A research and development (R&D) forecast for the 2004 microtechnology nanotechnology industry projects that the U.S. government as a whole increased its spending from $770 million in 2003 to $885 million in 2004. The R&D funding will rise from $283.8 billion in FY03 to $290.8 billion in FY04. A few important predictions are highlighted, including those related to spending for homeland security, the agencies that will provide the major incentive for increased federal spending; and the effects of September 11, 2001, which is still influencing the emphasis in federal R&D. The Departments of Defense and Homeland Security each were given large increases in R&D(13 percent for DOD AND 56 percent for DHS), and research is in the a tools for fighting the war on terrorism and systems for those actively in the fight. Academic R&D had dropped from annual 15 percent increases the last five years for the National Institutes of Health to a more normal level. Applied research spending has been somewhat static as a percentage of spending by the fed, and, moving into 2004, industries have to address the following challenges: offsetting of development of foreign technology how to benefit from the academic abilities and facilities in the U.S. use the powerful U.S. government's national lab facilities; how to garner a competitive edge in nanotechnology, grid cutting, genomics-based health care, and wireless communications areas.