US press helicopter crew record one person being carried on a stretcher to a waiting helicopter.
The fate of two pilots is unknown, the company said but reports are coming out that 1 has been killed and another seriously injured.
"During the test, the vehicle suffered a serious anomaly resulting in the loss of SpaceShipTwo. Our first concern is the status of the pilots, which is unknown at this time," the firm said in a tweet.
Virgin Galactic's SpaceShipTwo craft suffered an "anomaly" during a test flight over California on Friday, the commercial space flight operator announced on its Twitter feed.
The craft, which is still in its test phase and which normally carries two pilots, had been carried aloft on a bigger aircraft known as WhiteKnightTwo and then released for a test of its rocket engine.
The fate of the crew was not immediately known.
"SpaceShipTwo has experienced an in-flight anomaly. Additional info and statement forthcoming," Virgin said, giving no further details.
"SpaceShipTwo has been released by WhiteKnightTwo, and is now flying freely," the firm wrote in a blow-by-blow account of the flight, adding: "Ignition! SpaceShipTwo is flying under rocket power again."
The next tweet announced the "anomaly."
More than 500 people have already reserved seats—and paid a deposit on the $200,000 ticket price—for a minutes-long suborbital flight on SS2.
SpaceShipTwo can carry six passengers.
It is the commercial version of SpaceShipOne, the first private spacecraft to reach the edge of space in 2004, and which is now on displace at the National Air and Space Museum in Washington.
Private companies are rushing to fill the gap left by NASA, which ended its 30-year shuttle program in July with the completion of the final Atlantis mission to the International Space Station (ISS).
Friday's incident is the second involving a space craft this week, after an unmanned Orbital Science rocket exploded on Tuesday six seconds after launch on a resupply mission to the ISS.