . . . . . . . . . . . .          2003           2002
---------------------------------------------------------------------  -------------  -------------

 LIABILITIES AND STOCKHOLDERSDEFICIT

 CURRENT LIABILITIES
    Current portion of notes payable (Note 4(a)). . . . . . . . . . .  $     41,464   $  2,431,134
    Current portion of capitalized lease obligations (Note 9(a)). . .        10,332         32,783
    Notes payable - related party (Note 4(b)) . . . . . . . . . . . .        80,000        174,665
    Convertible debt notes payable (Note 5) . . . . . . . . . . . . .             -        127,075
    Accounts payable and accrued expenses . . . . . . . . . . . . . .       311,606        598,480
    Accrued payroll, vacation and related taxes . . . . . . . . . . .        84,001        174,188
    Customer deposits and deferred revenue (Note 1(f)). . . . . . . .             -         69,402
    Revolving line of credit (Note 4(c)). . . . . . . . . . . . . . .       748,893
    Provision for anticipated loss (Note 10(c)) . . . . . . . . . . .             -         11,044
    Employee Stock Purchase Plan (Note (7(b)) . . . . . . . . . . . .         5,498              -
    Other accrued liabilities (Note 9(b)) . . . . . . . . . . . . . .       248,530        121,611
---------------------------------------------------------------------  -------------  -------------

 TOTAL CURRENT LIABILITIES. . . . . . . . . . . . . . . . . . . . . .     1,530,324      3,740,382
---------------------------------------------------------------------  -------------  -------------

 NOTES PAYABLE, LESS CURRENT MATURITIES (NOTE 4(A)) . . . . . . . . .        46,127         89,052

 CAPITALIZED LEASE OBLIGATIONS, LESS CURRENT MATURITIES (NOTE 9(A)) .         5,253          8,431

 NOTES PAYABLE - RELATED PARTY, LESS CURRENT MATURITIES (NOTE 4(B)) .       505,522        563,831

 DEFERRED GAIN - ASSETS HELD FOR SALE (NOTE 2). . . . . . . . . . . .     1,065,221      1,172,720

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

 TOTAL LIABILITIES. . . . . . . . . . . . . . . . . . . . . . . . . .     3,157,447      5,579,416
---------------------------------------------------------------------  -------------  -------------

 COMMITMENTS AND CONTINGENCIES (NOTES 9)

 STOCKHOLDERSDEFICIT
   Convertible preferred stock, $.0001 par value, 10,000,000 shares
     authorized, no shares issued or outstanding (Note 8(a)). . . . .             -              -
   Common stock, $.0001 par value; 50,000,000 shares authorized, and
     16,413,260 and 14,447,640 shares issued and outstanding,
     respectively (Note 8(b)) . . . . . . . . . . . . . . . . . . . .         1,641          1,447
   Additional paid-in capital . . . . . . . . . . . . . . . . . . . .     9,243,507      8,302,803
   Additional paid-in capital - stock options (Note 8(d)) . . . . . .       750,000        750,000
   Deferred compensation (Note 8(d)). . . . . . . . . . . . . . . . .      (250,000)      (250,000)
   Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . .   (11,817,776)   (10,571,709)
---------------------------------------------------------------------  -------------  -------------

 TOTAL STOCKHOLDERSDEFICIT. . . . . . . . . . . . . . . . . . . . . .    (2,072,628)    (1,767,459)
---------------------------------------------------------------------  -------------  -------------

 TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT. . . . . . . . . . . . .  $  1,084,819   $  3,811,957
---------------------------------------------------------------------  -------------  -------------
---------------------------------------------------------------------  -------------  -------------


</TABLE>

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

                                  F-5
<PAGE>

<TABLE>
<CAPTION>

                                                                                       SPACEDEV, INC.
                                                                                     AND SUBSIDIARIES

                                                                CONSOLIDATED STATEMENTS OF OPERATIONS



<S>                                                     <C>           <C>           <C>          <C>
 Years Ended December 31,. . . . . . . . . . . . . . .         2003                       2002
------------------------------------------------------  ------------  ------------  -----------  ----

 NET SALES . . . . . . . . . . . . . . . . . . . . . .  $ 2,956,322           100%  $3,370,118   100%
------------------------------------------------------  ------------  ------------  -----------  ----

 Cost of sales . . . . . . . . . . . . . . . . . . . .    2,414,997            82%   3,348,671    99%
 Anticipated loss on uncompleted contract (Note 10(c))            -                    (58,941)   -2%
------------------------------------------------------  ------------  ------------  -----------  ----

 TOTAL COST OF SALES . . . . . . . . . . . . . . . . .    2,414,997            82%   3,289,730    98%
------------------------------------------------------  ------------  ------------  -----------  ----

 GROSS MARGIN. . . . . . . . . . . . . . . . . . . . .      541,325            18%      80,388     2%
------------------------------------------------------  ------------  ------------  -----------  ----

 OPERATING EXPENSES
    Marketing and sales expense. . . . . . . . . . . .      394,974            13%     257,648     8%
    Research and development . . . . . . . . . . . . .      281,280            10%           -     0%
    Stock and stock option based compensation. . . . .        9,170             0%       2,938     0%
    General and administrative . . . . . . . . . . . .      745,993            25%     260,882     8%
    EMC - stock based compensation (Note 8(b)) . . . .            -             0%    (455,000)  -14%

 TOTAL OPERATING EXPENSES. . . . . . . . . . . . . . .    1,431,417            48%      66,468     2%
------------------------------------------------------  ------------  ------------  -----------  ----

 INCOME/(LOSS) FROM OPERATIONS . . . . . . . . . . . .     (890,092)          -30%      13,920     0%
------------------------------------------------------  ------------  ------------  -----------  ----

 NON-OPERATING EXPENSE/(INCOME)
    Interest expense . . . . . . . . . . . . . . . . .       91,492             3%     263,480     8%
    Non-cash interest expense debt discount (Note 5) .      112,500             4%     125,000     4%
    Gain on Building Sale (Note 4(a)). . . . . . . . .     (107,499)           -4%           -     0%
    Loan Fee - Equity Compensation (Note 4(c) & 5) . .      257,882             9%           -     0%
------------------------------------------------------  ------------  ------------  -----------  ----
 TOTAL NON-OPERATING EXPENSE/(INCOME). . . . . . . . .      354,375            12%     388,480    12%
------------------------------------------------------  ------------  ------------  -----------  ----

 LOSS BEFORE INCOME TAXES. . . . . . . . . . . . . . .   (1,244,467)          -42%    (374,560)  -11%
 Income tax provision (Notes 1(j) and 6) . . . . . . .        1,600             0%       1,600     0%
------------------------------------------------------  ------------  ------------  -----------  ----
 NET LOSS. . . . . . . . . . . . . . . . . . . . . . .  $(1,246,067)          -42%  $ (376,160)  -11%
------------------------------------------------------  ------------  ------------  -----------  ----
------------------------------------------------------  ------------  ------------  -----------  ----
 NET LOSS PER SHARE:
   Net loss. . . . . . . . . . . . . . . . . . . . . .  $     (0.08)                $    (0.03)
------------------------------------------------------  ------------  ------------  -----------  ----

   Weighted-Average Shares Outstanding . . . . . . . .   16,092,292                  14,744,423
------------------------------------------------------  ------------  ------------  -----------  ----

</TABLE>

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


                                  F-6
<PAGE>

<TABLE>
<CAPTION>

                                                                                   SPACEDEV, INC.
                                                                                 AND SUBSIDIARIES

                                                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT



<S>                                                                      <C>             <C>

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

BALANCE AT JANUARY 1, 2002. . . . . . . . . . . . . . . . . . . . . . .     14,817,580   $ 1,481
Common stock issued for cash (Note 8(b)). . . . . . . . . . . . . . . .        153,060        15
Reversal of common stock issued for services (Note 8 (b)) . . . . . . .       (493,000)      (49)
Warrants issued for convertible debt program (Note 5 and 8(c)). . . . .              -         -

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

BALANCE AT DECEMBER 31, 2002. . . . . . . . . . . . . . . . . . . . . .     14,477,640     1,447
Common stock issued for cash (Note 8(b)). . . . . . . . . . . . . . . .        861,267        86
Common stock issued from notes on revolving credit facility (Note 4(c))        415,000        42
Common stock issued for services (Note 8(b)) . . . . . . . . . . . . .           7,500         1
Common stock issued from convertible debt program (Note 5 and 8(c)) . .        614,853        61
Common stock issued from employee stock options (Note 7(b)) . . . . . .         37,000         4

Warrants issued for convertible debt program (Note 5 and 8(c)). . . . .              -         -

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

BALANCE AT DECEMBER 31, 2003. . . . . . . . . . . . . . . . . . . . . .  $  16,413,260   $ 1,641


</TABLE>

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


                                  F-7
<PAGE>

<TABLE>
<CAPTION>

                                                                                                        SPACEDEV, INC.
                                                                                                      AND SUBSIDIARIES

                                                                      CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT



<S>                                                                       <C>           <C>             <C>
                                                                          Additional
                                                                          Additional    Paid-In
                                                                          Paid-in       Capital -       Deferred
                                                                          Capital       Stock Options   Compensation

BALANCE AT JANUARY 1, 2002 . . . . . . . . . . . . . . . . . . . . . . .  $ 8,204,831   $      750,000  $    (250,000)
Common stock issued for cash (Note 8(b)) . . . . . . . . . . . . . . . .       74,985                -              -
Reversal of common stock issued for services (Note 8 (b)). . . . . . . .     (452,013)               -              -
Warrants issued for convertible debt program (Note 5 and 8(c)) . . . . .      475,000                -              -

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

BALANCE AT DECEMBER 31, 2002 . . . . . . . . . . . . . . . . . . . . . .    8,302,803          750,000       (250,000)
Common stock issued for cash (Note 8(b)) . . . . . . . . . . . . . . . .      425,856                -              -
Common stock issued from notes on revolving credit facility (Note 4(c))       354,679                -              -
Common stock issued for services (Note 8(b)). . . . . . . . . . . . . .         9,169                -              -
Common stock issued from convertible debt program (Note 5 and 8(c)). . .      368,850                -              -
Common stock issued from employee stock options (Note 7(b)). . . . . . .       19,650                -              -

Warrants issued for convertible debt program (Note 5 and 8(c)) . . . . .     (237,500)
   Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            -                -              -

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

BALANCE AT DECEMBER 31, 2003 . . . . . . . . . . . . . . . . . . . . . .  $ 9,243,507   $      750,000  $    (250,000)


</TABLE>

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


                                  F-8
<PAGE>

<TABLE>
<CAPTION>

                                                                                       SPACEDEV, INC.
                                                                                     AND SUBSIDIARIES

                                                     CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT



<S>                                                                       <C>            <C>

                                                                          Accumulated
                                                                          Deficit        Total

BALANCE AT JANUARY 1, 2002 . . . . . . . . . . . . . . . . . . . . . . .  $(10,195,549)  $(1,489,237)
Common stock issued for cash (Note 8(b)) . . . . . . . . . . . . . . . .             -        75,000
Reversal of common stock issued for services (Note 8(b)). . . . . . . .              -      (452,062)
Warrants issued for convertible debt program (Note 5 and 8(c)) . . . . .             -       475,000
                                                                                     -
   Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .      (376,160)     (376,160)
------------------------------------------------------------------------  -------------  ------------
                                                                                     -
BALANCE AT DECEMBER 31, 2002 . . . . . . . . . . . . . . . . . . . . . .   (10,571,709)   (1,767,459)
Common stock issued for cash (Note 8(b)) . . . . . . . . . . . . . . . .             -       425,942
Common stock issued from notes on revolving credit facility (Note 4(c))              -       354,721
Common stock issued for services (Note 8(b)). . . . . . . . . . . . . .              -         9,170
Common stock issued from convertible debt program (Note 5 and 8(c)). . .             -       368,911
Common stock issued from employee stock options (Note 7(b)). . . . . . .             -        19,654

Warrants issued for convertible debt program (Note 5 and 8(c)) . . . . .             -      (237,500)
   Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    (1,246,067)   (1,246,067)
                                                                                     -

BALANCE AT DECEMBER 31, 2003 . . . . . . . . . . . . . . . . . . . . . .  $(11,817,776)  $(2,072,628)


</TABLE>

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


                                  F-9
<PAGE>

<TABLE>
<CAPTION>

                                                                                SPACEDEV, INC.
                                                                              AND SUBSIDIARIES

                                                         CONSOLIDATED STATEMENTS OF CASH FLOWS

<S>                                                                   <C>           <C>
 Years Ended December 31,. . . . . . . . . . . . . . . . . . . . . .         2003        2002
--------------------------------------------------------------------  ------------  ----------

 CASH FLOWS FROM OPERATING ACTIVITIES
    Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $(1,246,067)  $(376,160)
    Adjustments to reconcile net loss to net cash
       provided by (used in) operating activities:
       Depreciation and amortization . . . . . . . . . . . . . . . .      166,971     357,692
       Contributed assets. . . . . . . . . . . . . . . . . . . . . .            -     (16,251)
       (Gain) loss on disposal of assets . . . . . . . . . . . . . .     (107,499)      7,410
       Non-cash interest expense - convertible debt program. . . . .      131,411     125,000
       Non-cash loan fees. . . . . . . . . . . . . . . . . . . . . .      126,471           -
       Common stock issued for compensation and services . . . . . .        9,170    (452,062)
       Change in operating assets and liabilities: . . . . . . . . .            -           -

         Accounts receivable . . . . . . . . . . . . . . . . . . . .     (104,737)    208,290
         Work in Progress. . . . . . . . . . . . . . . . . . . . . .     (110,490)          -
         Prepaid and other current assets. . . . . . . . . . . . . .      (33,888)     10,168
         Inventory . . . . . . . . . . . . . . . . . . . . . . . . .       (8,232)     (1,729)
         Convertible debt notes payable. . . . . . . . . . . . . . .      130,661           -
         Costs in excess of billings and estimated earnings. . . . .      281,175    (281,175)
         Accrued interest revolving line of credit . . . . . . . . .       13,601           -
         Accounts payable and accrued expenses . . . . . . . . . . .     (286,874)    202,641
         Accrued payroll, vacation and related taxes . . . . . . . .      (90,187)     15,936
         Customer deposits and deferred revenue. . . . . . . . . . .      (69,402)   (158,319)
         Employee Stock Purchase Plan. . . . . . . . . . . . . . . .        5,498           -
         Billings in excess of costs incurred and estimated earnings            -    (302,553)
         Provision for anticipated loss. . . . . . . . . . . . . . .      (11,044)    (91,241)
         Accrued interest - related party. . . . . . . . . . . . . .       47,023      45,265
         Other accrued liabilities . . . . . . . . . . . . . . . . .      126,919         115
--------------------------------------------------------------------  ------------  ----------

 NET CASH (USED IN) OPERATING ACTIVITIES . . . . . . . . . . . . . .   (1,029,520)   (706,973)


CASH FLOWS FROM INVESTING ACTIVITIES
 Proceeds from the sale of building. . . . . . . . . . . . . . . . .    3,150,124      50,000
    Purchases of fixed assets. . . . . . . . . . . . . . . . . . . .      (39,292)     (1,900)
--------------------------------------------------------------------  ------------  ----------

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES. . . . . . . . .    3,110,832      48,100


 CASH FLOWS FROM FINANCING ACTIVITIES
    Proceeds (payments) from convertible debt program. . . . . . . .     (257,736)    475,000
    Principle payments on notes payable. . . . . . . . . . . . . . .   (2,432,595)    (65,785)
    Principal payments on capitalized lease obligations. . . . . . .      (35,764)    (37,330)
    Payments on notes payable - related party. . . . . . . . . . . .     (199,997)    (66,667)
    Proceeds from revolving credit facility. . . . . . . . . . . . .      963,542           -
    Proceeds on notes payable - related party. . . . . . . . . . . .            -      94,666
    Proceeds from issuance of common stock . . . . . . . . . . . . .      445,596      75,000

 NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES . . . . . . . .   (1,516,954)    474,884


 Net increase/(decrease) in cash . . . . . . . . . . . . . . . . . .      564,358    (183,989)


 CASH AT BEGINNING OF YEAR . . . . . . . . . . . . . . . . . . . . .       27,648     211,637
--------------------------------------------------------------------  ------------  ----------

 CASH AT END OF YEAR . . . . . . . . . . . . . . . . . . . . . . . .  $   592,006   $  27,648
--------------------------------------------------------------------  ------------  ----------
--------------------------------------------------------------------  ------------  ----------

</TABLE>

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

                                  F-10
<PAGE>

<TABLE>
<CAPTION>

                                                                                                       SPACEDEV, INC.
                                                                                                     AND SUBSIDIARIES

                                                                                CONSOLIDATED STATEMENTS OF CASH FLOWS



<S>                                                                                                 <C>      <C>
 Years Ended December 31,. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     2003      2002
--------------------------------------------------------------------------------------------------  -------  --------

 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Cash paid during the year for:
     Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $41,726  $249,385
     Income Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $ 1,600  $  1,600

 NONCASH INVESTING AND FINANCING ACTIVITIES:

 During 2003 and 2002, the Company issued 7,500 and 7,000 shares of restricted
      shares of stock for employee awards and services and for summer & student
      interns and recorded expenses of $9,170 and $2,900, respectively.

 During 2003 and 2002, the Company issued 861,267 and 153,060 shares of restricted
      shares of stock under the Company's Private Placement Memorandum
      for cash of $425,942 and $75,000, respectively.

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

 During 2003,  the Company issued 415,000 shares of its common stock to the Laurus Master
      Fund from conversions of its convertible debt notes under its revolving credit facility with
      Laurus;  thereby realizing a corresponding reduction in debt of $228,250.  The Company
      recorded additional loan fees of $126,471 and charged these fees to equity.

 During 2003,  the Company issued 37,000 shares of stock converted from employee stock
      options for $19,654 in cash.

During 2002, the Company recovered 500,000 shares of stock for a credit of $455,000 upon
      final judgment of the outstanding litigation against EMC Holdings, Inc. The expense for
      this matter was recorded during 2001.

 During 2003 and 2002,  the Company financed $10,135  and $20,472, respectively, in fixed assets
       through various capital lease obligations.


</TABLE>

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



                                  F-11
<PAGE>

                                                                  SPACEDEV, INC.
                                                                AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

1.     SUMMARY  OF  SIGNIFICANT  ACCOUNTING  POLICIES
A  summary of the Company's significant accounting policies consistently applied
in  the  preparation  of  the  accompanying  consolidated  financial  statements
follows.

(a)     Nature  of  operations

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

The Company was incorporated under the laws of the State of Colorado on December
23, 1996 as Pegasus Development Group, Inc. ("PDGI").  SpaceDev, LLC of Colorado
was  originally formed in 1997 for commercial space exploration and was the sole
owner of shares of common stock of SpaceDev (a Nevada corporation) ("SpaceDev"),
formed  on  August  22, 1997.  On October 22, 1997, PDGI issued 8,245,000 of its
$.0001  par  value common stock for 100 percent (1,000,000 shares) of SpaceDev's
common  stock  owned  by  SpaceDev,  LLC.  Upon  the acquisition of the SpaceDev
stock, SpaceDev was merged into PDGI and, on December 17, 1997, PDGI changed its
name  to SPACEDEV, INC.  After the merger, SpaceDev, LLC, changed its name to SD
Holdings,  LLC  on December 17, 1997. (See Notes 8(a) and 8(b).)  For accounting
purposes, the transaction was accounted for as a reverse merger with the Company
as  the  acquirer.  Since  SpaceDev  had minimal assets prior to the merger, the
transaction  was accounted for as the sale of the Company's common stock for net
assets  of  $1,232.  The  Company  became publicly traded in October 1997 and is
currently  trading  on  the  Over-the-Counter Bulletin Board ("OTCBB") under the
symbol  of  "SPDV."

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

                                  F-12
<PAGE>

(b)     Prior  year  going  concern

The  Company's  auditors, PKF, expressed in their formal auditors' opinion dated
February  11,  2004  (except for Note 11 as to which the date is April 2, 2004),
that  in  their  opinion,  based  on  their  audit,  the  Company's consolidated
financial  statements  referred  to  herein  present  fairly,  in  all  material
respects, the consolidated financial position of SPACEDEV, INC. AND SUBSIDIARIES
as  of December 31, 2003, and the consolidated results of our operations and our
cash  flows  for  the  year then ended, in conformity with accounting principles
generally  accepted  in  the  United  States  of  America.  In  previous  years,
including  the  opinion issued by the Company's previous auditors, Nation Smith,
dated  February  13, 2003, they expressed an opinion that our financial position
raised  substantial  doubt  about  the  Company's ability to continue as a going
concern.  The  accompanying consolidated financial statements as of December 31,
2003  have  been prepared assuming the Company will continue as a going concern.
However,  in  2002,  the  Company  had a working capital deficit of $197,381 and
incurred  a  net  loss  of  $376,160  for the year ended December 31, 2002.  The
working capital deficit, together with the total net loss, raised, at that time,
substantial  doubt  about  the Company's ability to continue as a going concern.
Subsequent to December 2003, the Company was awarded a $43,362,271 contract from
MDA  and  after  analysis  of  the  Company's  projections  (including   revenue
projections)  for  the  next  several  quarters  and other relevant factors, the
Company's  current auditors, PKF, concluded there is no longer substantial doubt
as  to  the Company's ability to continue as a gong concern, and has, therefore,
not  included  the  going concern language in its report dated February 11, 2004
(except  for  Note  11 as to which the date is April 2, 2004) for the year ended
December  31,  2003.  Management believes that this was appropriate and reflects
the  Company's  improved  financial  condition,  its  ability  to  forecast more
accurately  and  further  validate customer demand for the Company's technology,
products  and  services.  Management  still intends to obtain new commercial and
government  contracts,  continue  to utilize (and possibly expand) its revolving
credit facility and possibly raise some additional equity capital in a public or
private  offering  or  fund-raising  effort.  Regardless,  management  may  seek
additional  capital  through  a combination of public and private debt or equity
placements  in  the  future.  There  can be no assurance that existing contracts
will  be  completed  successfully  or  that  new contracts or additional debt or
equity  financing that may be needed to fund operations will be available or, if
available, obtained in sufficient amounts necessary to meet the Company's needs.
Management  does  believe  that current contracts will be sufficient to fund the
Company  through  2004.

The  accompanying   consolidated   financial   statements  do  not  include  any
adjustments  to  reflect  the  possible future effects on the recoverability and
classification  of  assets or the amounts and classification of liabilities that
may  result  from  the  possible inability of the Company to continue as a going
concern.

(c)     Principles  of  consolidation

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

                                  F-13
<PAGE>

(d)     Use  of  estimates

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

(e)     Software  Development  Costs

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

(f)     Revenue  recognition

The  Company's  revenues  in  2003  were  derived  primarily  from United States
government  cost  plus  fixed fee (CPFF) contracts compared to a predominance of
fixed price contracts in 2002.  Revenues from the CPFF contracts during 2003 are
recognized  as  expenses  are  incurred  compared  to  revenues from fixed price
contracts  in  2002,  which  were  recognized using the percentage-of-completion
method.  Estimated  contract  profits  are  taken into earnings in proportion to
revenues  recorded.  Revenues  under  certain  long-term  fixed price contracts,
which  provide  for  the  delivery  of minimal quantities or require significant
amounts  of development effort in relation to total contract value, are recorded
upon  achievement  of performance milestones or using the cost-to-cost method of
accounting  where  revenues and profits are recorded based on the ratio of costs
incurred  to  estimated  total  costs  at  completion.  Losses  on contracts are
recognized  when  estimated  costs are reasonably determined.  Actual results of
contracts  may  differ from management's estimates and such differences could be
material to the consolidated financial statements.  Professional fees are billed
to  customers  on  a  time  and  materials  basis,  a  fixed  price  basis  or a
per-transaction  basis  depending  on  the  terms and conditions of the specific
contract.  Time  and  material revenues are recognized as services are performed
and  costs  incurred.

In  2002,  billings in excess of costs incurred and estimated earnings represent
the  excess  of amounts billed in accordance with the contractual billing terms.
Costs in excess of billings represent the excess of actual costs incurred to the
amount  that  is  billed  to  date.

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

                                  F-14
<PAGE>

(g)     Depreciation  and  amortization

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

In  December  2002, the Company entered an agreement to sell its interest in its
only  facility,  which  closed in January 2003.  The escrow transaction included
the  sale  of  the  land and building at 13855 Stowe Drive, Poway, CA 92064.  In
conjunction  with  the  sale  of its only facility in December 2002, the Company
entered  into  a non-cancelable operating lease with the buyer to lease-back its
facilities for ten years (see Note 2).  The base rent shall increase by 3.5% per
year  (see  Notes  2  and  9(c)).

(h)     Research  and  development

The  Company  is  actively engaged in design and development activities with its
commercial  propulsion  systems  as  well  as  its new projects with the Missile
Defense  Agency  and the Air Force Research Laboratory.  The Company has several
SBIR  (Small  Business  Innovation  Research)  grants  from  the  government and
continues  to  seek new SBIR opportunities.  Cost incurred under SBIR grants are
charged  against revenues received under SBIR grants.  Non-reimbursable research
and  development  expenditures relating to possible future products are expensed
as  incurred.  The  Company  incurred  $281,280 in non-reimbursable research and
development  costs  during  2003  as  compared  to  no  recorded  research   and
development  costs  during  2002.

(i)     Advertising

The  Company  follows the policy of charging the costs of advertising to expense
as  incurred.  Advertising expense was approximately $1,460 and $900 in 2003 and
2002,  respectively.

(j)     Income  taxes

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

                                  F-15
<PAGE>


 (k)     Stock-based  compensation

In  October  1995,  the  FASB (Financial Accounting Standards Board) issued SFAS
(Statements  of  Financial  Accounting  Standards)  No.  123,   "Accounting  for
Stock-Based  Compensation."  The  Company  adopted  SFAS  No.  123 in 1997.  The
Company has elected to measure compensation expense for its stock-based employee
compensation  plans  using  the  intrinsic  value  method   prescribed   by  APB
(Accounting  Principles  Board)  Opinion No. 25, "Accounting for Stock Issued to
Employees,"  and  has  provided pro forma disclosures as if the fair value based
method  prescribed  in  SFAS  No. 123 has been utilized.  See Note 8(d).  During
December 2002, FASB issued SFAS No. 148 "Accounting for Stock Based Compensation
-  Transition and Disclosure", which amends SFAS No. 123 to require companies to
elect  to recognize fair value stock based compensation costs in their financial
statements  or to disclose the pro forma impact of those costs in the footnotes.
If  the Company had accounted for these options in accordance with SFAS No. 123,
the  total value of options granted during 2003 and 2002 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:

<TABLE>
<CAPTION>



<S>                       <C>           <C>
Years Ended December 31,         2003        2002
------------------------  ------------  ----------
Net loss:
As reported. . . . . . .  $(1,246,067)  ($376,160)
Pro forma. . . . . . . .  $(1,480,592)  ($604,395)
------------------------  ------------  ----------
Loss per Share:
As reported. . . . . . .  $     (0.08)     ($0.03)
Pro forma. . . . . . . .  $     (0.09)     ($0.04)
------------------------  ------------  ----------
</TABLE>

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

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

(m)     Net  loss  per  common  share

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

(n)     Financial  instruments

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

                                  F-16
<PAGE>

(o)     Segment  reporting

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

(p)     New  accounting  standards

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

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

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

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

                                  F-17
<PAGE>

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

2.     FIXED  ASSETS

In  December  2002, the Company entered an agreement to sell its interest in its
only facility.  As of December 31, 2002 the Company listed a receivable held for
sale  of  $3,150,124  which  was realized when the transaction closed in January
2003.  The  escrow  transaction  included  the  sale of the land and building at
13855  Stowe  Drive,  Poway,  CA  92064.

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

<TABLE>
<CAPTION>

Fixed  assets  consisted  of  the  following:


<S>                            <C>         <C>
December 31,. . . . . . . . .       2003        2002
-----------------------------  ----------  ----------
Capital leases. . . . . . . .  $ 155,802   $ 145,365
Computer equipment. . . . . .    163,721     124,429
Building improvements . . . .      9,488       9,488
Furniture and fixtures. . . .      5,271       5,271
-----------------------------  ----------  ----------
                                 334,282     284,553
Less accumulated depreciation
   and amortization . . . . .   (196,750)   (143,065)
-----------------------------  ----------  ----------
                               $ 137,532   $ 141,488
                               ----------  ----------
</TABLE>

Depreciation and amortization expense for fixed assets was approximately $53,000
and  $164,000  for  the  years  ending December 31, 2003 and 2002, respectively.
Depreciation  and amortization expense was significantly less during 2003 due to
the  sale of our facility in January 2003 and the full amortization of the AMROC
technology.  (See  Note  3(a).)

                                  F-18
<PAGE>

3.     ACQUISITIONS

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

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

For  each of the three years following the Agreement date, the licensor received
warrants  to  purchase  25,000 shares of restricted common stock.  In the fourth
through  tenth  year  following  the Agreement date, the licensor 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 of shares to be issued is 100,000
and  the  maximum  consideration shall not exceed warrants to purchase 3,000,000
shares  of  common stock or $6,000,000 in recognized value.  Recognized value is
the  sum of (a) the cumulative difference between the market price of the common
stock  and the strike price and (b) the cumulative difference between the market
price  on  the date of exercise and the strike price for each warrant previously
exercised.  To date, no revenue has been generated from the acquired technology.

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

The  Company's  intangible  assets  were  fully amortized in 2003.  Amortization
expense  was  approximately $11,000 and $40,000 for 2003 and 2002, respectively.

<TABLE>
<CAPTION>

Other  intangible  assets  consisted  of  the  following:


<S>                            <C>         <C>
December 31,. . . . . . . . .       2003        2002
-----------------------------  ----------  ----------
Other intangibles . . . . . .  $ 116,292   $ 116,292
Less accumulated amortization   (116,292)   (105,736)
-----------------------------  ----------  ----------
                               $       0   $  10,556
                               ----------  ----------
</TABLE>


                                  F-19
<PAGE>


4.     NOTES  PAYABLE

(a)     Building  and  settlement  notes
In  December 2002, the Company entered into an agreement to sell its interest in
its  only  facility.  The  transaction  closed  in   January  2003.  The  escrow
transaction  included  the  sale  of the land and building at 13855 Stowe Drive,
Poway,  CA  92064.  Net  fixed assets were reduced by approximately $1.9 million
and  notes  payable were reduced by approximately  $2.4 million while a deferred
gain  was  recorded.  In  conjunction  with the sale, the Company entered into a
lease agreement with the buyer to leaseback its facilities.  The Company's Chief
Executive  Officer provided a guarantee for the leaseback.  The gain on the sale
of the facility was deferred and amortized on a straight-line basis over the ten
(10)  year term of the lease.  Deferred gain of $1,172,720 is being amortized at
the  rate of $117,272 per year for ten (10) years ending in January 2013.  As of
December  31, 2003, the deferred gain was $1,065,221.  This amortization will be
included  in the Company's non-operating income and expense and totaled $107,499
in  2003.

Deferred  Gain  consisted  of  the  following:

<TABLE>
<CAPTION>


<S>                        <C>          <C>
December 31,. . . . . . .        2003    2002
-------------------------  -----------  -----

Deferred Gain . . . . . .  $1,172,720   $   -
Less Amortization to date    (107,499)      -
-------------------------  -----------  -----
                           $1,065,221   $   -
                           -----------  -----
</TABLE>

In  2001, the Company entered into three settlement loan agreements with various
vendors.  The  total  of $171,402 for all three loans called for payment between
24  and 50 months with interest that ranged from 0% to 8%.  At December 31, 2003
and  2002,  the  outstanding  balances on these notes were $87,591 and $146,527,
with  interest  expense  of  $4,956  and  $4,782,  respectively.

Future  minimum  principal  payments  on  notes  payable  are  as  follows:

<TABLE>
<CAPTION>


Year Ending December 31,
<S>                       <C>
2004 . . . . . . . . . .  $41,464
2005 . . . . . . . . . .   36,670
2006 . . . . . . . . . .    9,457
                          -------
Total Settlement Notes .  $87,591
------------------------  -------

</TABLE>

(b)     Related  parties
The  Company  has a note payable to its CEO.  At December 31, 2003 and 2002, the
balances were $585,522 and $738,496, respectively, with accrued interest of 10%.
The  note  was amended on March 20, 2000 to call for annual payments of not less
than  $80,000  per  year  with  interest  at  10%.


                                  F-20
<PAGE>

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

<TABLE>
<CAPTION>


<S>                      <C>
Year Ended December 31,
-----------------------
2004. . . . . . . . . .    80,000
2005. . . . . . . . . .    80,000
2006. . . . . . . . . .    80,000
2007. . . . . . . . . .    80,000
2008. . . . . . . . . .    80,000
Thereafter. . . . . . .  $185,522
-----------------------  --------
                         $585,522
-----------------------  --------
</TABLE>

Accrued interest expense on this note was $47,023 and $45,265 for 2003 and 2002,
respectively.

(c)     Revolving  Credit  Facility.

On  June  3,  2003,  the  Company  entered  into  a  Security Agreement, Secured
Convertible  Note,  Registration  Rights  Agreement  and  Common  Stock Purchase
Warrant,  with Laurus Master Fund, Ltd. ("Laurus"), which were filed on Form 8-K
dated  June  18,  2003.  Pursuant  to  the agreements, the Company received a $1
million  revolving  credit facility in the form of a three-year Convertible Note
secured  by  its  assets.  The  net  proceeds from the Convertible Note are  for
general  working  capital needs.  Advances on the Convertible Note may be repaid
at the Company's option, in cash or through the issuance of the Company's shares
of  common  stock.  The  Convertible  Note carries an interest rate of WSJ Prime
plus  0.75% on any outstanding balance.  In addition, the Company is required to
pay  a  collateral  management  payment  of  0.55%  of  the  average   aggregate
outstanding  balance  during  the month plus an unused line payment of 0.20% per
annum.  The outstanding balance on the revolving credit facility at December 31,
2003 was $748,893, of which approximately $13,600 had been accrued for interest.

The  Company  filed  a  registration  statement on Form SB-2 on July 25, 2003 in
connection  with  this  transaction.  The  Form  SB-2  was declared effective on
August  6,  2003.  With the securities registered for public resale, the Company
has  an option to pay amounts outstanding under the revolving credit facility by
converting  shares  of  its common stock at the fixed conversion price of  $0.55
per  share  on  the  first  $1 million of principal, as long as the then current
market  price  is  more  than  118%  of  the  fixed  conversion  price.

The  Convertible  Note  includes  a  right of conversion in favor of Laurus.  If
Laurus  exercises  its  conversion  right at any time or from time to time at or
prior  to maturity, on any outstanding balance at the time, the Convertible Note
will  be  convertible  into  shares  of  the  Company's  common stock at a fixed
conversion  price,  subject  to  adjustments  for stock splits, combinations and
dividends  and  for  shares  of  common  stock  issued  for  less than the fixed
conversion  price  (unless  exempted  pursuant  to  the  agreements).  The fixed
conversion  price  will  be adjusted after conversion of the first $1 million to
103%  of  the  then  fair  market  value  of  our  common stock ("Adjusted Fixed
Conversion  Price").  As  of  December  31,  2003,  Laurus had converted 415,000
shares  to  reduce  the  amount  borrowed under the revolving credit facility by
$228,250.  The  Company  expensed  approximately  $126,500 for non-cash loan fee
expenses  in 2003.  Fair market value of the stock was determined by discounting
the  closing  market  price  on  the  date  of  the  conversion  by  20%.

                                  F-21
<PAGE>

Availability  of  funds under the revolving credit facility will be based on our
accounts  receivables,  except  as  waivers  are provided by Laurus.  An initial
three  (3)  month  waiver  was offered by Laurus, under which Laurus permitted a
credit  advance  up  to  $300,000,  which amount might otherwise exceed eligible
accounts  receivable during the period.  Laurus subsequently extended the waiver
for  an additional six (6) months, under which Laurus permitted a credit advance
up  to  $1  million,  which  amount  might  otherwise  exceed  eligible accounts
receivable  during  the period.  The revolving credit facility is secured by all
of  the  assets  of  the  Company.

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

In  addition  to  the  initial  warrant,  the  Company  is obligated to issue an
additional  five-year warrant to Laurus to purchase one share of common stock at
an exercise price equal to 125% of the Adjusted Fixed Conversion Price for every
ten  dollars  ($10)  in  principal of the Convertible Note converted into common
stock,  if  and  when  over  $1  million is converted under the revolving credit
facility.  The  value of the warrant will be determined, if and when issued, and
will  be  treated  as additional interest expense and will be amortized over the
remaining  term of the Convertible Note, unless sooner terminated.  No more than
an aggregate of 100,000 shares of the Company's common stock may be purchased by
Laurus  under  such  additional  warrants.


5.     CONVERTIBLE  DEBENTURES

From  October  14, 2002 through November 14, 2002, the Company sold an aggregate
of $475,000 of 2.03% convertible debentures to various directors and officers of
the  Company.  The  total  funding  was  completed  on  November  14, 2002.  The
convertible  debentures  entitled the holder to convert the principal and unpaid
accrued  interest  into  the  Company's common stock when the note matures.  The
maturity on the notes was six (6) months from issue date.  On March 25, 2003, an
amendment  was executed which extended these notes an additional six (6) months.
The  convertible  debentures  were  exercisable  into  a number of the Company's
common  shares  at  a  conversion price that equals the 20-day average ask price
less  10%,  which  was,  established  when  the  note was issued, or the initial
conversion  price.

Concurrent  with  the issuance of the convertible debentures, the Company issued
warrants to purchase up to 1,229,705 shares of the Company's common stock to the
subscribers.  These  warrants  are exercisable for three (3) years from the date
of  issuance  at the initial exercise price which is equal to the 20-day average
ask  price  less  10%,  which  was  established when the note was issued, or the
initial  conversion price of the notes.  Upon issuance, the issued warrants were
valued using the Black-Scholes pricing model based on the expected fair value at
issuance  and  the  estimated  fair  value  was recorded as debt discount.  As a
result  of  the  change  to  the  maturity  date  of  the  convertible debt, the
amortization  period  for  the debt discounts was also extended during the first
quarter  in  2003.

                                  F-22
<PAGE>

On September 5, 2003, the Company repaid one-half of the convertible notes, with
the condition that the note holders convert the other half. Also, as a condition
of  the partial repayment, the note holders were required to relinquish one-half
of  the previously issued warrants. Finally, as additional consideration for the
transaction,  the  note  holders were offered 5% interest on their notes, rather
than  the  stated  2.03%.  All  the  note  holders  accepted  the  offer and the
convertible  notes were retired. As of December 31, 2003, the Company recorded a
credit  of  $88,408,  as  debt discount recovery; therefore, for the year ending
December  31,  2003,  the  debt  discount expense was $112,500. The Company also
expensed  $131,411 for non-cash loan fee expense. Fair market value of the stock
was  determined  by  discounting  the  closing  market  price on the date of the
transaction  by  20%,  based  on  the  nature  of  the  restricted  securities.


<TABLE>
<CAPTION>



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

Debt discount (Warrants) - beginning balance  $ 475,000
  Amount forfeited . . . . . . . . . . . . .  $(237,500)
  Amount expensed prior year . . . . . . . .  $(125,000)
  Amount expensed current year . . . . . . .  $(267,879)
  Current year - adjustment. . . . . . . . .  $ 155,379
--------------------------------------------  ----------
                                              $(475,000)
--------------------------------------------  ----------
Debt discount (Warrants) - ending balance. .  $       0
--------------------------------------------  ----------
--------------------------------------------  ----------

</TABLE>

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  $2,190,000  and $1,372,000 as of December 31, 2003 and
2002,  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
$818,000  in 2003 from $1,372,000 at December 31, 2002 to $2,190,000 at December
31,  2003.


                                  F-23
<PAGE>

At  December  31, 2003, the Company has federal and state tax net operating loss
and  capital  loss  carryforwards  of  approximately  $4,229,589 and $1,846,945,
respectively.  The  federal and state tax loss carryforwards will expire in 2023
and 2013, respectively, unless previously utilized.  The State of California has
suspended  the  utilization  of  net  operating  loss  for  2002  and  2003.

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



<S>                                             <C>    <C>
  Years Ended December 31,. . . . . . . . . .   2003   2002
---------------------------------------------   -----  -----
  Statutory U.S. federal rate . . . . . . . .    34%    34%
---------------------------------------------   -----  -----
  State income taxes - net of federal benefit
  Net operating loss for which no tax             5%     5%
   Benefit is currently available . . . . . .   (39%)  (39%)
--------------------------------------------    -----  -----
</TABLE>


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

<TABLE>
<CAPTION>



<S>                                      <C>           <C>
  December 31,. . . . . . . . . . . . .         2003          2002
---------------------------------------  ------------  ------------
  Deferred tax assets:
---------------------------------------
   Loss carryforwards . . . . . . . . .  $ 1,588,000   $ 1,262,000
   Deferred gain on sale of building         435,000             -
   Temporary differences. . . . . . . .      127,000       100,000
   Research and development credits . .       40,000        10,000
  Gross deferred tax assets . . . . . .    2,190,000     1,372,000
---------------------------------------  ------------  ------------

  Valuation allowance . . . . . . . . .   (2,190,000)   (1,372,000)
                                         $         -   $         -
                                         ------------  ------------

</TABLE>




7.     EMPLOYEE  BENEFIT  PLAN

(a)     Profit  sharing  401(k)  plan

During  1997,  the  Company  adopted  a  401(k)  retirement savings plan for its
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 2003 and 2002, the Company did not contribute to the Plan.

(b)     Incentive  stock  option  and  employee  stock  purchase  plans

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

                                  F-24
<PAGE>

At  the  2000 Annual Stockholder Meeting, the shareholders approved an amendment
to  the  Stock Option Plan of 1999, increasing the number of shares eligible for
issuance under the Plan to 30% of the then outstanding common stock and allowing
the  Board of Directors to make annual adjustments to the Plan to maintain a 30%
ratio  to  outstanding  common  stock  at  each  annual  meeting of the Board of
Directors.  The  Board,  at  its  annual  meetings  in  2002  and  2003, made no
adjustment, as a determination was made that the number of shares then available
under  the  Plan was sufficient to meet the Company's needs.  As of December 31,
2003, 4,184,698 shares were authorized for issuance under the Plan, 3,124,807 of
which are currently subject to outstanding options and awards.  The Stock Option
Plan  of  1999  was registered with the U.S. Securities & Exchange Commission on
Form  S-8.

During 2003, the Company issued non-statutory options to purchase 140,000 shares
to  its  independent  directors  for  attendance  at its 2003 Board of Directors
meetings.  In  addition  to  the  Stock  Option  Plan  of 1999, its shareholders
adopted  the  1999  Employee  Stock Purchase Plan with 1,000,000 shares reserved
under  the plan and authorized its Board of Directors to make twelve consecutive
offerings  of  our  common  stock  to  its  employees.  The  1999 Employee Stock
Purchase  Plan  has been instituted and the first employees enrolled in the plan
in  August 2003.  The first shares of common stock were issued under the Plan in
February  2004.  The exercise price for the Stock Purchase Plan will not be less
than  85%  of  the  fair  market  value  of  the  stock on the date the stock is
purchased.  During  2003  employees  contributed  $5,498  to  the employee stock
purchase  plan; however, no shares were issued under the plan as of December 31,
2003.


8.     STOCKHOLDERS'  EQUITY

(a)     Convertible  preferred  stock

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

(b)     Common  stock

On  October 22, 1997, PDGI issued 8,245,000 of its $.0001 par value common stock
for 100 percent (1,000,000 shares) of SpaceDev's common stock owned by SpaceDev,
LLC, a Nevada corporation.  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-25
<PAGE>

During  2003  and 2002, the Company issued 7,500 and 7,000, shares of its common
stock  for  employee  awards  and  services and for summer & student interns and
recorded  expenses  of  $9,170  and $2,900, respectively.  The fair value of the
shares  issued  was  calculated using the closing price on the date of issuance.

During  2002,  the  Company  recovered  500,000  shares of stock for a credit of
$455,000  during  2002  pursuant  to  an  arbitration  award  issued against EMC
Holdings,  Inc.   The  Company  recorded  the  credit  during 2002 to offset the
expense  that was recorded during 2001.  On June 18, 2001, SpaceDev entered into
a  relationship with two individuals (doing business as EMC Holdings Corporation
("EMC"))  whereby EMC was to provide certain consulting and advisory services to
the  Company.  EMC  received  the  first installment of 500,000 shares of common
stock  on  June  26,  2001. Total expense for the initial stock issuance through
September  30, 2001 was $455,000.  Pursuant to a demand for arbitration filed on
November  7,  2001,  the  Company  sought  the return of all or a portion of the
shares  issued  to  EMC.  EMC  filed its own claim with the American Arbitration
Association on November 13, 2001, alleging that the Company owed EMC $118,000 in
fees,  plus  damages  to  be  proven  at  arbitration.

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

Because  collection  of  the attorney and arbitration fees award is not assured,
the Company has expensed all of its fees related to this matter, any recovery of
the fees will be recorded as income in the period they are received; however, at
this  time,  the  Company  does  not  expect any recovery, and in June 2003, the
Company  ceased  efforts  to recover the awarded fees, as it was determined that
the cost to pursue collection exceeded the likelihood of collection.  The return
of the 500,000 shares, as provided in the interim award issued on July 17, 2002,
was  recorded in the third quarter of 2002 as a reversal of the original expense
recorded.  Because  the  original  expense  was not recorded as an extraordinary
item,  the  reversal  of  the  expense did not qualify as an extraordinary item.

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

In  June 2003, the Company ceased its efforts to recover the awarded fees, as it
determined  the cost to pursue collection exceeded the likelihood of collection.

                                  F-26
<PAGE>

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

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

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

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

(c)     Warrants

Concurrent  with  the  issuance  of the convertible debentures from October 2002
through November 2002, the Company issued to subscribers warrants to purchase up
to  1,229,705  shares  of the Company's common stock.  On September 5, 2003, the
Company  repaid  one-half  of the convertible notes, with the condition that the
note  holders  would  convert  the  other  half.  As  a condition of the partial
repayment,  the  note  holders  were  required  to  relinquish  one-half  of the
previously  issued  warrants  reducing  the  total  warrants  issued  under  the
convertible  debt  program to 614,853.  These warrants are exercisable for three
(3)  years  from  the  date  of issuance at the initial exercise price, which is
equal  to  the  20-day  average asking price less 10% established when the notes
were  issued.  Upon  issuance  the  warrants were valued using the Black-Scholes
pricing  model  based  on  the expected fair value at issuance and the estimated
fair  value  was  also  recorded as debt discount.  As of December 31, 2003, the
Company  had  other warrants outstanding issued as part of its private placement
that  allow  the  holders  to purchase up to 2,285,931 shares of common stock at
prices  between  $0.37  and  $1.05 per share.  The warrants may be exercised any
time  within  three  (3)  and  five  (5)  years  of  issuance.

(d)     Stock  options

On  November  21,  1997,  the  Company  entered  into a five (5) year employment
agreement  with  its  CEO.  As  part  of  the  employment agreement, the Company
granted  options  to the CEO to purchase up to 2,500,000 shares of the Company's
$.0001  par  value  restricted  common  stock.

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


                                  F-27
<PAGE>

All  options  expire  ten  (10)  years  from  date  of  amendment.

<TABLE>
<CAPTION>


                                                                                                    Exercise
                  Number                                                                            price per
                  Of shares         Vesting Conditions                                              share
                  -------           ----------------------------------------------------------     -------------------
<S>               <C>               <C>                                                            <C>
Granted Options:
                  500,000. . . . .  Currently vested                                               $              1.00
                  500,000. . . . .  Obtaining $6,500,000 additional equity capital                 $              1.50
                  500,000. . . . .  Financing and executing a definitive space launch agreement    $              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
Options to be Granted upon the Occurrence of Certain Events:
                  250,000. . . . .  Upon the Company market capitalization reading $250 million    $              5.00
                  500,000. . . . .  Upon the Company market capitalization reading $500 million    $             10.00
                  750,000. . . . .  Upon the Company market capitalization reading $1 billion      $             20.00
                  -------           ----------------------------------------------------------     -------------------
</TABLE>

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

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

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



                                  F-28
<PAGE>




<TABLE>
<CAPTION>


                                                    Weighted
                                Options              Average
                              Outstanding    Exercise Prices
                              ------------  ----------------
<S>                           <C>           <C>
Balance at January 1, 2002 .    4,360,162              1.67
Granted. . . . . . . . . . .    1,386,110              0.50
Exercised. . . . . . . . . .            0                 -
Expired. . . . . . . . . . .     (297,500)             0.88
----------------------------  ------------  ----------------

Balance at December 31, 2002    5,448,772              0.91
Granted. . . . . . . . . . .    1,219,615              0.76
Exercised. . . . . . . . . .      (37,000)            (0.53)
Expired. . . . . . . . . . .   (1,006,580)            (0.52)
----------------------------  ------------  ----------------

Balance at December 31, 2003    5,624,807              1.39
----------------------------  ------------  ----------------
</TABLE>

The  weighted  average fair value of options granted to employees under the plan
during  2003  and  2002 was $0.76 and $0.50, respectively.  At December 31, 2003
and  2002,  there were 2,266,520 and 2,064,716 options exercisable at a weighted
average exercise price of $1.05 and $0.42 per share, respectively.  The weighted
average  remaining  life  of  outstanding options under the plan at December 31,
2003  was  4.78  years.

<TABLE>
<CAPTION>



                                        Weighted-Average                          Weighted-
                                     Remaining Contractual                         Average
Range of           Number of            Life of Shares           Number of       Exercisable
Exercise         Outstanding             Outstanding            Exercisable        Price
Price
----------  ----------------  -------------------------  -----------------  ----------------
<S>         <C>                    <C>                        <C>                <C>
0.42-0.99          1,511,954                       4.34            552,001         0.61
1.00-1.99.         2,610,631                       4.02          1,712,297         1.19
2.00-2.99.         1,002,222                       6.54              2,222         2.25
3.00-3.50.           500,000                       6.54                  -            -
                   5,624,807                       4.78          2,266,520  $      1.05
----------  ----------------  -------------------------  -----------------  ----------------
</TABLE>

The  Company has elected to account for its stock-based compensation plans under
APB  25.  However,  the Company has computed, for pro forma disclosure purposes,
the  value  of  all options granted during 2003 and 2002 using the minimum value
method  as  prescribed by SFAS No. 123.  Under this method, the Company used the
risk-free  interest rate at date of grant, the expected volatility, the expected
dividend  yield and the expected life of the options to determine the fair value
of  options  granted.  The  risk-free  interest  rates ranged from 6.0% to 6.5%;
expected  volatility  of 117% and the dividend yield was assumed to be zero, and
the  expected life of the options was assumed to be three to five years based on
the  average  vesting  period  of  options  granted.


                                  F-29
<PAGE>

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

<TABLE>
<CAPTION>



<S>                            <C>         <C>

December 31,. . . . . . . . .       2003       2002
-----------------------------  ----------  ---------
Computer equipment. . . . . .  $ 155,802   $145,365
Less accumulated depreciation   (106,562)   (76,161)
                               ----------  ---------
                               $  49,240   $ 69,204
                               ----------  ---------
</TABLE>

Future  minimum  lease  payments  are  as  follows:

<TABLE>
<CAPTION>



<S>                                      <C>
Year Ending December 31, 2003
2004. . . . . . . . . . . . . . . . . .  $ 11,665
2005. . . . . . . . . . . . . . . . . .  $  4,425
2006. . . . . . . . . . . . . . . . . .  $  1,526
2007. . . . . . . . . . . . . . . . . .  $      -
Thereafter. . . . . . . . . . . . . . .  $      -
---------------------------------------  ---------
Total minimum lease payments. . . . . .  $ 17,616
Amount representing interest. . . . . .  $  2,031
---------------------------------------  ---------
Present value of minimum lease payments  $ 15,585

Total obligation. . . . . . . . . . . .  $ 15,585
Less current portion. . . . . . . . . .  $(10,332)
---------------------------------------  ---------
Long-term portion . . . . . . . . . . .  $  5,253
---------------------------------------  ---------
</TABLE>

(b)     Other  accrued  liabilities
During  2003,  the  Company accrued expenses in connection with current projects
and  commitments.  The  total of these accruals were $248,530 as of December 31,
2003.

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

                                  F-30
<PAGE>

(c)     Building  lease

In  conjunction  with  the sale of its only facility, the Company entered into a
non-cancelable  operating  lease with the buyer to lease-back its facilities for
ten  (10)  years  (see  Note  2).  The  base  rent is $25,678 per month and will
increase  by  3.5% per year.  Mr. Benson provided a guarantee for the leaseback.

10.     CONCENTRATIONS  AND  CONTINGENCIES

(a)     Credit  risk

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

(b)     Customer

During  2002,  the  Company  had  a  major  customer that accounted for sales of
approximately  $1,727,000  or  51%  of  consolidated  revenue.  Sales  from this
customer  were  approximately  $346,000  and the contract with this customer was
successfully  completed  during  2003.  During 2003, the Company had three major
customers  that  accounted  for  sales  of  approximately  $1,782,600  or 60% of
consolidated revenue.  At December 31, 2003 and 2002, the amount receivable from
these  customers  was  approximately  $160,200  and  $50,000,  respectively.

(c)     Contract

In  November  1999,  the  Space  Missions Division was awarded a turnkey mission
contract  by  the Space Sciences Laboratory at UCB worth as of December 31, 2002
approximately  $7.2  million,  including  two  change orders worth approximately
$412,000  June  12,  2002 and October 7, 2002.  This contract represented 51% of
the  Company's  revenue  in  2002.  The contract concluded on December 31, 2003.

11.     SUBSEQUENT  EVENTS

On  March  31,  2004,  the  Company  was  awarded   a  $43,362,271,   five-year,
cost-plus-fixed  fee indefinite delivery/indefinite quantity contract to conduct
a  micro  satellite  distributed  sensing  experiment,  an  option  for  a laser
communications  experiment, and other micro satellite studies and experiments as
required  in  support  of  the  Advanced Systems Deputate of the Missile Defense
Agency.  This  effort  will  be  accomplished  in  a phased approach.  The total
five-year  contract has a ceiling amount of $43,362,271.  The principal place of
performance will be Poway, California.  The Company expects to complete the work
under  the  contract  before  February 2009.  Government contract funds will not
expire  at  the  end of the current government fiscal year.  The micro satellite
distributed  sensing  experiment  is  intended  to  design  and  build up to six
responsive,  affordable,  high  performance micro satellites to support national
missile  defense.  The  milestone-based,  multiyear,  multiphase contract has an
effective  start  date  of  March  1,  2004.  The  first phase is expected to be
completed  this  year  and will result in detailed mission and microsat designs.
The  estimated  first phase revenue is $1.1 million.  The overall contract calls
for the Company to analyze, design, develop, fabricate, integrate, test, operate
and  support  a  networked  cluster  of  three  formation-flying boost phase and
midcourse  tracking  microsatellites,  with  an  option   to  design,   develop,
fabricate,  integrate,  test,  operate  and  support  a  second cluster of three
formation  flying  microsats  to  be  networked  on-orbit  with high speed laser
communications  technology.  The  second phase is anticipated to begin September
1,  2004  and  run  through  2005.

                                  F-31
<PAGE>

On  March  31,  2004,  the  Company  negotiated  an  amendment  to  its  Secured
Convertible  Note  dated June 3, 2003 with the Laurus Master Fund to add a fixed
conversion  price  at  $0.85 per share for the next $500,000 converted under the
revolving  credit facility after the initial $1 million conversion.  In exchange
for  the amendment, Laurus granted the Company a six-month waiver to utilize the
full revolving credit facility in advance of eligible accounts.  At December 31,
2003,  Laurus  had converted 415,000 shares under the revolving credit facility,
which  represented  approximately  $228,000  of  debt  converted  to  equity.

                                  F-32
<PAGE>