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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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(Mark One)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------



For the quarterly period ended March 31, 2005



OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
|- | -----------------------------------------------------------------------------------------



For the transition period from  to



Commission File No. 0-27206



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SPACEHAB, Incorporated

(Exact name of registrant as specified in this charter)



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|                                                               |  |                                    
|-------------------------------------------------------------- |  | -----------------------------------
|Washington                                                     |  | 91-1273737                         
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. EmployerIdentification No.)



12130 Highway 3,
Building 1

Webster, Texas 77598-1504

(713) 558-5000

(Address of principal executive offices, including zip code, and telephone number)



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Indicate by check mark whether the registrant: (1) has 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 ̈



Indicate by check mark whether the registrant is an accelerated filer (as defined in rule 12b-2 of the Exchange
Act).    Yes ̈No  x



As of May 12, 2005 there were 12,644,127 shares of the registrants common stock
outstanding.



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##### Table of Contents

SPACEHAB, INCORPORATED AND SUBSIDIARIES

MARCH 31, 2005 QUARTERLY REPORT ON FORM 10-Q



TABLE OF CONTENTS



|            |  |                                                                                                                       |  |     
|----------- |  | --------------------------------------------------------------------------------------------------------------------- |  | ----
|            |  |                                                                                                                       |  | Page
|DEFINITIONS |  | 2                                                                                                                    
|            |  |                                                                                                                      
|PART 1 -    |  | FINANCIAL INFORMATION                                                                                                 |  |     
|            |  |                                                                                                                      
|Item 1.     |  | Unaudited Condensed Consolidated Financial Statements                                                                 |  | 3   
|            |  |                                                                                                                      
|            |  | Unaudited Condensed Consolidated Balance Sheets as of March 31, 2005 and June 30, 2004                                |  | 3   
|            |  |                                                                                                                      
|            |  | Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended March 31, 2005 and 2004 |  | 4   
|            |  |                                                                                                                      
|            |  | Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended March 31, 2005 and 2004           |  | 5   
|            |  |                                                                                                                      
|            |  | Notes to Unaudited Condensed Consolidated Financial Statements                                                        |  | 6   
|            |  |                                                                                                                      
|Item 2.     |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                 |  | 15  
|            |  |                                                                                                                      
|Item 3.     |  | Quantitative and Qualitative Disclosures about Market Risk                                                            |  | 26  
|            |  |                                                                                                                      
|Item 4.     |  | Controls and Procedures                                                                                               |  | 26  
|            |  |                                                                                                                      
|PART II -   |  | OTHER INFORMATION                                                                                                     |  |     
|            |  |                                                                                                                      
|Item 1.     |  | Legal Proceedings                                                                                                     |  | 27  
|            |  |                                                                                                                      
|Item 6.     |  | Exhibits                                                                                                              |  | 28  



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##### Table of Contents

DEFINITIONS



As used in this Form 10-Q, the
abbreviations and acronyms contained herein have the meanings set forth below. Additionally, the terms SPACEHAB, the Company, we, us and our refer to SPACEHAB, Incorporated and its
subsidiaries, unless the context clearly indicates otherwise.



|                |  |                                                          
|--------------- |  | ---------------------------------------------------------
|APB             |  | Accounting Principles Board                              
|ASO             |  | Astrotech Space Operations                               
|Astrotech       |  | Astrotech Space Operations                               
|Boeing          |  | The Boeing Company                                       
|CCTS            |  | Commercial Cargo Transportation Services                 
|CE&R            |  | Concept Exploration and Refinement                       
|CM              |  | Configuration Management                                 
|CMC             |  | Cargo Mission Contract                                   
|Common Stock    |  | SPACEHAB common stock                                    
|EADS            |  | EADS Space Transportation                                
|EELV            |  | Evolved Expendable Launch Vehicle                        
|EPS             |  | Earnings Per Share                                       
|ESP2            |  | External Stowage Platform 2                              
|ESP3            |  | External Stowage Platform 3                              
|FASB            |  | Financial Accounting Standards Board                     
|FCSD            |  | Flight Crew Systems Development                          
|ICC             |  | Integrated Cargo Carrier                                 
|ISS             |  | International Space Station                              
|JAXA            |  | Japan Aerospace Exploration Agency                       
|JE              |  | Johnson Engineering Corporation                          
|JETIS           |  | Japanese Experiment Thermal Incubator Service            
|Lloyds         |  | Lloyds of London                                        
|Lockheed Martin |  | Lockheed Martin Corporation                              
|MIC             |  | Mission Integration Contract                             
|NASA            |  | National Aeronautics and Space Administration            
|ORU             |  | Orbital Replacement Unit                                 
|PI&C            |  | Program Integration and Control                          
|RDM             |  | Research Double Module                                   
|ReALMS          |  | Research and Logistics Mission Support                   
|RSC-Energia     |  | Rocket Space Corporation  Energia                       
|SEC             |  | Securities and Exchange Commission                       
|SEDC            |  | Stowage, Engineering and Decal Contract                  
|SFAS            |  | Statement of Financial Accounting Standards              
|SFS             |  | SPACEHAB Flight Services                                 
|SGS             |  | SPACEHAB Government Services                             
|SMI             |  | Space Media, Inc.                                        
|SPF             |  | Spacecraft Processing Facility                           
|SPPF            |  | SPACEHAB Payload Processing Facility (Cape Canaveral, FL)
|VCC             |  | Vertical Cargo Carrier                                   



2



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##### Table of Contents

PART 1: FINANCIAL INFORMATION



ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



SPACEHAB, INCORPORATED AND SUBSIDIARIES

Unaudited Condensed Consolidated Balance Sheets

(In thousands, except share data)



|                                                                                                                                                               |  |                           |         |   |              |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- | ------- | - | ------------ | - | ------- | -
|                                                                                                                                                               |  | March 31, 2005(unaudited) |         |   | June 30,2004 |  
|ASSETS                                                                                                                                                         |  |                           |         |   |              |   |         |  
|Cash and cash equivalents                                                                                                                                      |  | $                         | 5,122   |   |              | $ | 506     |  
|Restricted cash                                                                                                                                                |  |                           | 872     |   |              |   | 430     |  
|Short-term investments                                                                                                                                         |  |                           |        |   |              |   | 5,037   |  
|Restricted short-term investments                                                                                                                              |  |                           |        |   |              |   | 1,604   |  
|Accounts receivable, net                                                                                                                                       |  |                           | 9,459   |   |              |   | 7,878   |  
|Prepaid expenses and other current assets                                                                                                                      |  |                           | 895     |   |              |   | 495     |  
|                                                                                                                                                               |  |                           |         |   |              |   |         |  
|Total current assets                                                                                                                                           |  |                           | 16,348  |   |              |   | 15,950  |  
|Property and equipment, net of accumulated depreciation and                                                                                                    |  |                           |         |   |              |   |         |  
|amortization of $53,640 and $49,755, respectively                                                                                                              |  |                           | 76,530  |   |              |   | 79,600  |  
|Deferred financing costs, net                                                                                                                                  |  |                           | 1,048   |   |              |   | 1,163   |  
|Other assets, net                                                                                                                                              |  |                           | 1,799   |   |              |   | 3,212   |  
|                                                                                                                                                               |  |                           |         |   |              |   |         |  
|Total assets                                                                                                                                                   |  | $                         | 95,725  |   |              | $ | 99,925  |  
|                                                                                                                                                               |  |                           |         |   |              |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                           |  |                           |         |   |              |   |         |  
|Revolving loan payable                                                                                                                                         |  | $                         |        |   |              | $ | 1,445   |  
|Mortgage loan payable, current portion                                                                                                                         |  |                           | 1,946   |   |              |   | 1,946   |  
|Accounts payable                                                                                                                                               |  |                           | 1,335   |   |              |   | 2,424   |  
|Accounts payable-EADS                                                                                                                                          |  |                           | 1,057   |   |              |   | 3,262   |  
|Accrued interest                                                                                                                                               |  |                           | 2,358   |   |              |   | 1,108   |  
|Accrued expenses                                                                                                                                               |  |                           | 2,414   |   |              |   | 3,600   |  
|Accrued subcontracting services                                                                                                                                |  |                           | 3,752   |   |              |   | 2,176   |  
|Deferred revenue, current portion                                                                                                                              |  |                           | 2,429   |   |              |   | 6,340   |  
|                                                                                                                                                               |  |                           |         |   |              |   |         |  
|Total current liabilities                                                                                                                                      |  |                           | 15,291  |   |              |   | 22,301  |  
|Accrued contract cost and other                                                                                                                                |  |                           | 255     |   |              |   | 372     |  
|Deferred revenue, net of current portion                                                                                                                       |  |                           |        |   |              |   | 900     |  
|Mortgage loan payable, net of current portion                                                                                                                  |  |                           | 2,244   |   |              |   | 3,692   |  
|Convertible subordinated notes payable                                                                                                                         |  |                           | 63,250  |   |              |   | 63,250  |  
|                                                                                                                                                               |  |                           |         |   |              |   |         |  
|Total liabilities                                                                                                                                              |  |                           | 81,040  |   |              |   | 90,515  |  
|Commitments and contingencies                                                                                                                                  |  |                           |         |   |              |   |         |  
|Stockholders equity                                                                                                                                           |  |                           |         |   |              |   |         |  
|Preferred Stock, no par value, convertible, 2,500,000 shares authorized, 1,333,334 shares issued and outstanding, (liquidation preference of
$12.00 per share) |  |                           | 11,892  |   |              |   | 11,892  |  
|Common stock, no par value, 30,000,000 shares authorized, 12,760,227 and 12,688,062 shares issued, respectively                                                |  |                           | 83,857  |   |              |   | 83,751  |  
|Additional paid-in capital                                                                                                                                     |  |                           | 16      |   |              |   | 16      |  
|Treasury stock, 116,100 and 116,100 shares, respectively, at cost                                                                                              |  |                           | (117    | ) |              |   | (117    | )
|Accumulated deficit                                                                                                                                            |  |                           | (80,963 | ) |              |   | (86,132 | )
|                                                                                                                                                               |  |                           |         |   |              |   |         |  
|Total stockholders equity                                                                                                                                     |  |                           | 14,685  |   |              |   | 9,410   |  
|                                                                                                                                                               |  |                           |         |   |              |   |         |  
|Total liabilities and stockholders equity                                                                                                                     |  | $                         | 95,725  |   |              | $ | 99,925  |  
|                                                                                                                                                               |  |                           |         |   |              |   |         |  



See accompanying notes
to unaudited condensed consolidated financial statements.



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SPACEHAB, INCORPORATED AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Operations

(In thousands, except share data)



|                                                                |  |                              |            |   |                             |   |            |      |  |   |            |   |  |   |            |  
|--------------------------------------------------------------- |  | ---------------------------- | ---------- | - | --------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                                |  | Three Months Ended March 31, |            |   | Nine Months Ended March 31, |  
|                                                                |  | 2005                         |            |   | 2004                        |   |            | 2005 |  |   | 2004       |  
|Revenue                                                         |  | $                            | 14,272     |   |                             | $ | 14,800     |      |  | $ | 40,443     |   |  | $ | 66,466     |  
|Costs of revenue                                                |  |                              | 11,085     |   |                             |   | 9,815      |      |  |   | 32,592     |   |  |   | 36,172     |  
|                                                                |  |                              |            |   |                             |   |            |      |  |   |            |   |  |   |            |  
|Gross profit                                                    |  |                              | 3,187      |   |                             |   | 4,985      |      |  |   | 7,851      |   |  |   | 30,294     |  
|                                                                |  |                              |            |   |                             |   |            |      |  |   |            |   |  |   |            |  
|Operating expenses                                              |  |                              |            |   |                             |   |            |      |  |   |            |   |  |   |            |  
|Selling, general and administrative                             |  |                              | 2,321      |   |                             |   | 2,545      |      |  |   | 6,556      |   |  |   | 8,880      |  
|Research and development                                        |  |                              | 21         |   |                             |   | 7          |      |  |   | 37         |   |  |   | 9          |  
|Goodwill impairment                                             |  |                              |           |   |                             |   |           |      |  |   |           |   |  |   | 8,274      |  
|Impairment of investment in Guigne                              |  |                              |           |   |                             |   |           |      |  |   |           |   |  |   | 1,800      |  
|Recovery of nonrecurring charge, loss of Research Double Module |  |                              |           |   |                             |   |           |      |  |   | (8,244     | ) |  |   |           |  
|                                                                |  |                              |            |   |                             |   |            |      |  |   |            |   |  |   |            |  
|Total operating expenses                                        |  |                              | 2,342      |   |                             |   | 2,552      |      |  |   | (1,651     | ) |  |   | 18,963     |  
|                                                                |  |                              |            |   |                             |   |            |      |  |   |            |   |  |   |            |  
|Income from operations                                          |  |                              | 845        |   |                             |   | 2,433      |      |  |   | 9,502      |   |  |   | 11,331     |  
|Interest expense                                                |  |                              | (1,413     | ) |                             |   | (2,177     | )    |  |   | (4,299     | ) |  |   | (6,776     | )
|Interest and other income, net                                  |  |                              | 40         |   |                             |   | 22         |      |  |   | 121        |   |  |   | 97         |  
|                                                                |  |                              |            |   |                             |   |            |      |  |   |            |   |  |   |            |  
|Income (loss) before income taxes                               |  |                              | (528       | ) |                             |   | 278        |      |  |   | 5,324      |   |  |   | 4,652      |  
|Income tax expense                                              |  |                              | (13        | ) |                             |   | (11        | )    |  |   | (155       | ) |  |   | (251       | )
|                                                                |  |                              |            |   |                             |   |            |      |  |   |            |   |  |   |            |  
|Net income (loss)                                               |  | $                            | (541       | ) |                             | $ | 267        |      |  | $ | 5,169      |   |  | $ | 4,401      |  
|                                                                |  |                              |            |   |                             |   |            |      |  |   |            |   |  |   |            |  
|Income (loss) per share:                                        |  |                              |            |   |                             |   |            |      |  |   |            |   |  |   |            |  
|Net income (loss) per share  basic                             |  | $                            | (0.04      | ) |                             | $ | 0.02       |      |  | $ | 0.41       |   |  | $ | 0.35       |  
|                                                                |  |                              |            |   |                             |   |            |      |  |   |            |   |  |   |            |  
|Shares used in computing net income (loss) per share  basic    |  |                              | 12,626,130 |   |                             |   | 12,476,342 |      |  |   | 12,603,240 |   |  |   | 12,415,977 |  
|                                                                |  |                              |            |   |                             |   |            |      |  |   |            |   |  |   |            |  
|Net income (loss) per share  diluted                           |  | $                            | (0.04      | ) |                             | $ | 0.02       |      |  | $ | 0.36       |   |  | $ | 0.31       |  
|                                                                |  |                              |            |   |                             |   |            |      |  |   |            |   |  |   |            |  
|Shares used in computing net income (loss) per share  diluted  |  |                              | 12,626,130 |   |                             |   | 14,264,818 |      |  |   | 14,203,597 |   |  |   | 14,039,798 |  
|                                                                |  |                              |            |   |                             |   |            |      |  |   |            |   |  |   |            |  



See accompanying notes
to unaudited condensed consolidated financial statements.



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SPACEHAB, INCORPORATED AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Cash Flows

(In thousands)



|                                                                                            |  |                            |        |   |      |   |         |  
|------------------------------------------------------------------------------------------- |  | -------------------------- | ------ | - | ---- | - | ------- | -
|                                                                                            |  | Nine Months EndedMarch 31, |       
|                                                                                            |  | 2005                       |        |   | 2004 |  
|Cash flows from operating activities                                                        |  |                            |        |   |      |   |         |  
|Net income                                                                                  |  | $                          | 5,169  |   |      | $ | 4,401   |  
|Adjustments to reconcile net income to net cash provided by operating activities:           |  |                            |        |   |      |   |         |  
|Goodwill impairment                                                                         |  |                            |       |   |      |   | 8,274   |  
|Impairment of investment in Guigne                                                          |  |                            |       |   |      |   | 1,800   |  
|Amortization of debt placement costs                                                        |  |                            |       |   |      |   | 729     |  
|Depreciation and amortization                                                               |  |                            | 3,953  |   |      |   | 4,206   |  
|Loss on asset sales and write-offs                                                          |  |                            | 29     |   |      |   | 358     |  
|Changes in assets and liabilities:                                                          |  |                            |        |   |      |   |         |  
|(Increase) decrease in accounts receivable                                                  |  |                            | (1,581 | ) |      |   | 953     |  
|Increase in prepaid expenses and other current assets                                       |  |                            | (400   | ) |      |   | (329    | )
|(Increase) decrease in other assets                                                         |  |                            | 1,413  |   |      |   | (30     | )
|Decrease in accounts payable, accounts payable-EADS, accrued interest, and accrued expenses |  |                            | (3,230 | ) |      |   | (4,412  | )
|Increase in accrued subcontracting services                                                 |  |                            | 1,576  |   |      |   | 12      |  
|Decrease in deferred revenue                                                                |  |                            | (4,811 | ) |      |   | (8,581  | )
|Decrease in long-term contracts costs and other liabilities                                 |  |                            | (117   | ) |      |   | (94     | )
|                                                                                            |  |                            |        |   |      |   |         |  
|Net cash provided by operating activities                                                   |  |                            | 2,001  |   |      |   | 7,287   |  
|                                                                                            |  |                            |        |   |      |   |         |  
|Cash flows from investing activities                                                        |  |                            |        |   |      |   |         |  
|Payments for flight assets under construction                                               |  |                            | (62    | ) |      |   | (426    | )
|Purchases of property, equipment and leasehold improvements                                 |  |                            | (750   | ) |      |   | (868    | )
|Proceeds received from sale of property and equipment                                       |  |                            | 15     |   |      |   | 46      |  
|Sale of short-term investments                                                              |  |                            | 6,641  |   |      |   | 7,419   |  
|Increase in restricted cash                                                                 |  |                            | (442   | ) |      |   |        |  
|                                                                                            |  |                            |        |   |      |   |         |  
|Net cash provided by investing activities                                                   |  |                            | 5,402  |   |      |   | 6,171   |  
|                                                                                            |  |                            |        |   |      |   |         |  
|Cash flows from financing activities                                                        |  |                            |        |   |      |   |         |  
|Repayment of revolving loan payable, net                                                    |  |                            | (1,445 | ) |      |   |        |  
|Payment of mortgage loan                                                                    |  |                            | (1,448 | ) |      |   | (10,978 | )
|Payment of convertible notes payable to shareholder                                         |  |                            |       |   |      |   | (2,004  | )
|Proceeds from issuance of common stock, net of expenses                                     |  |                            | 106    |   |      |   | 273     |  
|Purchase of treasury stock                                                                  |  |                            |       |   |      |   | (6      | )
|                                                                                            |  |                            |        |   |      |   |         |  
|Net cash used in financing activities                                                       |  |                            | (2,787 | ) |      |   | (12,715 | )
|                                                                                            |  |                            |        |   |      |   |         |  
|Net change in cash and cash equivalents                                                     |  |                            | 4,616  |   |      |   | 743     |  
|Cash and cash equivalents at beginning of period                                            |  |                            | 506    |   |      |   | 1,301   |  
|                                                                                            |  |                            |        |   |      |   |         |  
|Cash and cash equivalents at end of period                                                  |  | $                          | 5,122  |   |      | $ | 2,044   |  
|                                                                                            |  |                            |        |   |      |   |         |  



See accompanying notes
to unaudited condensed consolidated financial statements.



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SPACEHAB, INCORPORATED AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements



1. The Company



Incorporated in 1984, SPACEHAB was the first company to commercially develop, own and operate pressurized space habitat modules which serve
the international community in supporting both manned and unmanned missions to space. SPACEHAB and its subsidiaries provide the following services:



| |  | Access to space through the use of research and logistics modules and carriers
|- |  | ------------------------------------------------------------------------------



| |  | Expertise on space architectures, habitability and occupational challenges of space
|- |  | -----------------------------------------------------------------------------------



| |  | Facility operations and spacecraft processing services
|- |  | ------------------------------------------------------



| |  | Engineering, analysis, and space payload transportation services
|- |  | ----------------------------------------------------------------



| |  | Program integration and control
|- |  | -------------------------------



| |  | Space equipment and product design and development
|- |  | --------------------------------------------------



| |  | Space media, education, and retail goods
|- |  | ----------------------------------------



Through our SPACEHAB Flight Services (SFS) business unit, the Company owns pressurized space habitat modules which are carried in the cargo bay of the space
shuttle to provide capacity and workspace for cargo and research payloads, and unpressurized cargo carriers which also are carried in the cargo bay of the space shuttle providing unpressurized capacity for cargo payloads such as International Space
Station spare and component parts. The need for our modules and ICCs depends on the specific requirements of each space shuttle mission. When our equipment is deployed on a space shuttle mission we provide the mission integration and operations
support required to successfully configure, load, operate and ultimately unload our modules and/or ICCs. We also solicit research payloads worldwide for space shuttle missions when space is available on our modules beyond NASAs requirements
and have provided similar research payload marketing for the Russian Progress spacecraft and the European ATV. Through March 31, 2005, SPACEHAB modules and ICCs have flown on 18 missions on the space shuttle, including 12 logistics missions
(five to the ISS and seven to the Russian space station Mir).



SPACEHAB
provides commercial spacecraft processing facilities and services through its wholly-owned subsidiary, Astrotech Space Operations, Inc. (Astrotech or ASO). Astrotech is a commercial provider of ground processing services in
the United States, supplying the facilities and services used in the launch preparation of spacecraft. We offer customers an alternative to using government-owned facilities and serve payload customers launching on a wide range of expendable launch
vehicles including Atlas, Delta, Pegasus, Sea Launch, and Taurus, as well as secondary payloads flown on the space shuttle. In fiscal year 2002, we completed construction of a state-of-the-art processing facility in Titusville, Florida to process
larger five-meter class satellites and payload fairings for the Evolved Expendable Launch Vehicle (EELV) programs. With more than 220 satellites processed, ASO diversifies SPACEHABs customer base and broadens our core competencies.



SPACEHAB Government Services (SGS) provides engineering support
services for the U.S. Government and various commercial industries. As a NASA contractor for over 30 years, this unit offers a wide array of products and services in the engineering, program integration and control, and product development
disciplines. Specifically, we manage projects in need of comprehensive engineering solutions and provide unique capabilities such as specialty engineering, hardware design and development, and configuration and data management.



Space Media, Inc. (SMI), a majority-owned subsidiary intended to create
proprietary space-themed content for education and commerce, provides the space enthusiast with a variety of services. These services range from outfitting a comprehensive space exhibit to providing astronaut appearances and product endorsements and
includes an online retailing outlet, TheSpaceStore.com. This website and retail store, adjacent to NASAs Johnson Space Center in Houston, offers more than 500 products, including distinctive and personalized gifts, clothing, mission patches,
and more. Through the STARS Program, we also provide educational and outreach services to schools around the globe.



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##### Table of Contents

2. Basis of Presentation



In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting of only normal recurring
accruals, except as discussed elsewhere within, necessary for a fair presentation of the consolidated financial position of SPACEHAB, Incorporated and its subsidiaries as of March 31, 2005, and the results of its operations and cash flows for the
periods ended March 31, 2005 and 2004. However, the condensed consolidated financial statements are unaudited and do not include all related footnote disclosures. Certain amounts presented for prior periods have been reclassified to conform with the
fiscal year 2005 presentation.



The consolidated results of operations for the
three and nine month periods ended March 31, 2005 are not necessarily indicative of the results that may be expected for the full year. Our results of operations have fluctuated significantly from quarter to quarter. The interim unaudited condensed
consolidated financial statements should be read in conjunction with the Companys audited consolidated financial statements appearing in our Annual Report on Form 10-K for the fiscal year ended June 30, 2004.



The Companys cash and short-term investments were approximately $6.0 million, of which
$0.9 million is restricted, as of March 31, 2005. Management believes that we have sufficient liquidity, including cash and short-term investments, advances available under the Companys revolving credit facility, and cash anticipated or
expected to be generated from operations to fund ongoing operations. We also expect to utilize existing cash and cash anticipated from future operations for research and development activities, and for new business initiatives.



3. Earnings per Share



The following are reconciliations of the numerators and denominators of the basic and diluted earnings per share (EPS)
computations for the three and nine month periods ended March 31, 2005 and 2004 (in thousands, except share and per share data):



|                                                      |  |                                   |      |   |                                   |            |                 |   |       |                    |  |                      |     |                 |            |  |   |     
|----------------------------------------------------- |  | --------------------------------- | ---- | - | --------------------------------- | ---------- | --------------- | - | ----- | ------------------ |  | -------------------- | --- | --------------- | ---------- |  | - | ----
|                                                      |  | Three months ended March 31, 2005 |      |   | Three months ended March 31, 2004
|                                                      |  | Income (Numerator)                |      |   | Shares (Denominator)              |            | Per ShareAmount |   |       | Income (Numerator) |  | Shares (Denominator) |     | Per ShareAmount
|Basic EPS:                                            |  |                                   |      |   |                                   |            |                 |   |       |                    |  |                      |     |                 |            |  |   |     
|Income (loss) available to common stockholders        |  | $                                 | (541 | ) |                                   | 12,626,130 |                 | $ | (0.04 | )                  |  | $                    | 267 |                 | 12,476,342 |  | $ | 0.02
|Effect of dilutive securities:                        |  |                                   |      |   |                                   |            |                 |   |       |                    |  |                      |     |                 |            |  |   |     
|Options and warrants, using the treasury stock method |  |                                   |     |   |                                   |           |                 |   |      |                    |  |                      |    |                 | 455,142    |  |   |    
|Convertible preferred shares                          |  |                                   |     |   |                                   |           |                 |   |      |                    |  |                      |    |                 | 1,333,334  |  |   |    
|                                                      |  |                                   |      |   |                                   |            |                 |   |       |                    |  |                      |     |                 |            |  |   |     
|Diluted EPS:                                          |  |                                   |      |   |                                   |            |                 |   |       |                    |  |                      |     |                 |            |  |   |     
|Income (loss) available to common stockholders        |  | $                                 | (541 | ) |                                   | 12,626,130 |                 | $ | (0.04 | )                  |  | $                    | 267 |                 | 14,264,818 |  | $ | 0.02
|                                                      |  |                                   |      |   |                                   |            |                 |   |       |                    |  |                      |     |                 |            |  |   |     



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|                                                      |  |                                  |       |                                  |            |                 |   |                   |  |                     |       |                 |            |  |   |     
|----------------------------------------------------- |  | -------------------------------- | ----- | -------------------------------- | ---------- | --------------- | - | ----------------- |  | ------------------- | ----- | --------------- | ---------- |  | - | ----
|                                                      |  | Nine months ended March 31, 2005 |       | Nine months ended March 31, 2004
|                                                      |  | Income(Numerator)                |       | Shares(Denominator)              |            | Per ShareAmount |   | Income(Numerator) |  | Shares(Denominator) |       | Per ShareAmount
|Basic EPS:                                            |  |                                  |       |                                  |            |                 |   |                   |  |                     |       |                 |            |  |   |     
|Income available to common stockholders               |  | $                                | 5,169 |                                  | 12,603,240 |                 | $ | 0.41              |  | $                   | 4,401 |                 | 12,415,977 |  | $ | 0.35
|Effect of dilutive securities:                        |  |                                  |       |                                  |            |                 |   |                   |  |                     |       |                 |            |  |   |     
|Options and warrants, using the treasury stock method |  |                                  |      |                                  | 267,023    |                 |   |                  |  |                     |      |                 | 290,487    |  |   |    
|Convertible preferred shares                          |  |                                  |      |                                  | 1,333,334  |                 |   |                  |  |                     |      |                 | 1,333,334  |  |   |    
|                                                      |  |                                  |       |                                  |            |                 |   |                   |  |                     |       |                 |            |  |   |     
|Diluted EPS:                                          |  |                                  |       |                                  |            |                 |   |                   |  |                     |       |                 |            |  |   |     
|Income available to common stockholders               |  | $                                | 5,169 |                                  | 14,203,597 |                 | $ | 0.36              |  | $                   | 4,401 |                 | 14,039,798 |  | $ | 0.31
|                                                      |  |                                  |       |                                  |            |                 |   |                   |  |                     |       |                 |            |  |   |     



Convertible notes payable outstanding
as of March 31, 2005, convertible into 4,642,202 shares of common stock at $13.625 per share and due October 2007, were not included in the computation of diluted EPS for the three and nine months ended March 31, 2005 and 2004, as the conversion
price of the convertible notes payable per share was greater than the average market price of the common shares during the periods.



Options to purchase 1,877,313 shares of common stock outstanding at March 31, 2005 were not included in diluted EPS for the three months ended March 31, 2005 as they were
anti-dilutive to the Companys net loss. The options expire between July 2, 2005 and August 16, 2014.



Options to purchase 1,363,559 shares of common stock, at prices ranging from $2.08 to $11.75 per share, were outstanding at March 31, 2005 but were not included in diluted EPS for the nine months ended March 31, 2005
as the option prices were greater than the average market price of the common shares during the period. The options expire between July 2, 2005 and August 16, 2014.



Options to purchase 1,422,411 shares of common stock, at prices ranging from $3.44 to $12.00 per share, were outstanding at March 31, 2004
but were not included in diluted EPS for the three months ended March 31, 2004 as the option prices were greater than the average market price of the common shares during the period. The options expire between July 13, 2004 and February 12, 2011.



Options to purchase 1,468,441 shares of common stock, at prices ranging from
$2.31 to $12.00 per share, were outstanding at March 31, 2004 but were not included in diluted EPS for the nine months ended March 31, 2004 as the option prices were greater than the average market price of the common shares during the period. The
options expire between July 13, 2004 and July 23, 2011.



4. Revenue
Recognition



Our business units revenue is derived primarily from
long-term contracts with the U.S. Government, U.S. Government contractors, and commercial customers. Revenue under these contracts is recognized using the methods described below. Estimating future costs and, therefore, revenues and profits is a
process requiring management judgment. Management bases its estimate on historical experience and on various assumptions that are believed to be reasonable under the circumstances including the negotiation of an equitable adjustment on the Research
and Logistics Mission Support (ReALMS) contract which was added to the contract as a pricing amendment due to the delay in the return to flight of the space shuttle. Costs to complete include, when appropriate, material, labor,
subcontracting costs, lease costs, commissions, insurance and depreciation. Our business segment personnel perform periodic contract status and performance reviews. In the event of a change in total estimated contract cost or profit, the cumulative
effect of such change is recorded in the period that the change in estimate occurs.



8



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##### Table of Contents

A Summary of Revenue Recognition Methods Follows:



|                             |  |                                                                             |  |                                                  |  |                                                                                                  
|---------------------------- |  | --------------------------------------------------------------------------- |  | ------------------------------------------------ |  | -------------------------------------------------------------------------------------------------
|Business Segment             |  | Services/Products Provided                                                  |  | Contract Type                                    |  | Method of Revenue Recognition                                                                    
|SPACEHAB Flight Services     |  | Commercial Space Habitat Modules, Integration & Operations Support Services |  | Firm Fixed Price                                 |  | Percentage-of-completion based on costs incurred                                                 
|                             |  |                                                                             | 
|Astrotech Space Operations   |  | Payload Processing Facilities                                               |  | Firm Fixed Price  Mission Specific              |  | Ratably, over the occupancy period of a satellite within the facility from arrival through launch
|                             |  |                                                                             | 
|                             |  |                                                                             |  | Firm Fixed Price  Guaranteed Number of Missions |  | For multi-year contract payments recognized ratably over the contract period                     
|                             |  |                                                                             | 
|SPACEHAB Government Services |  | Configuration Management, Engineering Services                              |  | Cost Plus Award/Fixed Fee                        |  | Reimbursable costs incurred plus award/fixed fee                                                 
|                             |  |                                                                             | 
|Space Media, Inc.            |  | Space-Themed Commercial Products/Activities                                 |  | Retail                                           |  | Internet and retail sales recognized when goods are shipped                                      



For the three and nine months ended
March 31, 2005, the Company recognized revenue of approximately $0.6 million and $2.7 million, respectively, under the Japanese Experiment Thermal Incubator Service (JETIS) contract with the Mitsubishi Corporation, representing the
Japanese Aerospace Exploration Agency (JAXA), that was entered into in 2000. Subsequent to the suspension of the space shuttle flights and destruction of SPACEHABs Research Double Module (RDM), we contracted for
construction of certain space research equipment, for research space onboard the ISS, and for up to three Russian Progress cargo missions with V.J.F. Russian Consulting who is representing Rocket Space Corporation  Energia
(RSC-Energia), a major Russian aerospace manufacturer and mission operator. Revenue on this contract is recognized on the percentage-of-completion method as costs are incurred.



The ReALMS contract expired January 31, 2004 and support for STS-121, 116, and 118 continues
under a subcontract with Lockheed Martin Corporation (Lockheed Martin), effective February 1, 2004. We are currently providing these services under letter contract and we are in final contract negotiations with Lockheed Martin for this
new contract. Pending finalization of contract negotiations with Lockheed Martin, we are providing asset maintenance and continuing services in anticipation of the contractual missions under letter agreements, generally entered into on a
month-to-month basis. Revenues for the Lockheed Martin agreement are being accounted for under the percentage-of-completion method based on costs incurred over the period of the agreement. In April 2005 NASA announced the postponement of the return
to flight of the space shuttle from mid May 2005 to mid July 2005. We expect this delay to have a marginal impact on our revenues and margins over the coming months as we continue the mission specific work and receive revenue for our asset
maintenance fees.



For the period ended March 31, 2003, we recognized a
non-recurring charge of $50.3 million net of insurance proceeds, on the loss of its RDM in the Space Shuttle Columbia accident. Upon notification by NASA of its acceptance of our claim for indemnification of $8.0 million plus interest of $0.2
million, we recognized a recovery of $8.2 million of previously recognized loss in the period ended September 30, 2004. The Company received payment of the $8.2 million accounts receivable established for the period ended September 30, 2004 in
October 2004.



9



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5. Statements of Cash Flows - Supplemental Information



| | (a) | Cash paid for interest costs was $2.8 million and $4.9 million for the nine months ended March 31, 2005 and 2004, respectively. We did not capitalize any interest costs during the
nine months ended March 31, 2005 or 2004.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) | We paid an immaterial amount of income taxes for the nine months ended March 31, 2005 and paid no income taxes the nine months ended March 31, 2004.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------



6. Credit Facilities



On August 29, 2002 we entered into a $5.0 million line of credit with a financial institution. The term of this credit facility was through
August 28, 2005. Covenants included a liquidity ratio and a limited pledge of $5.6 million of the Companys investment account. The restriction on the investment balance was equal to 111% of the borrowings on the line of credit. In June 2004
the credit agreement was amended again to remove the financial covenant on capital expenditures. Borrowing on this credit facility for the nine months ended March 31, 2005 was at a weighted average interest rate of 4.8%. This credit facility was
replaced with a new revolving credit facility from another financial institution on February 11, 2005.



On February 11, 2005 we entered into a revolving credit facility with a bank providing for loans up to $5.0 million secured by the Companys accounts receivable. Funds available under the revolving credit
facility are limited to 80% of eligible accounts receivable and the Company is subject to various financial and other covenants including a minimum tangible net worth covenant, a cash flow coverage covenant, and a secured debt coverage covenant. As
of March 31, 2005 there have been no borrowings under this revolving credit facility, and we posted a restricted cash balance of $314,000 in accordance with the financial covenants. As of March 31, 2005 there was $5.0 million available under this
credit facility.



On August 30, 2001 our Astrotech subsidiary completed a $20.0
million financing of its Spacecraft Processing Facility (SPF) expansion project in Titusville, Florida (the term loan) with a financial institution. The proceeds of this financing were used to complete the construction of the
SPF and supporting infrastructure. The term loan was collateralized primarily by the multi-year payload processing contracts with The Boeing Company (Boeing) and Lockheed Martin and by the building. The net book value of the building as
of March 31, 2005 was $22.5 million. The term loan was scheduled to mature on January 15, 2011.



On October 1, 2004 Astrotech was notified by Boeing that it was exercising its termination rights with regards to its financial guarantees under the contract agreement with Astrotech for payload processing support
services for the Delta launch vehicle program. Boeing indicated that the decision to terminate its guarantees for future Astrotech services was based on the downturn of the commercial expendable launch market rather than performance related
considerations. We were in full compliance with the contract terms at the time of the termination. Under the contract provision related to termination of its financial guarantees, Boeing paid us $17.5 million representing consideration of future
contract payments previously used to collateralize the obligation. In the quarter ending March 31, 2004 we repaid $9.5 million of principal on the term loan.



In conjunction with the term loan, a swap agreement was required to be entered into to provide for a fixed rate of interest under the term loan commitment beginning
January 15, 2002. The fixed rate of interest on the outstanding principal balance was 5.62% plus 225 basis points. The objective of the swap was to eliminate the variability of cash flows in the interest payments for the total amount of the variable
rate debt, the sole source of which are changes in the USD-LIBOR-BBA interest rate. Due to the repayment of the Boeing portion of the term loan and the subsequent amendment of the loan agreement, the swap was no longer effective as a hedge. The
unrealized loss in other comprehensive loss for the portion of the debt that was repaid in December 2004 was recorded as interest expense in the period ended March 31, 2004 in the amount of $0.8 million. We recognized interest expense of $0.4
million for the unamortized debt placement costs related to the debt repayment in the period ended March 31, 2004. We recognized as additional interest expense the unamortized debt placement costs of $0.2 million and the balance of the deferred loss
on the swap in other comprehensive loss of $0.5 million in the third quarter of fiscal year 2004 in connection with the amendment of the loan agreement.



10



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##### Table of Contents

The term loan agreement was amended on January 29, 2004, whereby the maturity date was shortened to January 2007, the
interest rate was fixed at 5.5% and the hedge requirement was eliminated. For the fiscal year ended June 30, 2004, approximately $11.4 million of principal was repaid and the outstanding balance was $5.6 million as of June 30, 2004. For the nine
months ended March 31, 2005, approximately $1.4 million was repaid and the outstanding balance was $4.1 million as of March 31, 2005.



7. Segment Information



Based on our organization, we operate in four business segments: SFS, Astrotech, SGS, and SMI. SFS was founded to commercially develop space habitat modules that operate in the cargo bay of the space shuttles. SFS
provides access to the modules and integration and operations support services for both NASA and commercial customers. Astrotech provides payload processing facilities and services to serve the spacecraft manufacturing and launch services industry.
SGS is primarily engaged in providing engineering services and products to the Government including NASA. SMI was established in April 2000 to develop space-themed commercial business activities.



The Companys chief operating decision maker utilizes both revenue and income (loss)
before income taxes, in assessing performance and making overall operating decisions and resource allocations.



|                                                  |  |         |        |                                  |   |        |                  |  |                              |        |  |   |      
|------------------------------------------------- |  | ------- | ------ | -------------------------------- | - | ------ | ---------------- |  | ---------------------------- | ------ |  | - | -----
|Three Months Ended March 31, 2005 (in thousands):
|                                                  |  |         |        |                                 
|                                                  |  | Revenue |        | Income (Loss)before income taxes |   |        | Net Fixed Assets |  | DepreciationAndAmortization 
|SPACEHAB Flight Services                          |  | $       | 10,007 |                                  | $ | 2,032  |                  |  | $                            | 30,279 |  | $ | 706  
|Astrotech                                         |  |         | 2,533  |                                  |   | 443    |                  |  |                              | 45,966 |  |   | 525  
|SPACEHAB Government Services                      |  |         | 1,553  |                                  |   | 337    |                  |  |                              | 55     |  |   | 6    
|Space Media                                       |  |         | 179    |                                  |   | (41    | )                |  |                              |       |  |   |     
|Corporate                                         |  |         |       |                                  |   | (3,299 | )                |  |                              | 230    |  |   | 93   
|                                                  |  |         |        |                                  |   |        |                  |  |                              |        |  |   |      
|                                                  |  | $       | 14,272 |                                  | $ | (528   | )                |  | $                            | 76,530 |  | $ | 1,330
|                                                  |  |         |        |                                  |   |        |                  |  |                              |        |  |   |      
|                                                  |  |         |        |                                 
|Three Months Ended March 31, 2004 (in thousands): |  |         |        |                                  |   |        |                  |  |                              |        |  |   |      
|                                                  |  |         |        |                                 
|                                                  |  | Revenue |        | Income (Loss)before income taxes |   |        | Net FixedAssets  |  | Depreciation AndAmortization
|SPACEHAB Flight Services                          |  | $       | 10,240 |                                  | $ | 3,996  |                  |  | $                            | 32,935 |  | $ | 842  
|Astrotech                                         |  |         | 2,542  |                                  |   | 416    |                  |  |                              | 47,422 |  |   | 524  
|SPACEHAB Government Services                      |  |         | 1,826  |                                  |   | 171    |                  |  |                              | 125    |  |   | 15   
|Space Media                                       |  |         | 192    |                                  |   | (15    | )                |  |                              |       |  |   |     
|Corporate                                         |  |         |       |                                  |   | (4,290 | )                |  |                              |       |  |   |     
|                                                  |  |         |        |                                  |   |        |                  |  |                              |        |  |   |      
|                                                  |  | $       | 14,800 |                                  | $ | 278    |                  |  | $                            | 80,482 |  | $ | 1,381
|                                                  |  |         |        |                                  |   |        |                  |  |                              |        |  |   |      



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|                                                 |  |         |        |                                  |   |         |                 |  |                              |        |  |   |      
|------------------------------------------------ |  | ------- | ------ | -------------------------------- | - | ------- | --------------- |  | ---------------------------- | ------ |  | - | -----
|Nine Months Ended March 31, 2005 (in thousands):
|                                                 |  |         |        |                                 
|                                                 |  | Revenue |        | Income (Loss)before income taxes |   |         | Net FixedAssets |  | Depreciation AndAmortization
|SPACEHAB Flight Services                         |  | $       | 28,351 |                                  | $ | 13,523  |                 |  | $                            | 30,279 |  | $ | 2,110
|Astrotech                                        |  |         | 6,755  |                                  |   | 566     |                 |  |                              | 45,966 |  |   | 1,556
|SPACEHAB Government Services                     |  |         | 4,710  |                                  |   | 862     |                 |  |                              | 55     |  |   | 19   
|Space Media                                      |  |         | 627    |                                  |   | (29     | )               |  |                              |       |  |   |     
|Corporate                                        |  |         |       |                                  |   | (9,598  | )               |  |                              | 230    |  |   | 268  
|                                                 |  |         |        |                                  |   |         |                 |  |                              |        |  |   |      
|                                                 |  | $       | 40,443 |                                  | $ | 5,324   |                 |  | $                            | 76,530 |  | $ | 3,953
|                                                 |  |         |        |                                  |   |         |                 |  |                              |        |  |   |      
|                                                
|Nine Months Ended March 31, 2004 (in thousands):
|                                                 |  |         |        |                                 
|                                                 |  | Revenue |        | Income (Loss)before income taxes |   |         | NetFixedAssets  |  | DepreciationAndAmortization 
|SPACEHAB Flight Services                         |  | $       | 32,612 |                                  | $ | 9,381   |                 |  | $                            | 32,935 |  | $ | 2,635
|Astrotech                                        |  |         | 24,654 |                                  |   | 16,169  |                 |  |                              | 47,422 |  |   | 1,518
|SPACEHAB Government Services                     |  |         | 8,601  |                                  |   | (5,469  | )               |  |                              | 125    |  |   | 53   
|Space Media                                      |  |         | 599    |                                  |   | (25     | )               |  |                              |       |  |   |     
|Corporate                                        |  |         |       |                                  |   | (15,404 | )               |  |                              |       |  |   |     
|                                                 |  |         |        |                                  |   |         |                 |  |                              |        |  |   |      
|                                                 |  | $       | 66,466 |                                  | $ | 4,652   |                 |  | $                            | 80,482 |  | $ | 4,206
|                                                 |  |         |        |                                  |   |         |                 |  |                              |        |  |   |      



8. Stock  Based Compensation



In December 2002 the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (SFAS) No. 148, Accounting for Stock-Based CompensationTransition and Disclosurean amendment of SFAS No. 123. This statement amends SFAS No.
123, Accounting for Stock-Based Compensation, to provide 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
disclosure requirements of SFAS No. 123 to require prominent 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. We
have chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board (APB) Opinion No. 25 and related interpretations. Accordingly, compensation expense for stock
options is measured as the excess, if any, of the fair market value of the Companys stock at the date of the grant over the exercise price of the related option.



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##### Table of Contents

If compensation costs for the Companys stock options were determined based on SFAS No. 123, Accounting for
Stock-Based Compensation, our net income (loss) and earnings per share would have been as follows (in thousands, except per share amounts):



|                                                                                                                                                  |  |                             |       |   |                             |   |      |      |  |   |       |   |  |   |       |  
|------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ----- | - | --------------------------- | - | ---- | ---- |  | - | ----- | - |  | - | ----- | -
|                                                                                                                                                  |  | Three MonthsEnded March 31, |       |   | Nine Months Ended March 31, |  
|                                                                                                                                                  |  | 2005                        |       |   | 2004                        |   |      | 2005 |  |   | 2004  |  
|Net income (loss), as reported                                                                                                                    |  | $                           | (541  | ) |                             | $ | 267  |      |  | $ | 5,169 |   |  | $ | 4,401 |  
|                                                                                                                                                  |  |                             |       |  
|Deduct: Total stock-based compensation expense determined under fair value based Method (SFAS No. 123) for all awards, net of related tax
effects |  |                             | (70   | ) |                             |   | (75  | )    |  |   | (157  | ) |  |   | (248  | )
|                                                                                                                                                  |  |                             |       |   |                             |   |      |      |  |   |       |   |  |   |       |  
|Pro forma net income (loss)                                                                                                                       |  | $                           | (611  | ) |                             | $ | 192  |      |  | $ | 5,012 |   |  | $ | 4,153 |  
|                                                                                                                                                  |  |                             |       |   |                             |   |      |      |  |   |       |   |  |   |       |  
|Earnings per share:                                                                                                                               |  |                             |       |   |                             |   |      |      |  |   |       |   |  |   |       |  
|Basic - as reported                                                                                                                               |  | $                           | (0.04 | ) |                             | $ | 0.02 |      |  | $ | 0.41  |   |  | $ | 0.35  |  
|Diluted - as reported                                                                                                                             |  | $                           | (0.04 | ) |                             | $ | 0.02 |      |  | $ | 0.36  |   |  | $ | 0.31  |  
|                                                                                                                                                  |  |                             |       |  
|Basic - pro forma                                                                                                                                 |  | $                           | (0.05 | ) |                             | $ | 0.02 |      |  | $ | 0.40  |   |  | $ | 0.33  |  
|Diluted - pro forma                                                                                                                               |  | $                           | (0.05 | ) |                             | $ | 0.01 |      |  | $ | 0.35  |   |  | $ | 0.30  |  



9. Stock Repurchase



On March 25, 2003 the Board of Directors authorized the Company to repurchase up to $1.0
million of the Companys outstanding common stock at market prices. Any purchases under the Companys stock repurchase program may be made from time to time, in the open market, through block trades or otherwise in accordance with
applicable regulations of the Securities and Exchange Commission (SEC). For the three and nine months ended March 31, 2005, we did not repurchase any shares. As of March 31, 2005, we had repurchased 116,100 shares at a cost of $117,320
under the program.



10. Related Party Transactions



The Company engaged in certain transactions with directors, executive officers,
shareholders, and certain former officers during the three and nine months ended March 31, 2005. Following is a description of these transactions:



EADS Space Transportation



Dr. Graul, a member of SPACEHABs Board of Directors, is the Executive Vice President for EADS Space Transportation. EADS provides unpressurized payload and
integration efforts to SPACEHAB on a fixed-price basis in addition to providing engineering services as required. For the three months ended March 31, 2005 and 2004, EADSs payload and integration services included in cost of revenue were
approximately $2.9 million and $1.5 million, respectively. For the nine months ended March 31, 2005 and 2004, EADSs payload and integration services included in cost of revenue were approximately $9.2 million and $5.4 million, respectively.



V.J.F. Russian Consulting



On January 30, 2004 we entered into a subcontract agreement with V.J.F. Russian Consulting.
The president of V.J.F. Russian Consulting, Vladimir Fishel, is a former Vice President of SPACEHAB who at the time of entering into a part-time employment agreement for other consulting activities was receiving severance payments from the Company
on a part-time employment arrangement for other consulting activities. The services being provided under the subcontract agreement (valued at $2.6 million) is in support of a contract that SPACEHAB has with the Mitsubishi Corporation in support of
JAXA. The amount paid for the three months ended March 31, 2005 was $0.3 million. The amount paid for the nine months ended March 31, 2005 was $0.7 million.



13



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##### Table of Contents

On June 1, 2004 the Company entered into a consulting agreement with V.J.F. Russian Consulting for:



| | (1) | Marketing and promotion of SPACEHAB capabilities and services to RSC-Energia, the Russian Federation Space Agency, and other Russian entities involved in the exploration and
development of space;
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | Supporting and assisting SPACEHAB in the negotiation of service contracts and agreements between Russian entities; and
| | --- | ----------------------------------------------------------------------------------------------------------------------



| | (3) | Providing technical expertise and services in support of SPACEHAB activities, under contracts with Russian entities.
| | --- | --------------------------------------------------------------------------------------------------------------------



Total commitments under the consulting agreement are $0.4 million, of which $0.1 million was
paid in the three months ended March 31, 2005. For the nine months ended March 31, 2005, $0.2 million was paid.



11. Recent Accounting Pronouncement



The FASB has issued Statement 123R (revised 2004), Share-Based Payment. Statement 123(R) which will, with certain exceptions, require entities that grant stock
options and shares to employees to recognize the fair value of those options and shares as compensation cost over the service (vesting) period in their financial statements. The measurement of that cost will be based on the fair value of the equity
or liability instruments issued. The effective date for Statement 123(R) for the Company is the fiscal year beginning July 1, 2005. We have not yet made an assessment as to the impact on the Companys financial statements.



12. Subsequent Events



On April 28, 2005 we consummated the sale and simultaneous leaseback of our Cape Canaveral Florida SPPF. The sales price of the building was
$4.8 million including a note receivable of $0.7 million due December 2010. We received $4.1 million in cash of which $0.3 million was used for expenses related to the transaction. We will lease the building back for an initial term expiring
December 31, 2010 with an option to renew for one additional five-year term. In accordance with FASB 28, the Company will defer the gain of approximately $0.5 million from the sale leaseback transaction and recognize it as an offset to rent expense
over the five-year lease term.



In April 2005 NASA announced the postponement
of the return to flight of the space shuttle from mid May 2005 to mid July 2005. The delay is expected to have a small impact on our revenues and margins over the coming months as we continue the mission specific work now underway and are protected
in our contractual arrangements with a periodic asset maintenance fee applicable to provide and maintain our space assets pending launch.



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##### Table of Contents

ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations



The following discussion should be read together with the unaudited consolidated financial statements and the notes thereto included in this report.



OVERVIEW



This document may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934, including (without limitation) statements under Managements Discussion and Analysis of Financial Condition and Results of Operations and Liquidity and Capital Resources. Such
statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the statements. In addition to those risks and uncertainties discussed herein, such risks and uncertainties include, but
are not limited to, whether the Company will fully realize the economic benefits under its NASA and other customer contracts, continued utilization by NASA and others of our habitat modules and related commercial space assets, completion of the ISS,
continued availability and use of the U.S. space shuttle system, technological difficulties, product demand and market acceptance risks, the effect of economic conditions, uncertainty in government funding and the impact of competition, delays and
uncertainties in future space shuttle and ISS programs, uncertainties related to the Governments commitment to President Bushs vision for space exploration, and resolution of the Companys claims against NASA arising from the loss
of its RDM on the Columbia orbiter during the STS-107 mission.



Management is pleased that the White House issued a new vision for U.S. space leadership. SPACEHAB views the Presidents commitment to space exploration, the human spaceflight program, and the plan for missions to the Moon, Mars, and
beyond as positive indicators that will reinvigorate the space program, likely yielding benefits to the aerospace and space commerce industries. The vision provides NASA with a clear focus, stabilizes the NASA Program, and supplies increased funding
for the new pursuits.



We believe the impacts of this vision will materialize
over time, and SPACEHAB management will continue to align its business direction to remain a constructive force in the human spaceflight program. In the long term, management believes that our core competencies offer opportunities to continue to
provide high-value services as well as to design, build, and operate assets that could support initiatives beyond low earth orbit. We plan to pursue these new opportunities. In the near term, SPACEHABs primary objective is to continue
providing services to NASA and the space community in support of the space shuttle and ISS programs. Even with the renewed vision, we expect that the space shuttle and ISS will remain an integral part of the human spaceflight program through at
least 2010. We are currently supporting four of the next six scheduled space shuttle flights and are pursuing additional missions that will be important for completing the final assembly of the ISS. In January 2005 SPACEHAB received authorization to
proceed on integration and operations activities for the STS-116 mission currently manifested for February 2006. In addition, we received authorization for new contract work to add a deployable stowage platform to STS-118 scheduled to launch in July
2006 which will be permanently affixed to the ISS. In April 2005 NASA announced the delay of the return to flight of the space shuttle from mid May 2005 to mid July 2005. The delay is expected to have a small impact on our revenues and margins over
the coming months as we continue the mission specific work now underway and are protected in our contractual arrangements with a periodic asset maintenance fee applicable to provide and maintain our space assets pending launch.



SPACEHAB is also actively engaged in defining Commercial Payload Services (CPS) solutions
capable of meeting ISS on-orbit re-supply and return requirements more efficiently than the space shuttle. These activities, some of which leverage our international strategic partnerships and intellectual property rights, include the development of
an affordable cargo transportation system based on existing commercial launch vehicles, and SPACEHABs modular payload integration architecture to transport pressurized and unpressurized cargo to and from the ISS. Management further believes
that our experience and expertise in the conceptual design, development, ground processing, and on-orbit operations support of payload and crew accommodations position us well for a role in the development of NASAs space exploration systems,
the envisioned next phase in human exploration of space.



In September 2004,
the SFS Space Commerce Development group was awarded a six-month NASA study contract valued at approximately $1.0 million to support the space agencys new exploration initiatives. SPACEHAB defined concepts for accomplishing human lunar
exploration with a focus on innovative solutions and commercial approaches that could be extendible to Mars and beyond. In March 2005, we were awarded a contract option for an additional six-month effort also valued at nearly $1.0 million.



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SPACEHAB operates in three main areas generally related to space flight activities within the aerospace industry: space
assets and mission support services for manned and unmanned space exploration and research missions; commercial and exploratory satellite pre-launch services; and engineering services in support of government space operations. We also operate a
retail space merchandise operation and provide space-related educational services. Because of the diversity among the operations of our activities, we report the results of each business as a separate segment in our consolidated financial
statements. Our consolidated financial results also reflect corporate-level expenses such as general and administrative, interest, and depreciation and amortization, but because of their nature, these items are not reported as a separate segment.



Business Segments



Following is a brief discussion of each of our four business segments, including a list of
key factors that have affected, and are expected to continue to affect, their respective earnings and cash flows. We also present a brief discussion of our corporate-level expenses along with a summary of our current liquidity position and items
that could impact our liquidity position in fiscal year 2005 and beyond. This Overview section is merely a summary and should be read together with the remainder of Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations, as well as the audited consolidated financial statements, including the notes thereto, and the other information included in the Companys Form 10-K for the fiscal year ended June 30, 2004.



SPACEHAB Flight Servicesgenerates revenue by providing space shuttle-based, turnkey
services that include customer access to space via our fleet of pressurized modules and unpressurized pallet carriers; integration and operations support to logistics suppliers transporting their cargo aboard our carriers to and from the orbiting
ISS; and/or integration and operations support to scientists and technologists responsible for experiments performed aboard module and pallet research platforms.



We also offer on a space-available basis for each mission, access to space onboard the space shuttle, Russian Progress, and European
Space Agency ATV cargo vehicles under commercial contracts with non-NASA customers, including both government and private customers. Commercial contracts with non-NASA customers will continue to be established directly between SPACEHAB and its
commercial customers.



Additionally, during the space shuttle stand-down
period, SFS is providing cargo shipment coordination services to NASA for all U.S. cargo shipped to the ISS via the Russian Progress space vehicle. These services are provided under contract to Lockheed Martin, the Cargo Mission Contract
(CMC) contractor to NASA. We are also providing research access to space and on the ISS to JAXA through RSC-Energia, a major Russian aerospace enterprise. SPACEHAB contracted through V.J.F. Russian Consulting with RSC-Energia for
construction of certain space research equipment, launch vehicle, and research space aboard the Russian Progress carrier when the originally-scheduled services on the space shuttle were suspended due to the Columbia tragedy.



The primary factors impacting our SFS earnings and cash flows are the number
of space shuttle missions flown and the configuration of the cargo handling and research logistics required for each mission. Our revenues and earnings, if any, from each mission are dependent upon the space assets required in the cargo or research
logistics configuration and the mission support services required to employ those assets. Other factors that have impacted, and are expected to continue to impact, earnings and cash flows for this business unit include:



| |  | Congress funding for NASA and the allocation of that funding to ISS operations and space shuttle cargo missions
|- |  | ----------------------------------------------------------------------------------------------------------------



| |  | The return to flight of the U.S. Space Shuttle
|- |  | ----------------------------------------------



| |  | The role of international space research projects flying on future space shuttle and on Russian and European Space Agency missions
|- |  | ----------------------------------------------------------------------------------------------------------------------------------



| |  | The growth of space exploration programs within NASA and NASAs commitment to the Nations Vision on Space Exploration regarding enhancement of the role of commercial
enterprise in space exploration programs
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Our ability to control our capital expenditures, particularly those for spare or replacement parts for space assets
|- |  | -------------------------------------------------------------------------------------------------------------------



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Astrotech Space Operations, Inc. revenue is generated from various fixed-price contracts with launch service
providers in both the commercial and government markets. The services and facilities Astrotech provides to its customers support the final assembly, checkout, and countdown functions associated with preparing a satellite for launch. This preparation
may include: the final assembly and checkout of the satellite, check-out and installation of the solid rocket motors, loading of the liquid propellants, encapsulation of the satellite in the launch vehicle payload fairings, and command and control
of the satellite during pre-launch countdown.



The earnings and cash flows
generated from our Astrotech operations are related to the number of commercial satellite launches, which reflects the growth in the satellite-based communication industries, and the requirement to replace aging satellites. Other factors that have
impacted, and are expected to continue to impact, earnings and cash flows for this business include:



| |  | Our ability to control our capital expenditures, which primarily are limited to maintenance and safety, environ-mental and reliability projects, and other costs through disciplined
management and safe, efficient operations
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The continuing limited availability of government-owned facilities at the major domestic launch sites that can offer compatible services, leading to an increase in government use of
Astrotech services
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



SPACEHAB Government Services, Inc.
revenue is generated by providing support to the Government in the areas of large-scale configuration and data management programs such as the ISS; specialized hardware design, development, and fabrication; low- to high-fidelity mockup design and
construction; and safety and quality support services. This business unit offers a wide array of products and services in these varied fields. SGS is currently under contract to provide configuration management services within the Program
Integration and Control (PI&C) contract of which ARES Corporation is the prime contractor.



Our earnings in SGS operations are dependent on our ability to continue to win contracts with NASA or other government entities through the competitive bidding process and our performance under those contracts in
achieving performance bonuses. Other factors that have impacted, and are expected to continue to impact, earnings and cash flows for this business include:



| |  | Continuation through 2008 of our PI&C contract with the ISS Program
|- |  | -------------------------------------------------------------------



| |  | Our ability to maintain small business qualification under NASA contracting rules
|- |  | ---------------------------------------------------------------------------------



| |  | Our ability to control costs within our budget commitments
|- |  | ----------------------------------------------------------



Space Media, Incorporatedoperates a retail store and internet store offering space-themed products and is engaged in space-related educational programs and other
space-themed activities. Revenue and earnings in our retail operations are dependent upon general enthusiasm for the space exploration program, advertising and promotion, and competition.



Corporate and Other. Significant items impacting future earnings and cash flows include:



| |  | Interest expense is expected to decrease in fiscal year 2005 due to the repayment of a substantial portion of our mortgage debt during fiscal year 2004 from proceeds from
Boeings early termination of their satellite preparation contract with our Astrotech subsidiary
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | General and administrative costs, which were reduced in fiscal year 2004 due to staff reductions and the closing of our Washington D.C. corporate office, and our ability to continue
to manage future overhead costs
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The ultimate settlement of our claim against NASA for indemnification of our losses on the Space Shuttle Columbia mission and/or our Tort Claim
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------



| |  | Income taxes, with respect to which we currently only pay alternative minimum tax and minimal state income taxes; income taxes will also be impacted by our ability to realize our
significant deferred tax assets, including loss carry forwards
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Liquidity. As of March 31, 2005 we had cash on hand and in short-term investments of $6.0 million. Our $5.0 million revolving credit facility had no outstanding borrowings as of March 31, 2005. Our ability to maintain sufficient
liquidity in the future will depend on a number of factors including our ability to acquire future business, control our costs and manage capital expenditures, the return to flight of the space shuttle, and the continued activity in the commercial
and governmental satellite launch industry.



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We expect that our operating cash flows through fiscal year 2006 will be sufficient to satisfy our capital expenditures,
debt maturities, interest expenses, and operating commitments. In February 2005 we entered into a new $5.0 million revolving credit facility, replacing our previous revolving credit facility. This new revolving credit facility is secured by our
accounts receivable and is subject to various financial and other covenants, including a minimum tangible net worth covenant, a cash flow covenant, and a secured debt coverage covenant. The new revolving credit agreement provides access to
previously restricted cash and short term investments and to advances secured by accounts receivable, significantly enhancing the Companys liquidity.



Over the longer term we believe that the space shuttle return to flight and the Presidents vision for space exploration will lead to increased activity and related
cash flows from operations for our SFS business segment. We expect additions to our contract with Lockheed Martin for ISS configuration hardware and contract additions in our satellite processing business, reflecting increased activity in the space
exploration and commercial satellite industries. However, there can be no assurance that the space shuttle will return to flight in the near term or that we will be able to win future contracts with NASA, other national space agencies, or commercial
space enterprises, or to successfully exploit other business opportunities. Failure to achieve such events would have a material adverse effect on our financial condition and results of operations and could adversely affect our ability to redeem our
subordinated convertible notes when they mature in October 2007.



Revenue



The Companys revenue for the nine months ended March 31, 2005 and
2004 was generated primarily from the ReALMS contract, Lockheed Martin letter contract, and contracts with related commercial customers in the SFS segment; the remaining contracts under the Flight Crew Systems Development (FCSD) contract
and the PI&C contract in the SGS segment; and our contract with Lockheed Martin in the Astrotech segment and other commercial satellite providers. Revenue for SMI was immaterial for the nine months ended March 31, 2005 and 2004. During the
period, there were launch delays that affected planned revenue that is expected to materialize in the upcoming months in our Astrotech business unit.



Our SFS business segment is supporting NASAs return-to-flight activities and is continuing operations in preparation for shuttle missions including STS-114, 121,
116, and 118 (in order of their anticipated flight sequence). We contracted directly with NASAs prime ISS contractor, Boeing, for the STS-114 mission. SFS is preparing cargo carriers for STS-114 and STS-118, the External Stowage Platforms
(ESP2 and ESP3 respectively), that will be deployed and permanently mounted to the ISS. For STS-121, we are scheduled to provide our non-deployable unpressurized carrier to NASA under our CMC subcontract with Lockheed Martin
for transport of several critical ISS Orbital Replacement Unit (ORU) spares. For both STS-116 and 118, missions also under the CMC contract, we are scheduled to provide a pressurized single module and unpressurized non-deployable carrier
for transport of critical cargo and ORUs to and from the ISS. We have successfully completed negotiations with Boeing and Lockheed Martin for the respective contract equitable adjustments required to continue uninterrupted support to ongoing
STS-114, 121, 116 and 118 mission preparation activities during the shuttle down period following the Columbia tragedy. Support for missions STS-121, 116 and 118 is continuing under a subcontract agreement to Lockheed Martin, effective
February 1, 2004. We are currently providing these services under a letter contract, have completed final contract negotiations with Lockheed Martin, and are awaiting issuance of this new contract. Additionally, after approximately April 15, 2004,
SFS no longer is subcontracting its module mission integration, operations and sustaining engineering technical support to Boeing. Most module mission tasks previously performed by Boeing personnel are now being performed by SFS personnel, and
selected NASA cargo integration tasks on SPACEHAB module missions are now being performed by Lockheed Martin as a part of their CMC with NASA. This decision enables SFS to continue to provide services to NASA and is consistent with the direction of
the ISS Program Office.



In January 2004 the Company initiated activity under
the JETIS contract with the Mitsubishi Corporation, representing JAXA, that was entered into in 2000 and originally scheduled to fly aboard SPACEHABs RDM. Subsequent to the suspension of the space shuttle flights and destruction of
SPACEHABs RDM, the Company



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##### Table of Contents

contracted for construction of certain space research equipment and for research space aboard the ISS and up to three
Russian Progress cargo missions with V.J.F. Russian Consulting, representing RSC-Energia, a major Russian aerospace manufacturer and mission operator. The first experiment was successfully launched on the Russian Progress spacecraft on
August 11, 2004.



During the three and nine months ended March 31, 2005,
deferred revenue decreased by $0.2 million and $4.8 million, respectively, as the Company recognized revenue on contracts where milestone payments had been received in prior periods. Management expects further reduction of deferred revenue through
the next twelve months which will result in revenue recognition on contracts for which the related cash was received in a prior period.



Costs of Revenue



SPACEHAB has several types of costs of revenue in its business segments. Costs of revenue for SFS include integration and operations expenses associated with the performance of two types of efforts: (i) sustaining
engineering in support of all missions under a contract and (ii) mission specific support. Costs associated with the performance of the contracts using the percentage-of-completion method of revenue recognition are expensed as incurred. Costs
associated with the cost-plus award and fixed-fee contracts are expensed as incurred by SGS. Other costs of revenue include depreciation expense and costs associated with the Astrotech payload processing facilities. Flight related insurance covering
transportation of the SPACEHAB modules from SPACEHABs payload processing facility to the space shuttle, in-flight insurance, and third-party liability insurance are also included in costs of revenue and are recorded as incurred. Selling,
general and administrative and interest and other expenses are recognized when incurred.



Non Recurring Charge



On February 1,
2003 the RDM was lost in the STS-107 tragedy. The net book value of the RDM was $67.9 million, which, net of insurance proceeds of $17.7 million, was recognized as a loss in the third quarter of fiscal year 2004. The $8.0 million plus interest of
$0.2 million paid by NASA as indemnification for our loss of the RDM is recognized as a recovery of previously recognized loss in the quarter ended September 30, 2004. At this time we do not plan to replace the RDM. SPACEHABs SFS business
segment has two additional modules and other flight assets available to support current NASA requirements. These modules and assets can also be used to support future NASA requirements. The shuttle is currently scheduled to return to flight in July
2005.



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RESULTS OF OPERATIONS



For the three months ended March 31, 2005 as compared to the three months ended March 31, 2004.



Revenue. Revenue decreased approximately 4% to $14.3 million as compared to $14.8 million for the three months ended March 31, 2005
and 2004, respectively (in millions).



|                             |  |                              |      |      |   |              |  |   |               |   |  |     |   
|---------------------------- |  | ---------------------------- | ---- | ---- | - | ------------ |  | - | ------------- | - |  | --- | --
|                             |  | Three Months Ended March 31, |      |      |   |              |  |  
|                             |  | 2005                         |      | 2004 |   | DollarChange |  |   | PercentChange |  
|SPACEHAB Flight Services     |  | $                            | 10.0 |      | $ | 10.3         |  | $ | (0.3          | ) |  | (3  | )%
|Astrotech Space Operations   |  |                              | 2.5  |      |   | 2.5          |  |   | 0.0           |   |  | 0   | % 
|SPACEHAB Government Services |  |                              | 1.6  |      |   | 1.8          |  |   | (0.2          | ) |  | (11 | )%
|Space Media                  |  |                              | 0.2  |      |   | 0.2          |  |   | 0.0           |   |  | 0   | % 
|                             |  |                              |      |      |   |              |  |   |               |   |  |     |   
|                             |  | $                            | 14.3 |      | $ | 14.8         |  | $ | (0.5          | ) |  | (4  | )%
|                             |  |                              |      |      |   |              |  |   |               |   |  |     |   



Revenue from the SFS business segment
has been adversely affected by the temporary grounding of the shuttle fleet due to the STS-107 tragedy in February 2003, partially offset by revenue from the Lockheed Martin letter contract, and other contract revenue. The following summarizes the
significant items:



| |  | Decrease in ReALMS revenue of $4.2 million in the three months ended March 31, 2005 compared to the three months ended March 31, 2004 due to the termination of the ReALMS contract
in January 2004
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Increase in Lockheed Martin contract revenue of $4.4 million in the three months ended March 31, 2005 compared to the three months ended March 31, 2004 due to the startup of the
contract in February 2004
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Decrease in revenue from the JETIS contract of $1.2 million due to the timing of the mission operations
|- |  | -------------------------------------------------------------------------------------------------------



| |  | Increase in revenue from Concept Exploration and Refinement (CE&R) contract of $0.6 million that was started in the first quarter of fiscal year 2005
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Other contract revenue increase of $0.1 million
|- |  | -----------------------------------------------



Revenue from our Astrotech business unit was generally unchanged in the current quarter as compared to the prior quarter.



The decrease in revenue at the SGS business segment is primarily due to the closeout of the
Stowage, Engineering and Decal Contract (SEDC) and Configuration Management (CM) contract in December 2004. The following summarizes the significant items:



| |  | Revenue decrease of $0.4 million due to the closeout of the SEDC and CM contracts in December 2004
|- |  | --------------------------------------------------------------------------------------------------



| |  | Other contract revenue increase of $0.2 million
|- |  | -----------------------------------------------



Costs of Revenue. Costs of revenue for the three months ended March 31, 2005 increased by 13% to approximately $11.1 million, as compared to $9.8 million for the
prior years quarter (in millions).



|                             |  |                              |      |      |   |              |  |   |               |   |  |     |   
|---------------------------- |  | ---------------------------- | ---- | ---- | - | ------------ |  | - | ------------- | - |  | --- | --
|                             |  | Three Months Ended March 31, |      |      |   |              |  |  
|                             |  | 2005                         |      | 2004 |   | DollarChange |  |   | PercentChange |  
|SPACEHAB Flight Services     |  | $                            | 7.9  |      | $ | 6.2          |  | $ | 1.7           |   |  | 27  | % 
|Astrotech Space Operations   |  |                              | 2.0  |      |   | 2.0          |  |   | 0.0           |   |  | 0   | % 
|SPACEHAB Government Services |  |                              | 1.1  |      |   | 1.5          |  |   | (0.4          | ) |  | (27 | )%
|Space Media                  |  |                              | 0.1  |      |   | 0.1          |  |   |              |   |  | 0   | % 
|                             |  |                              |      |      |   |              |  |   |               |   |  |     |   
|                             |  | $                            | 11.1 |      | $ | 9.8          |  | $ | 1.3           |   |  | 13  | % 
|                             |  |                              |      |      |   |              |  |   |               |   |  |     |   



Costs of revenue from the SFS business
segment have been affected by the temporary grounding of the shuttle fleet due to the STS-107 tragedy in February 2004, partially offset by costs of revenue from the Lockheed Martin letter contract, the termination of Boeing as a subcontractor for
module services, and other contract costs of revenue. The following summarizes the significant items:



| |  | Decrease in costs of revenue for shuttle related mission work performed by Boeing of $0.9 million due to subcontract termination
|- |  | --------------------------------------------------------------------------------------------------------------------------------



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| |  | Increase in costs of revenue for shuttle related mission work performed by EADS of $1.4 million due to the scheduled launch of STS-114 in July 2005
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Increase in costs of revenue for shuttle related missions for in-house engineering labor of $1.2 million
|- |  | --------------------------------------------------------------------------------------------------------



| |  | Other costs of revenue decreases of $0.4 million offset by CE&R contract costs of $0.3 million
|- |  | ----------------------------------------------------------------------------------------------



Cost of revenue from our Astrotech business unit were generally unchanged in the current quarter as compared to the prior quarter.



The decrease in costs of revenue at the SGS business segment is primarily due
to the closeout of the SEDC contract in December 2004. The following summarizes the significant items:



| |  | Costs of revenue decrease of $0.3 million due to the closeout of the SEDC contract in December 2004
|- |  | ---------------------------------------------------------------------------------------------------



| |  | Other costs of revenue decreases of $0.1 million due to less contract activities in third quarter 2005 as compared to third quarter of fiscal year 2004
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



Operating Expenses. Operating expenses decreased to $2.3 million for the three months
ended March 31, 2005 as compared to approximately $2.6 million for the three months ended March 31, 2004. Operating expenses are lower in the quarter ended March 31, 2005 compared to last years quarter due to the Companys ongoing cost
reduction efforts and staffing reductions in selling, general and administrative expenses. Research and development expenses were immaterial for the three months ended March 31, 2005 and 2004 although the Company expects these costs to increase in
future periods. In the three months ended March 31, 2005, the Company recognized legal expenses of $0.3 million relating to its claims against NASA for loss of the RDM and response to Lloyds complaint regarding its payment of insurance
proceeds on the accident.



Interest Expense. Interest expense was
approximately $1.4 million for the three months ended March 31, 2005 as compared to approximately $2.2 million for the three months ended March 31, 2004. The decrease in interest expense is primarily due to the loss in hedge accounting in 2004,
resulting in expense of $0.5 million on a portion of the interest rate swap for the mortgage loan payable. Additionally, there was an acceleration of $0.2 million of debt placement costs in 2004 associated with the repayment of the mortgage loan and
decreasing interest expense on the amended mortgage loan.



Interest and
Other Income. Interest and other income was immaterial for the three months ended March 31, 2005 and March 31, 2004. Interest income is earned on the Companys short-term investments.



Income Taxes. Based on the Companys projected effective tax rate for fiscal year
2005, we recorded minimal tax expense for the three months ended March 31, 2005 as compared to a minimal tax expense for the three months ended March 31, 2004.



Net Income (Loss). Net loss for the three months ended March 31, 2005 was approximately $0.5 million or $0.04 per share basic and diluted on 12,626,130 shares
as compared to net income of approximately $0.3 million or $0.02 per share basic and $0.02 per share diluted on 12,476,342 and 14,264,818 shares, respectively, for the three months ended March 31, 2004.



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For the nine months ended March 31, 2005 as compared to the nine months ended March 31, 2004.



Revenue. Revenue decreased approximately 39% to $40.4 million as compared to $66.5
million for the nine months ended March 31, 2005 and 2004, respectively (in millions).



|                             |  |                             |      |      |   |              |  |   |               |   |  |     |   
|---------------------------- |  | --------------------------- | ---- | ---- | - | ------------ |  | - | ------------- | - |  | --- | --
|                             |  | Nine Months Ended March 31, |      |      |   |              |  |  
|                             |  | 2005                        |      | 2004 |   | DollarChange |  |   | PercentChange |  
|SPACEHAB Flight Services     |  | $                           | 28.4 |      | $ | 32.6         |  | $ | (4.2          | ) |  | (13 | )%
|Astrotech Space Operations   |  |                             | 6.7  |      |   | 24.7         |  |   | (18.0         | ) |  | (73 | )%
|SPACEHAB Government Services |  |                             | 4.7  |      |   | 8.6          |  |   | (3.9          | ) |  | (45 | )%
|Space Media                  |  |                             | 0.6  |      |   | 0.6          |  |   | 0.0           |   |  | 0   | % 
|                             |  |                             |      |      |   |              |  |   |               |   |  |     |   
|                             |  | $                           | 40.4 |      | $ | 66.5         |  | $ | (26.1         | ) |  | (39 | )%
|                             |  |                             |      |      |   |              |  |   |               |   |  |     |   



Revenue from the SFS business segment
has been adversely affected by the temporary grounding of the shuttle fleet due to the STS-107 tragedy in February 2003. Even though the shuttle fleet was grounded for both the nine months ended March 31, 2005 and nine months ended March 31, 2004,
there is a significant difference in revenue due to how NASA proceeded with the grounding of the shuttle fleet. For the nine months ended March 31, 2004, we were operating as if the shuttle would return to flight in the near term which resulted in
higher revenue due to the products and services that were being required to be delivered to NASA in preparation for the return to flight. For the period ended March 31, 2005, we were required to deliver fewer products and services to NASA due to a
more defined return to flight schedule. The following summarizes the significant items:



| |  | Decrease in ReALMS revenue of $23.3 million in the nine months ended March 31, 2005 compared to the nine months ended March 31, 2004 due to the termination of the ReALMS contract in
January 2004
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Increase in Lockheed Martin contract revenue which replaced the ReALMS contract in February 2004 of $16.0 million in the current period
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------



| |  | Increase on ESP2 revenue of $3.6 million in the nine months ended March 31, 2005 compared to the nine months ended March 31, 2004 due to the anticipated launch in May 2005
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Increase in revenue from the JETIS contract of $0.8 million that was started in the third quarter of fiscal year 2004
|- |  | ---------------------------------------------------------------------------------------------------------------------



| |  | Revenue from CE&R contract of $1.0 million that was started in the first quarter of fiscal year 2005
|- |  | ----------------------------------------------------------------------------------------------------



| |  | Other contract revenue decrease of $2.3 million, mainly due to the cancellation of the RDMs planned second mission under the ReALMS contract during the nine months ended March
31, 2004
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The decrease in revenue at the Astrotech business unit
is primarily due to Boeings termination of its contractually fixed guarantee payments to ASO and the one time payment in the amount of $17.5 million. During the nine months ended March 31, 2005, Astrotech underwent scheduled downtime between
launches recognizing contractually guaranteed revenues of $2.5 million and $0.6 million from missions that began in the fourth quarter of fiscal year 2004 and were completed in the first quarter of fiscal year 2005, and contract revenue from five
missions that began in the second and third quarter of fiscal year 2005 of $2.9 million and other revenue of $0.7 million.



The decrease in revenue at the SGS business segment is primarily due to the closeout of the SEDC and CM contract in December 2004 partially offset by the PI&C
contract which started in January 2004. The following summarizes the significant items:



| |  | Revenue decrease of $6.3 million due to the closeout of the SEDC and CM contracts in December 2004
|- |  | --------------------------------------------------------------------------------------------------



| |  | Other contract revenue decrease of $0.3 million due to less contract activity
|- |  | -----------------------------------------------------------------------------



| |  | Revenue increase of $2.7 million due to the PI&C contract
|- |  | ---------------------------------------------------------



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##### Table of Contents

Costs of Revenue. Costs of revenue for the nine months ended March 31, 2005 decreased by 10% to approximately
$32.6 million, as compared to $36.2 million for the prior years quarter (in millions).



|                             |  |                             |      |      |   |              |  |   |               |   |  |     |   
|---------------------------- |  | --------------------------- | ---- | ---- | - | ------------ |  | - | ------------- | - |  | --- | --
|                             |  | Nine Months Ended March 31, |      |      |   |              |  |  
|                             |  | 2005                        |      | 2004 |   | DollarChange |  |   | PercentChange |  
|SPACEHAB Flight Services     |  | $                           | 22.8 |      | $ | 23.0         |  | $ | (0.2          | ) |  | (1  | )%
|Astrotech                    |  |                             | 5.9  |      |   | 5.7          |  |   | 0.2           |   |  | 4   | % 
|SPACEHAB Government Services |  |                             | 3.6  |      |   | 7.2          |  |   | (3.6          | ) |  | (50 | )%
|Space Media                  |  |                             | 0.3  |      |   | 0.3          |  |   |              |   |  | 0   | % 
|                             |  |                             |      |      |   |              |  |   |               |   |  |     |   
|                             |  | $                           | 32.6 |      | $ | 36.2         |  | $ | (3.6          | ) |  | (10 | )%
|                             |  |                             |      |      |   |              |  |   |               |   |  |     |   



Costs of revenue from the SFS business
segment has been affected by the temporary grounding of the shuttle fleet due to the STS-107 tragedy in February 2003, partially offset by costs of revenue from the Lockheed Martin letter contract, the termination of Boeing as a subcontractor for
module services, and other contract costs of revenue. The following summarizes the significant items:



| |  | Decrease in ReALMS costs of revenue of $13.0 million from March 31, 2004 to March 31, 2005 due to the ReALMS contract closeout
|- |  | ------------------------------------------------------------------------------------------------------------------------------



| |  | Costs of revenue from Lockheed Martin letter contract of $9.7 million that started in the third quarter of fiscal year 2004
|- |  | ---------------------------------------------------------------------------------------------------------------------------



| |  | Increase in ESP2 costs of revenue of $3.1 million due to the expected launch in July 2005
|- |  | -----------------------------------------------------------------------------------------



| |  | Costs of revenue of $0.2 million from JETIS that was started in the third quarter of fiscal year 2004
|- |  | -----------------------------------------------------------------------------------------------------



| |  | Costs of revenue of $0.8 million from the CE&R contract that was stated in the first quarter of fiscal year 2005
|- |  | ----------------------------------------------------------------------------------------------------------------



| |  | Other costs of revenue decreases of $1.0 million, primarily resulting from the termination of Boeing as a subcontractor for module services offset by in-house engineering labor and
related costs
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Astrotechs increase in costs of revenue is
due to increased mission support costs and increase in the costs of operations at the satellite processing facilities, including increased utility costs.



The decrease in costs of revenue at the SGS business segment is primarily due to the closeout of the SEDC and CM contracts in December 2004 partially offset by the
PI&C contract. The following summarizes the significant items:



| |  | Costs of revenue decrease of $3.8 million due to the closeout of the SEDC contract in December 2004
|- |  | ---------------------------------------------------------------------------------------------------



| |  | Costs of revenue decrease of $2.3 million due to the closeout of the CM contract in December 2004
|- |  | -------------------------------------------------------------------------------------------------



| |  | Costs of revenue increase of $3.1 million due to the startup of the PI&C contract in January 2004
|- |  | -------------------------------------------------------------------------------------------------



| |  | Other costs of revenue decrease of $0.6 million due to less contract activity
|- |  | -----------------------------------------------------------------------------



Operating Expenses. Operating expenses, other than the $8.2 million recovery of a non-recurring charge for the loss of the RDM that was recorded for the period
ended September 30, 2004, the goodwill and Guigne impairments totaling $10.1 million that were recorded for the period ended March 31, 2004, decreased to $6.6 million for the nine months ended March 31, 2005 as compared to approximately $8.9 million
for the nine months ended March 31, 2004. The primary factors causing this decrease are the Companys on-going reductions in staff and facilities which resulted in a decrease of $1.5 million. Research and development expenses were immaterial
for the nine months ended March 31, 2005 and 2004 although we expect these costs to increase in future periods. For the nine months ended March 31, 2005, there were no significant bid and proposal efforts. In the nine months ended March 31, 2004, we
incurred bid and proposal costs of $0.2 million primarily relating to the Mission Integration Contract (MIC) proposal. During the nine months ended March 31, 2005, the Company recognized legal expenses of $0.8 million relating to its
claims against NASA for loss of the RDM and response to Lloyds complaint regarding its payment of insurance proceeds on the accident.



Interest Expense. Interest expense was approximately $4.3 million for the nine months ended March 31, 2005 as compared to approximately $6.8 million for the nine
months ended March 31, 2004. The decrease in interest expense is primarily due to the loss of hedge accounting on a portion of the interest rate swap for the mortgage loan in 2004



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resulting in the expensing of $1.3 million of unrealized losses previously in other comprehensive loss upon repayment of
$9.5 million of the mortgage loan, as well as the acceleration of $0.7 million of debt placement costs associated with the repayment for the nine months ended March 31, 2004. Due to the $9.5 million payment on the mortgage loan and the subsequent
lower interest rate (5.5%), the interest expense on the loan is $0.8 million less in the nine months ended March 31, 2005 compared to the nine months ended March 31, 2004.



Interest and Other Income. Interest and other income was immaterial for the nine months ended March 31, 2005 and March 31, 2004.
Interest income is earned on the Companys short-term investments.



Income Taxes. Based on the Companys projected effective tax rate for fiscal year 2005, we recorded a tax expense of $0.2 million for the nine months ended March 31, 2005 as compared to a tax expense of $0.3 million during the
nine months ended March 31, 2004.



Net Income. Net income for the nine
months ended March 31, 2005 was approximately $5.2 million or $0.41 per share basic and $0.36 per share diluted on 12,603,240 and 14,203,597 shares, respectively, as compared to net income of approximately $4.4 million or $0.35 per share basic and
$0.31 per share diluted on 12,415,977 and 14,039,798 shares, respectively, for the nine months ended March 31, 2004.



Liquidity and Capital Resources



Historically, the Company obtained operating and capital investment funds from the proceeds of its initial public offering of common stock and an offering of Series B
Senior Convertible Preferred Stock. We also completed a private placement offering of convertible subordinated notes to support capital investments required for development and construction of space flight assets.



Our primary source of liquidity is cash flow from operations and short-term investments. The
principal uses of cash flow that affect our liquidity position include both operational expenditures and debt service payments. Management is focused on increasing cash flow and on managing cash effectively through limiting cash investments in
long-term assets.



The Company maintained a working capital line of credit
facility totaling $5.0 million in order to ensure appropriate levels of liquidity. The term of this credit facility was through January 2005. Covenants included a liquidity ratio and a limited pledge of $5.6 million of the Companys investment
account. The restriction on the investment balance was limited to 111% of the Companys borrowings on the line of credit. This credit facility was replaced in February 2005 with a new revolving credit facility from another financial
institution.



On February 11, 2005 we entered into a revolving credit facility
with a new credit facility providing for loans up to $5.0 million secured by the Companys accounts receivable. Funds available under the revolving credit facility are limited to 80% of eligible accounts receivable, and we are subject to
various financial and other covenants including a minimum tangible net worth covenant, a cash flow coverage covenant, and limitation of future secured debt relative to tangible net worth. As of March 31, 2005 there was $5.0 million available under
this credit facility and restricted cash of $0.3 million.



Cash Flows From
Operating Activities.Cash provided by operations for the nine months ended March 31, 2005 and 2004 was $2.0 million and $7.3 million, respectively. The significant items affecting the differences in cash flows from operating activities for the
nine months ended March 31, 2005 as compared to the nine months ended March 31, 2004 are discussed below:



| |  | Net income for the nine months ended March 31, 2005 was $5.2 million as compared to net income for the nine months ended March 31, 2004 of $4.4 million. Included in net income for
the nine months ended March 31, 2005 is $8.2 million recognized as recovery of a previously reported non-recurring loss
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | For the nine months ended March 31, 2004, we received $17.5 million due to the Boeing termination. In addition, we recorded a non-cash charge of $8.3 million for impairment of
goodwill at Astrotech and SGS. We recorded a non-cash valuation allowance charge of $1.8 million for its investment in Guigne. We also recorded a non-cash charge of approximately $0.7 million due to the loan repayment
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  | Depreciation and amortization for the nine months ended March 31, 2005 was $4.0 million as compared to $4.2 million for the nine months ended March 31, 2004
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Changes in assets for the nine months ended March 31, 2005 was immaterial. For the nine months ended March 31, 2004 change in assets provided cash from operations of $0.6 million
primarily from a decrease in accounts receivable
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Changes in liabilities for the nine months ended March 31, 2005 used cash from operations of $6.6 million. This change is due primarily to the decreases in accounts payable and
accrued expenses of $1.8 million and the decrease in deferred revenue of $4.8 million. The decrease in deferred revenue is primarily due to the first launch for the JETIS contract during the nine months ended March 31, 2005 and on-orbit operations.
For the nine months ended March 31, 2004 changes in liabilities used cash in operations of $13.0 million, primarily due to an accounts payable, accrued expenses, and accounts payable EADS decrease of $4.5 million and a deferred revenue decrease of
approximately $8.6 million primarily due to revenue recognition for STS-116 and NASAs planned dedicated research mission that was previously scheduled to follow STS-107
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Cash Flows From Investing Activities.For the nine months ended March 31, 2005 and
2004, cash flows provided by investing activities were $5.4 million and $6.1 million, respectively. The significant items affecting the differences in cash flows from investing activities for the nine months ended March 31, 2005 as compared to the
nine months ended March 31, 2004 are discussed below:



| |  | There were minor purchases of property and equipment of $0.8 million for the nine months ended March 31, 2005 as compared to $1.3 million for the nine months ended March 31, 2004
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | For the nine months ended March 31, 2005, cash flows from investing activities were primarily generated from the sale of short-term investments of $6.6 million as compared to sales
of $7.4 million for the nine months ended March 31, 2004.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | This was offset by an increase in restricted cash of $0.4 million as compared to no change for the nine months ended March 31, 2004
|- |  | -----------------------------------------------------------------------------------------------------------------------------------



Cash Flows From Financing Activities.For the nine months ended March 31, 2005 and
2004, cash flows used in financing activities were $2.8 million and $12.7 million, respectively. The significant items affecting the differences in cash flows from financing activities for the nine months ended March 31, 2005 as compared to the nine
months ended March 31, 2004 are discussed below:



| |  | For the nine months ended March 31, 2005, we had net repayments of $1.4 million under the revolving credit facility as compared to no net borrowings for the nine months ended March
31, 2004
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | For the nine months ended March 31, 2005, we paid $1.4 million under various credit agreements as compared to $13.0 million for the nine months ended March 31, 2004. This reduction
is primarily due to the payment of $11.0 million on our mortgage loan due to the Boeing termination and the final payment to Alenia Spazio S.P.A during the nine months ended March 31, 2004
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | For the nine months ended March 31, 2005 we had proceeds from the issuance of common stock of $0.1 million as compared to $0.3 million for the nine months ended March 31, 2004
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



On March 25, 2003 the Board of Directors authorized the Company
to repurchase up to $1.0 million of the Companys outstanding common stock at market prices. Any purchases under our stock repurchase program may be made from time to time, in the open market, through block trades or otherwise in accordance
with applicable regulations of the SEC. As of March 31, 2005, we had repurchased 116,100 shares at a cost of $117,320 under the program. We will continue to evaluate the stock repurchase program and the funds authorized for the program.



Management continues to focus its efforts on improving the overall liquidity of the
Company through identifying new business opportunities within the areas of our core competencies, reducing operating expenses, and limiting cash commitments for future capital investments and new asset development. On November 5, 2004 NASA notified
the Company that it was not awarded the ISS Mission Integration Contract. Additionally, the Boeing teams bid for the Cargo Mission Contract with NASA, of which SGS was a subcontractor, was not selected for contract award. As a result of the
loss of these contract awards, we have made significant adjustments to our staffing and cost base structure during 2004. We reduced staffing by 67 employees in the quarter ended March 31, 2004 as a result of NASAs award decisions. On October
1, 2003 we announced that we would close our corporate office in Washington, D.C. by March 31, 2004 and consolidate those operations into our headquarters in Houston, Texas. We



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took these actions as part of our continuing efforts to further reduce operating expenses and improve profitability. The
Company subleased its Washington, D.C. facility for the remaining lease period which is under lease through May 31, 2006. We have continued to restrict new capital investment and new asset development, limiting projects to those required to support
current contracts and facility maintenance. Additionally, management continues to evaluate operating expenses in an effort to reduce or eliminate costs not required to effectively operate the Company.



On April 28, 2005 we consummated the sale and simultaneous lease back of our Cape Canaveral,
Florida SPPF. The sale resulted in net cash to the Company of approximately $3.8 million. On May 9, 2005 we consummated the sale and lease back of our corporate offices in Webster (Houston), Texas. The sale resulted in net cash to the Company of
approximately $0.9 million.



The Companys cash and short-term investments
were approximately $6.0 million as of March 31, 2005. Management believes that we have sufficient liquidity, including cash and short-term investments, advances available under our revolving credit facility, and cash anticipated or expected to be
generated from operations to fund ongoing operations beyond the remainder of this fiscal year. We also expect to utilize existing cash, cash anticipated from future operations to support strategies for new business initiatives and reduce long-term
debt.



The Companys contractual obligations as of March 31, 2005 are as
follows (in thousands):



|                                    |  |                  |        |                             |   |                |  |                |       |                |   |                |  |            |        |  |   |       |  |   |      
|----------------------------------- |  | ---------------- | ------ | --------------------------- | - | -------------- |  | -------------- | ----- | -------------- | - | -------------- |  | ---------- | ------ |  | - | ----- |  | - | -----
|Contractual Obligations             |  | AtMarch 31, 2005 |        | Remaining inFiscal Year2005 |   | FiscalYear2006 |  | FiscalYear2007 |       | FiscalYear2008 |   | FiscalYear2009 |  | Thereafter
|Long-term Debt                      |  | $                | 63,250 |                             | $ |               |  | $              |      |                | $ |               |  | $          | 63,250 |  | $ |      |  | $ |     
|Mortgage Loan Payable               |  |                  | 4,190  |                             |   | 497            |  |                | 2,057 |                |   | 1,636          |  |            |       |  |   |      |  |   |     
|V.J.F. Russian Consultant Agreement |  |                  | 210    |                             |   | 45             |  |                | 165   |                |   |               |  |            |       |  |   |      |  |   |     
|V.J.F. Russian Subcontract          |  |                  | 1,003  |                             |   | 603            |  |                | 400   |                |   |               |  |            |       |  |   |      |  |   |     
|Operating leases1,3                 |  |                  | 21,826 |                             |   | 960            |  |                | 4,918 |                |   | 4,507          |  |            | 4,372  |  |   | 4,217 |  |   | 2,852
|                                    |  |                  |        |                             |   |                |  |                |       |                |   |                |  |            |        |  |   |       |  |   |      
|Total Contractual Cash Obligations2 |  | $                | 90,479 |                             | $ | 2,105          |  | $              | 7,540 |                | $ | 6,143          |  | $          | 67,622 |  | $ | 4,217 |  | $ | 2,852
|(excluding interest payments)       |  |                  |        |                             |   |                |  |                |       |                |   |                |  |            |        |  |   |       |  |   |      

---

|
|

|  |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|- |  | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1 |  | - |  | For the remainder of fiscal year 2005, the Company expects to receive net payments of $0.2 million for subleases. For fiscal years 2006, 2007, and 2008, the Company expects to receive net
payments of approximately $0.7 million, $0.5 million, and $0.3 million, respectively, for subleases. Additionally, we exercised a four year option on our ICC/VCC leases with EADS.                                                                                                                                                                                                                                        
|2 |  | - |  | Does not include commitment to Dayna Justiz for compensation that can be earned as a result of the agreement dated June 19, 2000. The agreement states that Dayna Justiz can earn up to $375,000
as additional compensation if she meets certain financial goals in the management of The Space Store. The yearly amount is equal to five percent of The Space Stores net after-tax operating income during each fiscal year until such
time an aggregate amount of $375,000 has been earned. At this time, we have not recorded a liability for this obligation due to the uncertainty of the obligation being met.
|3 |  | - |  | Does not include amounts for sale leaseback of the SPPF consummated on April 28, 2005                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  



ITEM 3. Quantitative and Qualitative Disclosures about Market Risk



The Company has no material changes to the disclosure made on this matter in our Annual Report on Form 10-K for the year ended June 30, 2004.



ITEM 4. Controls and Procedures



Under the
supervision and with the participation of our management, including our principal executive officer and principal financial officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the
end of the period covered by this quarterly report, and, based on our evaluation, our principal executive officer and principal financial officer have concluded that these controls and procedures are effective. There have been no changes in our
internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



Disclosure controls and procedures are our controls and other procedures that are designed to
ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SECs rules and forms. Disclosure
controls and



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procedures include, without limitation, controls and procedures designed to ensure that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions
regarding required disclosure.



Section 404 of the Sarbanes Oxley Act of 2002
requires us to perform an evaluation of our internal control over financial reporting and have our auditors attest to such evaluation. We have been actively preparing for the implementation of this requirement by, among other things, establishing an
ongoing program to perform the system and process evaluation and testing necessary for compliance. We are not an accelerated filer under the rules of the SEC and, therefore, will not be subject to these requirements until our fiscal year ending June
30, 2006. While we anticipate that we will be able to comply on a timely basis with this requirement, unforeseen delays may occur which could prevent us from achieving timely compliance. If we fail to complete our evaluation on a timely basis and in
a satisfactory manner, or if our auditors are unable to attest on a timely basis to the adequacy of our internal control, we may be subject to additional regulatory scrutiny and to a loss of public confidence in our internal control over financial
reporting.



PART II - OTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS



Contract
Claim.In January 2004 the Company filed a formal proceeding with NASA seeking indemnification under the ReALMS contract in the amount of $87.7 million for the value of our RDM and related equipment that was destroyed during the STS-107
Space Shuttle Columbiatragedy. NASA responded to this contract claim on October 5, 2004. NASAs determination states that its liability is limited under the ReALMS contract to $8.0 million. The Company received payment of $8.2 million,
which included $0.2 million of interest, from NASA in October 2004. In December 2004 the Company filed an appeal of NASAs decision to deny its claim for indemnification in excess of $8.0 million with the Armed Services Board of Contract
Appeals. On May 5, 2005 NASA filed its answer to SPACEHABs complaint with the Armed Services Board of Appeals. SPACEHAB is now proceeding with discovery.



Tort Claim.On November 8, 2004 the Company filed a second claim with NASA seeking damages of $79.7 million under the Federal Tort Claims Act for the
loss of the RDM resulting from NASAs alleged negligence leading to the destruction of the Space Shuttle Columbia and the loss of the RDM. The claim represents the loss of $87.7 million less the $8.0 million recovered from NASA. NASA has
not responded to this claim. Under federal tort claim procedures, upon NASAs denial or failure to respond to this claim, the Company has the right to pursue the claim through appeal to Federal District Court.



Lloyds Complaint.In January 2004 Lloyds, the Companys
insurer for the RDM, filed a complaint in the United States District Court for the Western District of Washington seeking the return of the $17.7 million Lloyds had paid to the Company under the RDM insurance policy alleging that, among other
things, (i) such proceeds were paid erroneously primarily due to the fact that NASA had not paid indemnification due to the Company prior to the payment of the insurance proceeds, (ii) the Company and its insurance broker misled Lloyds in
issuing the policy, and (iii) the Company has not cooperated with Lloyds in protecting Lloyds right of subrogation. In February 2004 Lloyds withdrew its complaint from the United States District Court and filed a similar complaint
in Superior Court of the State of Washington. The parties are currently in discovery proceedings relative to the matter with a trial date set for July 2005. The Company believes that Lloyds complaint is without merit and will continue to
respond to the complaint accordingly.



27



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##### Table of Contents

ITEM 6. EXHIBITS



The following
exhibits are filed herewith:



|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|3           |  | Articles of Incorporation and Bylaws                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            | 
|3.1         |  | Amended and Restated Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 of the Registrants Registration Statement on Form S-3 (File No. 333-43221)
filed with the Securities and Exchange Commission on December 24, 1997)                                                                                                                                                                                                                                                        
|            | 
|3.2         |  | Designation of Rights, Terms and Preferences of Series A Junior Preferred Stock of the Registrant (incorporated by reference to Exhibit 2 of the Registrants Report on Form 8-K filed
with the Securities and Exchange Commission on April 1, 1999)                                                                                                                                                                                                                                                                  
|            | 
|3.3         |  | Designation of Rights, Terms and Preferences of Series B Senior Convertible Preferred Stock of the Registrant (incorporated by reference to Exhibit 4.1 of the Registrants Report on Form
8-K filed with the Securities and Exchange Commission on August 19, 1999)                                                                                                                                                                                                                                                  
|            | 
|3.4         |  | Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 of the Registrants Registration Statement on Form S-3 (File No. 333-43221) filed with the
Securities and Exchange Commission on December 24, 1997)                                                                                                                                                                                                                                                                           
|            | 
|4           |  | Instruments Defining the Rights of Security Holders, including Indentures                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            | 
|4.1         |  | Designation of Rights, Terms and Preferences of Series B Senior Convertible Preferred Stock of the Registrant (incorporated by reference to Exhibit 4.1 of the Registrants Report on Form
8-K filed with the Securities and Exchange Commission on August 19, 1999)                                                                                                                                                                                                                                                  
|            | 
|4.2         |  | Preferred Stock Purchase Agreement between the Registrant and DaimlerChrysler Aerospace AG dated as of August 2, 1999 (incorporated by reference to Exhibit 4.2 of the Registrants Report
on Form 8-K filed with the Securities and Exchange Commission on August 19, 1999)                                                                                                                                                                                                                                          
|            | 
|4.3         |  | Registration Rights Agreement between the Registrant and DaimlerChrysler Aerospace AG dated as of August 5, 1999 (incorporated by reference to Exhibit 4.3 of the Registrants Report on
Form 8-K filed with the Securities and Exchange Commission on August 19, 1999)                                                                                                                                                                                                                                               
|            | 
|4.4         |  | Rights Agreement, dated as of March 26, 1999, between the Registrant and American Stock Transfer & Trust Company, including the Designation of Rights, Terms and Preferences of Series A
Junior Preferred Stock attached thereto as Exhibit A, the form of Rights Certificate attached thereto as Exhibit B and the Summary of Rights attached thereto as Exhibit C (incorporated by reference to Exhibit 2 of the Registrants Report on
Form 8-K filed with the Securities and Exchange Commission on April 1, 1999)
|            | 
|4.5         |  | Indenture dated as of October 15, 1997 between the Registrant and First Union National Bank, as Trustee, relating to the Registrants 8% Convertible Subordinated Notes due 2007
(incorporated by reference to Exhibit 4.1 of the Registrants Registration Statement on Form S-3 (File No. 333-43221) filed with the Securities and Exchange Commission on December 24, 1997)                                                                                                                                        
|            | 
|31.1        |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.                                                                                                                                                                                                                                                                                                                                                                                                           
|            | 
|31.2        |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.                                                                                                                                                                                                                                                                                                                                                                                                           
|            | 
|32          |  | Certification pursuant to Rule 13a-14(b) of the Securities and Exchange Act of 1934.                                                                                                                                                                                                                                                                                                                                                                                                                                  



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SIGNATURE



Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.



|                   |  |                                                  
|------------------ |  | -------------------------------------------------
|                   |  | SPACEHAB, INCORPORATED                           
|                   | 
|Date: May 13, 2005 |  | /s/ Michael E. Kearney                           
|                   |  | Michael E. Kearney                               
|                   |  | President and Chief Executive Officer            
|                   | 
|                   |  | /s/ Brian K. Harrington                          
|                   |  | Brian K. Harrington                              
|                   |  | Senior Vice President and Chief Financial
Officer



29