diff --git a/src/damage_system_shields.rs b/src/damage_system_shields.rs
new file mode 100644
index 0000000..114805f
--- /dev/null
+++ b/src/damage_system_shields.rs
@@ -0,0 +1,274 @@
+use bevy::prelude::*;
+use crate::GameplaySystem;
+use crate::sun_system::{Satellite, Level, SolarSystemAssets, Sun};
+use crate::physics::velocity::Velocity;
+use crate::physics::calc_gravity::Attractee;
+use crate::collision::HitBox;
+
+#[derive(Component, Debug, Copy, Clone)]
+pub struct Shields {
+    pub current: f32,
+    pub max: f32,
+    pub regen_per_sec: f32,
+}
+
+impl Shields {
+    pub fn new(level: f32) -> Self {
+        let (max, regen) = match level as i32 {
+            1 => (30.0, 5.0),
+            2 => (50.0, 8.0),
+            3 => (75.0, 12.0),
+            _ => (30.0, 5.0),
+        };
+        Self { current: max, max, regen_per_sec: regen }
+    }
+}
+
+#[derive(Component, Debug, Copy, Clone)]
+pub struct Hull {
+    pub hp: f32,
+    pub max_hp: f32,
+}
+
+impl Hull {
+    pub fn new(level: f32) -> Self {
+        let max_hp = match level as i32 {
+            1 => 50.0,
+            2 => 85.0,
+            3 => 120.0,
+            _ => 50.0,
+        };
+        Self { hp: max_hp, max_hp }
+    }
+}
+
+#[derive(Event)]
+pub struct DamageEvent {
+    pub target: Entity,
+    pub amount: f32,
+    pub source: Entity,
+}
+
+#[derive(Component)]
+struct ShieldHit {
+    elapsed: f32,
+    duration: f32,
+}
+
+#[derive(Component)]
+struct SunExposure {
+    time_in_heat: f32,
+}
+
+#[derive(Component, Default)]
+pub struct DemoteCooldown(pub Timer);
+
+impl DemoteCooldown {
+    pub fn new(_level: f32) -> Self {
+        Self(Timer::from_seconds(0.0, TimerMode::Once))
+    }
+}
+
+pub struct DamageSystemShieldsPlugin;
+
+impl Plugin for DamageSystemShieldsPlugin {
+    fn build(&self, app: &mut App) {
+        app.add_event::<DamageEvent>();
+        app.add_systems(Update, (
+            apply_sun_radiation_damage,
+            handle_damage_events,
+            regenerate_shields,
+            update_shield_hit_effects,
+            draw_shield_effects,
+            draw_hull_damage_effects,
+        ).in_set(GameplaySystem));
+    }
+}
+
+fn apply_sun_radiation_damage(
+    mut commands: Commands,
+    sun_query: Query<(&Transform, &HitBox), With<Sun>>,
+    mut satellite_query: Query<(Entity, &Transform, Option<&mut SunExposure>), With<Satellite>>,
+    time: Res<Time>,
+) {
+    let Ok((sun_transform, sun_hitbox)) = sun_query.single() else { return; };
+    let sun_pos = sun_transform.translation.truncate();
+    let heat_radius = sun_hitbox.radius * 1.5;
+    
+    for (entity, sat_transform, exposure_opt) in satellite_query.iter_mut() {
+        let sat_pos = sat_transform.translation.truncate();
+        let distance = sun_pos.distance(sat_pos);
+        
+        if distance < heat_radius {
+            if let Some(mut exposure) = exposure_opt {
+                exposure.time_in_heat += time.delta_secs();
+                
+                if exposure.time_in_heat >= 1.0 {
+                    exposure.time_in_heat = 0.0;
+                    commands.trigger(DamageEvent {
+                        target: entity,
+                        amount: 5.0,
+                        source: entity,
+                    });
+                }
+            } else {
+                commands.entity(entity).insert(SunExposure { time_in_heat: 0.0 });
+            }
+        } else {
+            if exposure_opt.is_some() {
+                commands.entity(entity).remove::<SunExposure>();
+            }
+        }
+    }
+}
+
+fn handle_damage_events(
+    mut evr: EventReader<DamageEvent>,
+    mut q: Query<(&mut Shields, &mut Hull, &mut Level, &mut Sprite, &mut DemoteCooldown, &Transform), With<Attractee>>,
+    source_q: Query<&Transform>,
+    mut velocity_q: Query<&mut Velocity>,
+    assets: Res<SolarSystemAssets>,
+    time: Res<Time>,
+    mut commands: Commands,
+) {
+    for ev in evr.read() {
+        if let Ok((mut shields, mut hull, mut lvl, mut spr, mut cd, transform)) = q.get_mut(ev.target) {
+            // Apply damage to shields first
+            let shield_damage = ev.amount.min(shields.current);
+            shields.current -= shield_damage;
+            
+            let remaining_damage = ev.amount - shield_damage;
+            
+            // Add shield hit effect if shields absorbed damage
+            if shield_damage > 0.0 {
+                commands.entity(ev.target).insert(ShieldHit {
+                    elapsed: 0.0,
+                    duration: 0.3,
+                });
+                
+                // Apply knockback if shields absorbed damage
+                if let Ok(source_transform) = source_q.get(ev.source) {
+                    if let Ok(mut velocity) = velocity_q.get_mut(ev.target) {
+                        let direction = (transform.translation - source_transform.translation)
+                            .normalize_or_zero()
+                            .truncate();
+                        let knockback_force = shield_damage * 0.5;
+                        velocity.0 += direction * knockback_force;
+                    }
+                }
+            }
+            
+            // Apply remaining damage to hull
+            if remaining_damage > 0.0 {
+                cd.0.tick(time.delta());
+                if !cd.0.finished() && cd.0.elapsed_secs() < 0.5 {
+                    continue;
+                }
+                
+                hull.hp = (hull.hp - remaining_damage).max(0.0);
+                let pct = hull.hp / hull.max_hp;
+                
+                let new_lvl = if pct == 0.0 {
+                    0.0
+                } else if pct <= 0.33 {
+                    1.0
+                } else if pct <= 0.66 {
+                    2.0
+                } else {
+                    3.0
+                };
+                
+                if new_lvl != lvl.level {
+                    let old_lvl = lvl.level;
+                    lvl.level = new_lvl;
+                    
+                    *spr = match new_lvl as i32 {
+                        3 => Sprite::from(assets.collector3.clone()),
+                        2 => Sprite::from(assets.collector2.clone()),
+                        1 => Sprite::from(assets.collector.clone()),
+                        _ => spr.clone(),
+                    };
+                    
+                    cd.0 = Timer::from_seconds(0.5, TimerMode::Once);
+                    
+                    info!("Satellite demoted from level {} to level {} (Hull: {:.1}/{:.1})", 
+                          old_lvl, new_lvl, hull.hp, hull.max_hp);
+                }
+                
+                if hull.hp <= 0.0 {
+                    info!("Satellite destroyed");
+                    commands.entity(ev.target).despawn_recursive();
+                }
+            }
+        }
+    }
+}
+
+fn regenerate_shields(
+    mut query: Query<&mut Shields, With<Satellite>>,
+    time: Res<Time>,
+) {
+    for mut shields in query.iter_mut() {
+        if shields.current < shields.max {
+            shields.current = (shields.current + shields.regen_per_sec * time.delta_secs())
+                .min(shields.max);
+        }
+    }
+}
+
+fn update_shield_hit_effects(
+    mut commands: Commands,
+    mut query: Query<(Entity, &mut ShieldHit)>,
+    time: Res<Time>,
+) {
+    for (entity, mut hit) in query.iter_mut() {
+        hit.elapsed += time.delta_secs();
+        if hit.elapsed >= hit.duration {
+            commands.entity(entity).remove::<ShieldHit>();
+        }
+    }
+}
+
+fn draw_shield_effects(
+    mut gizmos: Gizmos,
+    query: Query<(&Transform, &Shields, Option<&ShieldHit>), With<Satellite>>,
+    time: Res<Time>,
+) {
+    for (transform, shields, hit_opt) in query.iter() {
+        let position = transform.translation.truncate();
+        
+        // Draw shield ring
+        let shield_pct = shields.current / shields.max;
+        let alpha = shield_pct * 0.4;
+        let color = Color::srgb(0.3, 0.7, 1.0).with_alpha(alpha);
+        let iso = Isometry2d::from_translation(position);
+        gizmos.circle_2d(iso, 6.0, color);
+        
+        // Flicker effect on hit
+        if let Some(hit) = hit_opt {
+            let flicker = ((hit.elapsed * 20.0).sin() * 0.5 + 0.5);
+            let hit_color = Color::srgb(1.0, 1.0, 1.0).with_alpha(flicker * 0.8);
+            gizmos.circle_2d(iso, 6.5, hit_color);
+        }
+    }
+}
+
+fn draw_hull_damage_effects(
+    mut gizmos: Gizmos,
+    query: Query<(&Transform, &Hull, &Shields), With<Satellite>>,
+) {
+    for (transform, hull, shields) in query.iter() {
+        // Only show hull damage when shields are down
+        if shields.current <= 0.0 {
+            let hp_pct = hull.hp / hull.max_hp;
+            
+            if hp_pct < 0.66 {
+                let intensity = 1.0 - hp_pct;
+                let color = Color::srgb(1.0, 0.0, 0.0).with_alpha(intensity * 0.5);
+                let position = transform.translation.truncate();
+                let iso = Isometry2d::from_translation(position);
+                gizmos.circle_2d(iso, 5.0, color);
+            }
+        }
+    }
+}
\ No newline at end of file
diff --git a/src/launching.rs b/src/launching.rs
index 046a010..9cd65bf 100644
--- a/src/launching.rs
+++ b/src/launching.rs
@@ -15,6 +15,7 @@ use bevy::input::common_conditions::{input_just_pressed, input_just_released};
 use bevy::prelude::*;
 use bevy::window::PrimaryWindow;
 use bevy::input::touch::{TouchInput, TouchPhase};
+use crate::damage_system_shields::{Shields, Hull, DemoteCooldown};
 
 #[derive(Component)]
 pub struct LaunchPad;
@@ -170,6 +171,9 @@ let collector_id = commands.spawn((
             _total_collected: 0.0,
         },
         Pickable::default(),
+        Shields::new(lvl),
+        Hull::new(lvl),
+        DemoteCooldown::new(lvl),
     ))
         .observe(on_hover_collector_over)
         .id();
@@ -319,6 +323,9 @@ fn start_launch_from_touch_end(
             _total_collected: 0.0,
         },
         Pickable::default(),
+        Shields::new(lvl),
+        Hull::new(lvl),
+        DemoteCooldown::new(lvl),
     ))
         .observe(on_hover_collector_over)
         .id();
@@ -528,5 +535,4 @@ fn sun_thruster_touch(
             _ => {}
         }
     }
-}
-
+}
\ No newline at end of file
diff --git a/src/main.rs b/src/main.rs
index 6620dc0..bd6cc42 100644
--- a/src/main.rs
+++ b/src/main.rs
@@ -17,6 +17,7 @@ mod sound;
 mod trails;
 mod effects;
 mod achievements;
+mod damage_system_shields;
 
 use std::ops::{Deref, DerefMut};
 use crate::screens::Screen;
@@ -78,6 +79,7 @@ impl Plugin for AppPlugin {
             sound::SoundPlugin,
             trails::TrailsPlugin,
             achievements::AchievementsPlugin,
+            damage_system_shields::DamageSystemShieldsPlugin,
         ));
         // Tell bevy that our AppSystems should always be executed in the below order
         app.configure_sets(
@@ -154,4 +156,4 @@ impl DerefMut for RandomSource {
     fn deref_mut(&mut self) -> &mut Self::Target {
         &mut self.0
     }
-}
+}
\ No newline at end of file