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Dream Chaser

The primary current focus of the SpaceDev Advanced Systems group is an overall space transportation system based on the NASA HL-20 lifting body spaceplane. Christened the Dream ChaserTM, it is being designed to carry passengers and cargo in the sub-orbital and orbital flights regimes, including flights to and from the International Space Station. Leveraging the work performed on the NASA HL-20, the Dream ChaserTM will provide a safe and affordable solution for commercial space operations, will launch vertically and land horizontally on conventional runways.

As of December 31, 2006, SpaceDev's executive officers and directors together beneficially owned approximately 45.7% of the issued and outstanding shares of our common stock. James W. Benson and Susan C. Benson beneficially own approximately 22% of SpaceDev common stock. Mr. Benson separated from SpaceDev's employ in September 2006 and founded Benson Space Company but retains a seat on our Board of Directors. In October 2006, SpaceDev was awarded a $330,000 Phase I study contract from Benson Space Company to further the SpaceDev Dream ChaserT spaceship program. The study contributed to the on-going development of the spaceship and resulted in space vehicle and rocket motor designs ready for Phase II vehicle fabrication and testing. The SpaceDev Dream ChaserT spaceship is based on NASA's design of the ten passenger orbital HL-20 Personnel Launch System, and will launch vertically and land horizontally. SpaceDev recognized approximately $76,000 in revenue under this contract from inception through December 31, 2006.

SpaceDev is currently working in conjunction with NASA Commercial Orbital Transporation Services (COTS) office to develop and configure the system for ISS servicing. In parallel, SpaceDev has signed a memorandum of understanding with United Launch Alliance (ULA) and is evaluating man-rating the Atlas 5 launch vehicle and configuring it for use with Dream ChaserTM to provide a launch configuration based on the exceptional heritage of the Atlas family of launch vehicles.

Marketing and sales expenses increased to approximately $2.2 million, or 6.8% of net sales, for the year ended December 31, 2006, from approximately $674,000, or 7.5% of net sales, during the same period in 2005. The total dollar increase of approximately $1.5 million was mainly due to costs related to bidding a number of proposals, including approximately $800,000 for the NASA COTS proposal during 2006, as well as absorbing a larger marketing and sales organization as part of the merger with Starsys. Unfortunately, SpaceDev did not win the COTS contract.

SpaceDev has begun designing a reuseable, piloted, sub-orbital space ship that could be scaled to transport passengers to and from Low Earth Orbit, including the International Space Station. The name of the vehicle is the SpaceDev Dream ChaserT. SpaceDev signed a non-binding Space Act Memorandum of Understanding with NASA Ames Research Center, which confirmed SpaceDev's intention to explore novel, hybrid propulsion based hypersonic test beds for routine human space access. SpaceDev will explore with NASA collaborative partnerships to investigate the potential of using SpaceDev's proven hybrid propulsion and other technologies, and a low cost, private space program development approach to establish and design new piloted small launch vehicles and flight test platforms to enable near-term, low-cost routine space access for NASA and the United States.

Unlike the more complex SpaceShipOne, for which SpaceDev provided critical proprietary hybrid rocket motor propulsion technologies and components, the SpaceDev Dream ChaserT would be crewed and launch vertically, like most launch vehicles, and would glide back for a normal horizontal runway landing. The sub-orbital SpaceDev Dream ChaserT would have an altitude goal of approximately 160 km (about 100 miles) and would be powered by a single, high performance hybrid rocket motor, under parallel development by us for the SpaceDev StreakerT, a family of small, expendable launch vehicles, designed to affordably deliver small satellites to Low Earth Orbit. The SpaceDev Dream ChaserT motor would produce approximately 100,000 pounds of thrust, about six times the thrust of the SpaceShipOne motor, but less than one-half the thrust of the 250,000 pounds of thrust produced by hybrid rocket motors developed several years ago by the American Rocket Company.

On September 29, 2004 and October 4, 2004, SpaceDev's hybrid propulsion technology helped propel SpaceShipOne into space flight history as the craft garnered the $10 Million Ansari X Prize, a contest created to stimulate the development of the private sector human space flight industry. SpaceDev provided several critical components and the hybrid rocket technology for the craft's motor, including igniter, injector and main operating valve, which successfully performed as expected and powered SpaceShipOne on its historic manned flight. SpaceShipOne exceeded the altitude requirement on both scheduled flights as required by the Ansari X Prize competition. The hybrid propulsion system burned full duration and pilot Brian Binnie steered SpaceShipOne high above the Mojave, California desert to a height of 367,442 feet altitude (69.5 miles), which far exceeded the required 328,000 feet altitude - a sky-high goal required by the X Prize Foundation of St. Louis, Missouri.

SpaceDev, Inc., including wholly-owned active subsidiary, Starsys, Inc., which was acquired by SpaceDevs on January 31, 2006, is engaged in the conception, design, development, manufacture, integration, sale and operation of space technology systems, subsystems, products and services, as well as the design, manufacture, and sale of mechanical and electromechanical subsystems and components for spacecraft. We are currently focused on the commercial and military development of low-cost small satellites and related subsystems, hybrid rocket propulsion for space and launch vehicles, subsystems that enable critical spacecraft functions such as pointing solar arrays and communication antennas and restraining, deploying and actuating moving spacecraft components.

The acquisition of Starsys on January 31, 2006 fundamentally changed the SpaceDev profile. Starsys was insolvent at the time of the merger. SpaceDev's historic business had 2005 revenues of approximately $9.0 million and a 2005 profit of approximately $0.5 million. Starsys is a mature operating company with 2005 revenues of approximately $18 million and 2005 losses of approximately $3.4 million. In 2006, SpaceDev and Starsys merged and had combined revenues of approximately $32 million and losses of less than $1.0 million.

During 2006, approximately 89% of our net sales were generated from direct government contracts, and from government-related work through subcontracts with others, while the remaining 11% was generated from commercial contracts. In 2005, approximately 98% of our net sales were generated from direct government contracts and from government-related work through subcontracts with others, while the remaining 2% was generated from commercial contracts. The mix shift was primarily due to our January 2006 acquisition of Starsys.

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