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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-Q



(Mark One)



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



For the quarterly period ended December 31, 2004



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



SPACEHAB, Incorporated

(Exact name
of registrant as specified in this charter)



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



12130 Highway 3,
Building 1

Webster, Texas 77598-1504

(713) 558-5000



The number of shares of
Common Stock outstanding as of January 3, 2005



|             |  |                             
|------------ |  | ----------------------------
|Class        |  | Number of Shares Outstanding
|Common Stock |  | 12,625,928                  



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  þ    No ̈



Indicate by check mark whether the registrant is an accelerated filer (as defined in rule
12b-2 of the Exchange Act).



Yes ̈No  þ



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##### Table of Contents



SPACEHAB, INCORPORATED AND
SUBSIDIARIES

DECEMBER 31, 2004 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 December 31, 2004 and June 30, 2004                               |  | 3   
|            |  |                                                                                                                        
|            |  | Unaudited Condensed Consolidated Statements of Operations for the three and six months ended December 31, 2004 and 2003 |  | 4   
|            |  |                                                                                                                        
|            |  | Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2004 and 2003           |  | 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 4.     |  | Submission of Matters to a Vote of Security Holders                                                                     |  | 28  
|            |  |                                                                                                                        
|Item 6.     |  | Exhibits                                                                                                                |  | 28  



1



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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                        
|EELV            |  | Evolved Expendable Launch Vehicle            
|EPS             |  | Earnings Per Share                           
|ESP2            |  | External Stowage Platform 2                  
|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       
|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               



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)



|                                                                                                                                                      |  |                             |         |   |              |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ------------ | - | ------- | -
|                                                                                                                                                      |  | December 31,2004(unaudited) |         |   | June 30,2004 |  
|ASSETS                                                                                                                                                |  |                             |         |   |              |   |         |  
|Cash and cash equivalents                                                                                                                             |  | $                           |        |   |              | $ | 506     |  
|Restricted cash                                                                                                                                       |  |                             | 558     |   |              |   | 430     |  
|Short-term investments                                                                                                                                |  |                             | 6,056   |   |              |   | 5,037   |  
|Restricted short-term investments                                                                                                                     |  |                             |        |   |              |   | 1,604   |  
|Accounts receivable, net                                                                                                                              |  |                             | 8,109   |   |              |   | 7,878   |  
|Prepaid expenses and other current assets                                                                                                             |  |                             | 957     |   |              |   | 495     |  
|                                                                                                                                                      |  |                             |         |   |              |   |         |  
|Total current assets                                                                                                                                  |  |                             | 15,680  |   |              |   | 15,950  |  
|Property and equipment, net of accumulated depreciation and amortization of $52,332 and $49,755, respectively                                         |  |                             | 77,598  |   |              |   | 79,600  |  
|Deferred financing costs, net                                                                                                                         |  |                             | 1,019   |   |              |   | 1,163   |  
|Other assets, net                                                                                                                                     |  |                             | 2,356   |   |              |   | 3,212   |  
|                                                                                                                                                      |  |                             |         |   |              |   |         |  
|Total assets                                                                                                                                          |  | $                           | 96,653  |   |              | $ | 99,925  |  
|                                                                                                                                                      |  |                             |         |   |              |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                  |  |                             |         |   |              |   |         |  
|Revolving loan payable                                                                                                                                |  | $                           |        |   |              | $ | 1,445   |  
|Mortgage loan payable, current portion                                                                                                                |  |                             | 1,946   |   |              |   | 1,946   |  
|Accounts payable                                                                                                                                      |  |                             | 2,009   |   |              |   | 2,424   |  
|Accounts payable-EADS                                                                                                                                 |  |                             | 2,215   |   |              |   | 3,262   |  
|Accrued interest                                                                                                                                      |  |                             | 1,098   |   |              |   | 1,108   |  
|Accrued expenses                                                                                                                                      |  |                             | 2,345   |   |              |   | 3,600   |  
|Accrued subcontracting services                                                                                                                       |  |                             | 2,991   |   |              |   | 2,176   |  
|Deferred revenue, current portion                                                                                                                     |  |                             | 2,643   |   |              |   | 6,340   |  
|                                                                                                                                                      |  |                             |         |   |              |   |         |  
|Total current liabilities                                                                                                                             |  |                             | 15,247  |   |              |   | 22,301  |  
|Accrued contract cost and other                                                                                                                       |  |                             | 264     |   |              |   | 372     |  
|Deferred revenue, net of current portion                                                                                                              |  |                             |        |   |              |   | 900     |  
|Mortgage loan payable, net of current portion                                                                                                         |  |                             | 2,733   |   |              |   | 3,692   |  
|Convertible subordinated notes payable                                                                                                                |  |                             | 63,250  |   |              |   | 63,250  |  
|                                                                                                                                                      |  |                             |         |   |              |   |         |  
|Total liabilities                                                                                                                                     |  |                             | 81,494  |   |              |   | 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
$12,000) |  |                             | 11,892  |   |              |   | 11,892  |  
|Common stock, no par value, 30,000,000 shares authorized, 12,625,928 and 12,688,062 shares issued, respectively                                       |  |                             | 83,827  |   |              |   | 83,751  |  
|Less treasury stock, 116,100 and 116,100 shares, respectively                                                                                         |  |                             | (117    | ) |              |   | (117    | )
|Unrealized loss on available-for-sale securities                                                                                                      |  |                             | (38     | ) |              |   |        |  
|Additional paid-in capital                                                                                                                            |  |                             | 16      |   |              |   | 16      |  
|Accumulated deficit                                                                                                                                   |  |                             | (80,421 | ) |              |   | (86,132 | )
|                                                                                                                                                      |  |                             |         |   |              |   |         |  
|Total stockholders equity                                                                                                                            |  |                             | 15,159  |   |              |   | 9,410   |  
|                                                                                                                                                      |  |                             |         |   |              |   |         |  
|Total liabilities and stockholders equity                                                                                                            |  | $                           | 96,653  |   |              | $ | 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 December 31, |            |   | Six Months Ended December 31, |  
|                                                                |  | 2004                            |            |   | 2003                          |   |            | 2004 |  |   | 2003       |  
|Revenue                                                         |  | $                               | 13,138     |   |                               | $ | 32,816     |      |  | $ | 26,171     |   |  | $ | 51,666     |  
|Costs of revenue                                                |  |                                 | 10,721     |   |                               |   | 12,830     |      |  |   | 21,507     |   |  |   | 26,357     |  
|                                                                |  |                                 |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Gross profit                                                    |  |                                 | 2,417      |   |                               |   | 19,986     |      |  |   | 4,664      |   |  |   | 25,309     |  
|                                                                |  |                                 |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Operating expenses                                              |  |                                 |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Selling, general and administrative                             |  |                                 | 2,269      |   |                               |   | 3,403      |      |  |   | 4,235      |   |  |   | 6,335      |  
|Research and development                                        |  |                                 | 8          |   |                               |   | 2          |      |  |   | 16         |   |  |   | 2          |  
|Goodwill impairment                                             |  |                                 |           |   |                               |   | 8,274      |      |  |   |           |   |  |   | 8,274      |  
|Impairment of investment in Guigne                              |  |                                 |           |   |                               |   | 1,800      |      |  |   |           |   |  |   | 1,800      |  
|Recovery of nonrecurring charge, loss of Research Double Module |  |                                 |           |   |                               |   |           |      |  |   | (8,244     | ) |  |   |           |  
|                                                                |  |                                 |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Total operating expenses                                        |  |                                 | 2,277      |   |                               |   | 13,479     |      |  |   | (3,993     | ) |  |   | 16,411     |  
|                                                                |  |                                 |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Income from operations                                          |  |                                 | 140        |   |                               |   | 6,507      |      |  |   | 8,657      |   |  |   | 8,898      |  
|Interest expense                                                |  |                                 | (1,428     | ) |                               |   | (2,859     | )    |  |   | (2,886     | ) |  |   | (4,599     | )
|Interest and other income, net                                  |  |                                 | 39         |   |                               |   | 42         |      |  |   | 81         |   |  |   | 75         |  
|                                                                |  |                                 |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Income (loss) before income taxes                               |  |                                 | (1,249     | ) |                               |   | 3,690      |      |  |   | 5,852      |   |  |   | 4,374      |  
|Income tax expense                                              |  |                                 |           |   |                               |   | (222       | )    |  |   | (142       | ) |  |   | (240       | )
|                                                                |  |                                 |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Net income (loss)                                               |  | $                               | (1,249     | ) |                               | $ | 3,468      |      |  | $ | 5,710      |   |  | $ | 4,134      |  
|                                                                |  |                                 |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Income (loss) per share:                                        |  |                                 |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Net income (loss) per share  basic                             |  | $                               | (0.10      | ) |                               | $ | 0.28       |      |  | $ | 0.45       |   |  | $ | 0.33       |  
|                                                                |  |                                 |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Shares used in computing net income (loss) per share  basic    |  |                                 | 12,609,863 |   |                               |   | 12,401,291 |      |  |   | 12,592,044 |   |  |   | 12,386,123 |  
|                                                                |  |                                 |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Net income (loss) per share  diluted                           |  | $                               | (0.10      | ) |                               | $ | 0.25       |      |  | $ | 0.40       |   |  | $ | 0.30       |  
|                                                                |  |                                 |            |   |                               |   |            |      |  |   |            |   |  |   |            |  
|Shares used in computing net income (loss) per share  diluted  |  |                                 | 12,609,863 |   |                               |   | 13,897,126 |      |  |   | 14,200,519 |   |  |   | 13,810,998 |  
|                                                                |  |                                 |            |   |                               |   |            |      |  |   |            |   |  |   |            |  



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)



|                                                                                  |  |                              |        |   |      |   |         |  
|--------------------------------------------------------------------------------- |  | ---------------------------- | ------ | - | ---- | - | ------- | -
|                                                                                  |  | Six Months EndedDecember 31, |       
|                                                                                  |  | 2004                         |        |   | 2003 |  
|Cash flows from operating activities                                              |  |                              |        |   |      |   |         |  
|Net income                                                                        |  | $                            | 5,710  |   |      | $ | 4,134   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                              |        |   |      |   |         |  
|Goodwill impairment                                                               |  |                              |       |   |      |   | 8,274   |  
|Impairment of investment in Guigne                                                |  |                              |       |   |      |   | 1,800   |  
|Loss on hedge investment                                                          |  |                              |       |   |      |   | 793     |  
|Amortization of debt placement costs                                              |  |                              |       |   |      |   | 472     |  
|Depreciation and amortization                                                     |  |                              | 2,689  |   |      |   | 2,825   |  
|Loss on asset sales and write-offs                                                |  |                              | 29     |   |      |   | 356     |  
|Changes in assets and liabilities:                                                |  |                              |        |   |      |   |         |  
|Increase in accounts receivable                                                   |  |                              | (231   | ) |      |   | (93     | )
|Increase in prepaid expenses and other current assets                             |  |                              | (462   | ) |      |   | (444    | )
|Decrease in other assets                                                          |  |                              | 856    |   |      |   | 205     |  
|Decrease in accounts payable, accounts payable-EADS and accrued expenses          |  |                              | (2,727 | ) |      |   | (5,025  | )
|Increase in accrued subcontracting services                                       |  |                              | 815    |   |      |   | 243     |  
|Decrease in deferred revenue                                                      |  |                              | (4,597 | ) |      |   | (3,624  | )
|Decrease in long-term contracts costs and other liabilities                       |  |                              | (108   | ) |      |   | (60     | )
|                                                                                  |  |                              |        |   |      |   |         |  
|Net cash provided by operating activities                                         |  |                              | 1,974  |   |      |   | 9,856   |  
|                                                                                  |  |                              |        |   |      |   |         |  
|Cash flows from investing activities                                              |  |                              |        |   |      |   |         |  
|Payments for flight assets under construction                                     |  |                              | (62    | ) |      |   | (74     | )
|Purchases of property, equipment and leasehold improvements                       |  |                              | (524   | ) |      |   | (684    | )
|Proceeds received from sale of property and equipment                             |  |                              | 15     |   |      |   | 46      |  
|Sale of short-term investments                                                    |  |                              | 547    |   |      |   | 5,040   |  
|Increase in restricted cash                                                       |  |                              | (128   | ) |      |   | (1,734  | )
|                                                                                  |  |                              |        |   |      |   |         |  
|Net cash provided by (used in) investing activities                               |  |                              | (152   | ) |      |   | 2,594   |  
|                                                                                  |  |                              |        |   |      |   |         |  
|Cash flows from financing activities                                              |  |                              |        |   |      |   |         |  
|Proceeds from (repayment of) revolving loan payable, net                          |  |                              | (1,445 | ) |      |   | 3,989   |  
|Payment of mortgage loan                                                          |  |                              | (959   | ) |      |   | (10,578 | )
|Payment of convertible notes payable to shareholder                               |  |                              |       |   |      |   | (1,327  | )
|Proceeds from issuance of common stock, net of expenses                           |  |                              | 76     |   |      |   | 44      |  
|Purchase of treasury stock                                                        |  |                              |       |   |      |   | (6      | )
|                                                                                  |  |                              |        |   |      |   |         |  
|Net cash used in financing activities                                             |  |                              | (2,328 | ) |      |   | (7,878  | )
|                                                                                  |  |                              |        |   |      |   |         |  
|Net change in cash and cash equivalents                                           |  |                              | (506   | ) |      |   | 4,572   |  
|Cash and cash equivalents at beginning of period                                  |  |                              | 506    |   |      |   | 1,301   |  
|                                                                                  |  |                              |        |   |      |   |         |  
|Cash and cash equivalents at end of period                                        |  | $                            |       |   |      | $ | 5,873   |  
|                                                                                  |  |                              |        |   |      |   |         |  



See accompanying notes
to unaudited condensed consolidated financial statements.



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##### Table of Contents

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, our habitat modules and unpressurized cargo carriers provide space-based research facilities and
cargo services for use aboard the U.S. space shuttle system. A SPACEHAB single module, when installed in the payload bay of a space shuttle, more than doubles the space available to astronauts for research, habitation, and storage. We offer our
modules in single and double configurations, outfitted for research, logistics, or a combination of research and logistics depending on customer needs. We also offer an unpressurized cargo carrier system, the Integrated Cargo Carrier
(ICC), which is used to ferry equipment, supplies, and tools to the International Space Station (ISS).



The Company sells research and logistics services to NASA and commercial customers who want to use the modules and carriers in space. In addition to our flight assets, we
offer a full range of ground-based pre- and post-flight experiment and payload processing services and in-flight operations support. As of December 31, 2004, 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 satellite processing facilities and services through its wholly-owned subsidiary, Astrotech Space Operations, Inc. (Astrotech or ASO). Astrotech is a commercial provider of satellite
processing services in the United States, supplying the facilities and services used in the launch preparation of spacecraft. Astrotech offers customers an alternative to using government-owned facilities and serves 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, Astrotech 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, SGS manages projects in need of comprehensive engineering solutions and provides 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, now 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 including 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, providing distinctive and
personalized gifts, clothing, mission patches, and more. Through the STARS Program, SMI also provides 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 subsidiaries (SPACEHAB or the Company) as of December 31, 2004, and the
results of its operations and cash flows for the periods ended December 31, 2004 and 2003. 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 six month periods ended December 31, 2004 are not necessarily indicative of the results that may be expected for the full year. The Companys 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 the Companys
Annual Report on Form 10-K for the year ended June 30, 2004.



The
Companys cash and short-term investments were approximately $6.6 million, of which $0.6 million is restricted, as of December 31, 2004. Management believes that the Company has 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 beyond the remainder of this fiscal year. We also expect to utilize existing cash and
cash anticipated from future operations, to support strategies for new business initiatives and reduce long-term debt.



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 six month periods ended December 31, 2004 and 2003 (in
thousands, except per share data):



|                                                      |  |                                     |        |   |                                     |            |                 |   |       |                   |  |                     |       |                 |            |  |   |     
|----------------------------------------------------- |  | ----------------------------------- | ------ | - | ----------------------------------- | ---------- | --------------- | - | ----- | ----------------- |  | ------------------- | ----- | --------------- | ---------- |  | - | ----
|                                                      |  | Three months endedDecember 31, 2004 |        |   | Three months endedDecember 31, 2003
|                                                      |  | Income(Numerator)                   |        |   | Shares(Denominator)                 |            | Per ShareAmount |   |       | Income(Numerator) |  | Shares(Denominator) |       | Per ShareAmount
|Basic EPS:                                            |  |                                     |        |   |                                     |            |                 |   |       |                   |  |                     |       |                 |            |  |   |     
|Income (loss) available to common stockholders        |  | $                                   | (1,249 | ) |                                     | 12,609,863 |                 | $ | (0.10 | )                 |  | $                   | 3,468 |                 | 12,401,291 |  | $ | 0.28
|Effect of dilutive securities:                        |  |                                     |        |   |                                     |            |                 |   |       |                   |  |                     |       |                 |            |  |   |     
|Convertible notes payable                             |  |                                     |       |   |                                     |           |                 |   |      |                   |  |                     |      |                 |           |  |   |    
|Options and warrants, using the treasury stock method |  |                                     |       |   |                                     |           |                 |   |      |                   |  |                     |      |                 | 162,501    |  |   |    
|Convertible preferred shares                          |  |                                     |       |   |                                     |           |                 |   |      |                   |  |                     |      |                 | 1,333,334  |  |   |    
|                                                      |  |                                     |        |   |                                     |            |                 |   |       |                   |  |                     |       |                 |            |  |   |     
|Diluted EPS:                                          |  |                                     |        |   |                                     |            |                 |   |       |                   |  |                     |       |                 |            |  |   |     
|Income (loss) available to common stockholders        |  | $                                   | (1,249 | ) |                                     | 12,609,863 |                 | $ | (0.10 | )                 |  | $                   | 3,468 |                 | 13,897,126 |  | $ | 0.25
|                                                      |  |                                     |        |   |                                     |            |                 |   |       |                   |  |                     |       |                 |            |  |   |     



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|                                                      |  |                                   |       |                                   |            |                |   |                   |  |                     |       |                |            |  |   |     
|----------------------------------------------------- |  | --------------------------------- | ----- | --------------------------------- | ---------- | -------------- | - | ----------------- |  | ------------------- | ----- | -------------- | ---------- |  | - | ----
|                                                      |  | Six months endedDecember 31, 2004 |       | Six months endedDecember 31, 2003
|                                                      |  | Income(Numerator)                 |       | Shares(Denominator)               |            | PerShareAmount |   | Income(Numerator) |  | Shares(Denominator) |       | PerShareAmount
|Basic EPS:                                            |  |                                   |       |                                   |            |                |   |                   |  |                     |       |                |            |  |   |     
|Income available to common stockholders               |  | $                                 | 5,710 |                                   | 12,592,044 |                | $ | 0.45              |  | $                   | 4,134 |                | 12,386,123 |  | $ | 0.33
|Effect of dilutive securities:                        |  |                                   |       |                                   |            |                |   |                   |  |                     |       |                |            |  |   |     
|Convertible notes payable                             |  |                                   |      |                                   |           |                |   |                  |  |                     |      |                |           |  |   |    
|Options and warrants, using the treasury stock method |  |                                   |      |                                   | 275,141    |                |   |                  |  |                     |      |                | 91,541     |  |   |    
|Convertible preferred shares                          |  |                                   |      |                                   | 1,333,334  |                |   |                  |  |                     |      |                | 1,333,334  |  |   |    
|                                                      |  |                                   |       |                                   |            |                |   |                   |  |                     |       |                |            |  |   |     
|Diluted EPS:                                          |  |                                   |       |                                   |            |                |   |                   |  |                     |       |                |            |  |   |     
|Income available to common stockholders               |  | $                                 | 5,710 |                                   | 14,200,519 |                | $ | 0.40              |  | $                   | 4,134 |                | 13,810,998 |  | $ | 0.30
|                                                      |  |                                   |       |                                   |            |                |   |                   |  |                     |       |                |            |  |   |     



Convertible notes payable outstanding
as of December 31, 2004, 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 six months ended December 31, 2004 and 2003, as the
conversion price of the convertible notes payable per share were greater than the average market price of the common shares during the periods.



Options to purchase 1,383,559 shares of common stock, at prices ranging from $1.75 to $11.75 per share, were outstanding at December 31, 2004 but were not included in
diluted EPS for the three months ended December 31, 2004 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 1,308,559 shares of common stock, at prices ranging from $2.31 to $11.75 per share, were outstanding at December 31,
2004 but were not included in diluted EPS as the option prices were greater than the average market price of the common shares during the six months ended December 31, 2004. The options expire between July 2, 2005 and August 16, 2014.



Options to purchase 1,592,065 shares of common stock, at prices ranging from $1.69 to $12.00
per share, were outstanding at December 31, 2003 but were not included in diluted EPS as the option prices were greater than the average market price of the common shares during the three months ended December 31, 2003. The options expire between
July 13, 2004 and February 12, 2011.



Options to purchase 1,697,065 shares of
common stock, at prices ranging from $1.06 to $12.00 per share, were outstanding at December 31, 2003 but were not included in diluted EPS as the option prices were greater than the average market price of the common shares during the six months
ended December 31, 2003. The options expire between July 13, 2004 and May 1, 2013.



4. Revenue Recognition



SPACEHABs 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 are recognized using the methods described below. Estimating future costs and,
therefore, revenues and profits is a process requiring a high degree of 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



8



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estimated contract cost or profit, the cumulative effect of such change is recorded in the period that the change in estimate occurs.



A Summary of Revenue Recognition Methods Follows:



|                             |  |                                                                             |  |                                                                                       |  |                                                                                                                                                                                 
|---------------------------- |  | --------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Business Segment             |  | Services/ProductsProvided                                                   |  | 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  Firm Fixed Price  Guaranteed Number of Missions |  | Ratably, over the occupancy period of a satellite within the facility from arrival through launch   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 six months ended
December 31, 2004, the Company recognized revenue of approximately $0.3 million and $2.1 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 RDM, we contracted for construction of certain space research
equipment, for research space aboard the ISS, and for up to three Russian Progress cargo missions with V.J.F. Russian Consulting who is representing 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 will continue under a subcontract with Lockheed Martin Corporation (Lockheed Martin), effective February 1, 2004. SPACEHAB is currently providing
these services under letter contract and is in final contract negotiations with Lockheed Martin for this new contract. Pending finalization of contract negotiations with Lockheed Martin, the Company is 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.



For the period ended March
31, 2003, the Company 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 the Companys claim for
indemnification of $8.0 million plus interest of $0.2 million, the Company 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.



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5. Statements of Cash Flows - Supplemental Information



| | (a) | Cash paid for interest costs was $2.7 million and $3.3 million for the six months ended December 31, 2004 and 2003, respectively. The Company did not capitalize any interest costs
during the six months ended December 31, 2004 or 2003.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) | The Company paid an immaterial amount of income taxes for the six months ended December 31, 2004 and paid no income taxes the six months ended December 31, 2003.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



6. Credit Facilities



On August 29, 2002 the Company entered into a $5.0 million line of credit with a financial
institution. The term of this credit facility is through August 28, 2005. Covenants include a liquidity ratio and a limited pledge of $5.6 million of the Companys investment account. The restriction on the Companys investment balance is
equal to 111% of the Companys borrowings on the line of credit. In June 2004 the credit agreement was amended again to remove the financial covenant on capital expenditures. As of December 31, 2004 the outstanding balance on this line of
credit was $0.0 million, and the restricted investment balance was $0.0 million. The weighted average interest rate for the six months ended December 31, 2004 was 5.1%. This credit facility was replaced with a new revolving credit facility from
another financial institution in February 2005. The new revolving credit facility provides for loans up to $5.0 million secured by the Companys accounts receivable. See Note 12.



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 December 31, 2004 was $37.4 million. Interest accrued on the
outstanding principal balance at a LIBOR-based rate, adjusted quarterly. The term loan was scheduled to mature on January 15, 2011. The term loan was converted from a construction loan to a term loan on December 31, 2001. Amortization of term loan
principal began on January 15, 2002 on a quarterly basis through the maturity date.



On October 1, 2003 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. Astrotech was
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 Astrotech $17.5 million representing consideration of future contract payments
previously used to collateralize the obligation. On December 31, 2003 the Company repaid $9.5 million of principal on the term loan.



In conjunction with the original financing, 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 2003 was recorded as interest expense in the period ended December 31, 2003 in the amount of $0.8 million. The Company recognized interest
expense of $0.4 million for the unamortized debt placement costs related to the debt repayment in the period ended December 31, 2003. The Company 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.



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



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June 30, 2004. For the six months ended December 31, 2004, approximately $0.9 million was repaid and the outstanding balance was $4.6 million as of December
31, 2004.



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 to 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 satellite 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.



On April 3, 2003 the Company changed the name of its Johnson Engineering Corporation (JE) subsidiary to SPACEHAB Government Services, Incorporated, to more appropriately reflect the subsidiarys strategic direction of
operating in the government business section. In the fourth quarter of our fiscal year ended June 30, 2004 and on a going forward basis, the Other segment represents corporate selling, general and administrative expenses. Segment amounts have been
restated based on the revised reporting structure.



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 December 31,2004 (in thousands): |  | Revenue |        | Income (Loss)before income taxes |   |        | Net Fixed Assets |  | DepreciationAndAmortization 
|SPACEHAB Flight Services                            |  | $       | 8,701  |                                  | $ | 1,345  |                  |  | $                            | 30,898 |  | $ | 698  
|Astrotech                                           |  |         | 2,510  |                                  |   | 354    |                  |  |                              | 46,335 |  |   | 519  
|SPACEHAB Government Services                        |  |         | 1,619  |                                  |   | 297    |                  |  |                              | 61     |  |   | 7    
|Space Media                                         |  |         | 308    |                                  |   | 32     |                  |  |                              |       |  |   |     
|Corporate and Other                                 |  |         |       |                                  |   | (3,277 | )                |  |                              | 304    |  |   | 83   
|                                                    |  |         |        |                                  |   |        |                  |  |                              |        |  |   |      
|                                                    |  | $       | 13,138 |                                  | $ | (1,249 | )                |  | $                            | 77,598 |  | $ | 1,307
|                                                    |  |         |        |                                  |   |        |                  |  |                              |        |  |   |      
|                                                    |  |         |        |                                 
|Three Months Ended December 31,2003 (in thousands): |  | Revenue |        | Income (Loss)before income taxes |   |        | Net FixedAssets  |  | Depreciation AndAmortization
|SPACEHAB Flight Services                            |  | $       | 10,594 |                                  | $ | 2,642  |                  |  | $                            | 32,756 |  | $ | 749  
|Astrotech                                           |  |         | 18,739 |                                  |   | 12,354 |                  |  |                              | 47,852 |  |   | 492  
|SPACEHAB Government Services                        |  |         | 3,243  |                                  |   | (5,169 | )                |  |                              | 138    |  |   | 16   
|Space Media                                         |  |         | 240    |                                  |   | 23     |                  |  |                              |       |  |   |     
|Corporate and Other                                 |  |         |       |                                  |   | (6,160 | )                |  |                              | 565    |  |   | 152  
|                                                    |  |         |        |                                  |   |        |                  |  |                              |        |  |   |      
|                                                    |  | $       | 32,816 |                                  | $ | 3,690  |                  |  | $                            | 81,311 |  | $ | 1,409
|                                                    |  |         |        |                                  |   |        |                  |  |                              |        |  |   |      



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|                                                  |  |         |        |                                  |   |        |                  |  |                             |        |  |   |      
|------------------------------------------------- |  | ------- | ------ | -------------------------------- | - | ------ | ---------------- |  | --------------------------- | ------ |  | - | -----
|Six Months Ended December 31,2004 (in thousands): |  | Revenue |        | Income (Loss)before income taxes |   |        | Net Fixed Assets |  | DepreciationAndAmortization
|SPACEHAB Flight Services                          |  | $       | 18,344 |                                  | $ | 11,492 |                  |  | $                           | 30,898 |  | $ | 1,396
|Astrotech                                         |  |         | 4,222  |                                  |   | 123    |                  |  |                             | 46,335 |  |   | 1,031
|SPACEHAB Government Services                      |  |         | 3,157  |                                  |   | 525    |                  |  |                             | 61     |  |   | 13   
|Space Media                                       |  |         | 448    |                                  |   | 11     |                  |  |                             |       |  |   |     
|Corporate and Other                               |  |         |       |                                  |   | (6,299 | )                |  |                             | 304    |  |   | 175  
|                                                  |  |         |        |                                  |   |        |                  |  |                             |        |  |   |      
|                                                  |  | $       | 26,171 |                                  | $ | 5,852  |                  |  | $                           | 77,598 |  | $ | 2,615
|                                                  |  |         |        |                                  |   |        |                  |  |                             |        |  |   |      
|                                                  |  |         |        |                                 
|Six Months Ended December 31,2003 (in thousands): |  | Revenue |        | Income (Loss)before income taxes |   |        | NetFixedAssets   |  | DepreciationAndAmortization
|SPACEHAB Flight Services                          |  | $       | 22,371 |                                  | $ | 6,029  |                  |  | $                           | 32,756 |  | $ | 1,452
|Astrotech                                         |  |         | 22,112 |                                  |   | 13,417 |                  |  |                             | 47,852 |  |   | 994  
|SPACEHAB Government Services                      |  |         | 6,776  |                                  |   | (5,407 | )                |  |                             | 138    |  |   | 38   
|Space Media                                       |  |         | 407    |                                  |   | (10    | )                |  |                             |       |  |   |     
|Corporate and Other                               |  |         |       |                                  |   | (9,655 | )                |  |                             | 565    |  |   | 341  
|                                                  |  |         |        |                                  |   |        |                  |  |                             |        |  |   |      
|                                                  |  | $       | 51,666 |                                  | $ | 4,374  |                  |  | $                           | 81,311 |  | $ | 2,825
|                                                  |  |         |        |                                  |   |        |                  |  |                             |        |  |   |      



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



|                                                                                                                                                  |  |                                |        |   |                              |   |       |      |  |   |       |   |  |   |       |  
|------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------ | ------ | - | ---------------------------- | - | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                                                                                                                                                  |  | Three MonthsEnded December 31, |        |   | Six Months EndedDecember 31, |  
|                                                                                                                                                  |  | 2004                           |        |   | 2003                         |   |       | 2004 |  |   | 2003  |  
|Net income (loss), as reported                                                                                                                    |  | $                              | (1,249 | ) |                              | $ | 3,468 |      |  | $ | 5,710 |   |  | $ | 4,134 |  
|Deduct: Total stock-based compensation expense determined under fair value based Method (SFAS No. 123) for all awards, net of related tax
effects |  |                                | (55    | ) |                              |   | (82   | )    |  |   | (87   | ) |  |   | (173  | )
|                                                                                                                                                  |  |                                |        |   |                              |   |       |      |  |   |       |   |  |   |       |  
|Pro forma net income (loss)                                                                                                                       |  | $                              | (1,304 | ) |                              | $ | 3,386 |      |  | $ | 5,623 |   |  | $ | 3,961 |  
|                                                                                                                                                  |  |                                |        |   |                              |   |       |      |  |   |       |   |  |   |       |  
|Earnings per share:                                                                                                                               |  |                                |        |   |                              |   |       |      |  |   |       |   |  |   |       |  
|Basic - as reported                                                                                                                               |  | $                              | (0.10  | ) |                              | $ | 0.28  |      |  | $ | 0.45  |   |  | $ | 0.33  |  
|Diluted - as reported                                                                                                                             |  | $                              | (0.10  | ) |                              | $ | 0.25  |      |  | $ | 0.40  |   |  | $ | 0.30  |  
|                                                                                                                                                  |  |                                |        |  
|Basic - pro forma                                                                                                                                 |  | $                              | (0.10  | ) |                              | $ | 0.27  |      |  | $ | 0.45  |   |  | $ | 0.32  |  
|Diluted - pro forma                                                                                                                               |  | $                              | (0.10  | ) |                              | $ | 0.24  |      |  | $ | 0.40  |   |  | $ | 0.29  |  



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 six months ended December 31, 2004, the Company did not repurchase any shares. As of December 31, 2004, the Company had repurchased 116,100 shares
at a cost of $117,320 under the program.



10. Related Party Transaction



The Company engaged in certain transactions with directors, executive
officers, shareholders, and certain former officers during the three months ended December 31, 2004. 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 December 31, 2004 and 2003, EADSs payload and integration services included in cost of revenue were approximately $2.9 million and $2.0 million,
respectively.



V.J.F. Russian Consulting



On January 30, 2004 the Company 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 December 31, 2004 was $0.1 million.



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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 December 31, 2004.



11. Recent Accounting
Pronouncement



The FASB has issued Statement 123 (revised 2004),
Share-Based Payment. Statement 123(R) 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. The
Company has not yet made an assessment as to the impact on the Companys financial statements.



12. Subsequent Events



Bank
Credit Facility. On February 11, 2005 the Company 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.



The new revolving credit facility replaces the $5.0 million revolving credit
facility secured by short term investments with previous credit facility. The Company expects to transfer most of its deposit and investment accounts to bank.



Space Shuttle Return to Flight Activities. SPACEHAB received authorization to proceed on integration and operations activities for the STS-116 mission
currently manifested for February 2006. This contract milestone officially kicks off a 13-month processing template for flight of the ICC and the logistics single module, slated to ferry key provisions and equipment to the ISS. In addition, the
Company was authorized new contract work to add a deployable stowage platform to STS-118 scheduled for launch in July 2006 that will hold spare parts on the International Space Station.



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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 the Companys
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 the Columbia orbiter and its crew 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 the Companys 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. SPACEHAB plans
to pursue these new opportunities aggressively. 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, the
Company expects that the space shuttle and ISS will remain an integral part of the human spaceflight program through at least 2010. SPACEHAB is currently supporting four of the next six scheduled space shuttle flights and is pursuing additional
missions that will be important for completing the final assembly and beginning operation 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, the Company was authorized new contract work to add a deployable stowage platform to STS-118 scheduled to launch in July 2006 that will hold spare parts on the International Space Station.



SPACEHAB is also actively engaged in defining commercial cargo transportation services
(CCTS) solutions to ISS on-orbit re-supply and return requirements which could more effectively be satisfied independent of the space shuttle transportation system. These activities, some of which leverage the Companys
international strategic partnerships and intellectual property rights, include the development of an affordable cargo delivery system based on an expendable launch vehicle, the Russian Progress family of carriers, and a SPACEHAB payload integration
architecture to transport pressurized and unpressurized cargo to and from the ISS. Management further believes that the Companys experience and expertise in the conceptual design, development, ground processing, and on-orbit operations support
of payload and crew accommodations position it well for a role in the development of NASAs Crew Exploration Vehicle, the envisioned next phase in human exploration of space.



During the six months ended December 31, 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. As one of a handful of the proposals selected from the multitude submitted, SPACEHAB will define concepts for accomplishing human lunar exploration with a
focus on innovative solutions and commercial



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approaches that could be extensible to Mars and beyond. The Company has been notified of NASAs intent to award a contract option for an additional
six-month effort also expected to be valued at nearly $1.0 million.



SPACEHAB
operates through 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 administrative 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 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 aboard 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, environmental and reliability projects, and other costs through disciplined
management and safe, efficient operations
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The continuing unavailability 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.
expands SPACEHABs core business of supporting people living and working in space. Specifically, SGS has proven capabilities supporting 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 and
brings over thirty years of advanced ideas and solid execution of these innovations to its customers. 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 December 31, 2004 we had cash on hand and in short-term investments of $6.6 million. Our $5.0 million revolving credit facility had a balance drawn of $0.0 million as of December 31, 2004. Our ability to maintain
sufficient liquidity in the future will depend on a number of factors including our ability to acquire future



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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.



We expect that our operating cash
flows over the remainder of the current fiscal year 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 Nations Vision for Space Exploration will lead to increased activity and related cash flows from operations for our SFS business segment. The Company expects to be awarded a six month extension of its contract with NASA for the
study of the space agencys new exploration initiatives; additions to its contract with Lockheed Martin for ISS configuration hardware and contract additions in its 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 six months ended December 31, 2004 and
2003 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 its contract with Lockheed Martin in the Astrotech segment and other commercial satellite providers. Revenue for SMI was immaterial for the six months ended December 31, 2004 and 2003. Astrotech
recognized scheduled idle time at its facilities during the six months ended December 31, 2004, recognizing revenue primarily from the pro-rata guarantee under its contract with Lockheed Martin. Also, during the period, there were launch delays that
affected planned revenue that is expected to materialize in the upcoming months.



SPACEHABs SFS business segment is supporting NASAs return-to-flight activities and is continuing its operations in preparation for shuttle missions including STS-114, 121, 116, and 118 (in order of their anticipated flight
sequence). SFS is preparing a cargo carrier for STS-114, the External Stowage Platform 2 (ESP2), that will be deployed and permanently mounted to the ISS. SPACEHAB contracted directly with NASAs prime ISS contractor, Boeing, for
the STS-114 mission. For STS-121, a new mission added to the NASA ReALMS contract during the period ended December 31, 2003, SPACEHAB is scheduled to provide its non-deployable unpressurized carrier to NASA for transport of several critical ISS
Orbital Replacement Unit (ORU) spares. For both STS-116 and 118, missions previously placed under ReALMS, SPACEHAB is scheduled to provide its pressurized single module and its unpressurized non-deployable carrier for transport of
critical cargo and ORUs to and from the ISS. The Company has 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. As previously described, the ReALMS contract expired January 31, 2004 and support for missions STS-121, 116 and 118 is continuing under
a subcontract agreement to Lockheed Martin, effective February 1, 2004. SPACEHAB is currently providing these services under a letter contract and is in final contract negotiations with Lockheed Martin for 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 SPACEHABs 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.



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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 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 six months ended December 31, 2004, deferred revenue decreased by $1.6 million and $4.6 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 remainder of the next fiscal year 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 Companys 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 2003. The $8.0 million plus interest of $0.2 million paid by NASA as indemnification for the Companys loss of the RDM is recognized as a recovery
of previously recognized loss in the quarter ended September 30, 2004. At this time the Company does not plan to replace the RDM. SPACEHABs SFS business segment has two additional modules and other flight assets available to support the
Companys current NASA requirements. These modules and assets can also be used to support future NASA requirements. Based on public statements made by NASA, the Company believes the shuttle will return to flight; however, that return is
currently expected to be no earlier than May 2005.



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RESULTS OF OPERATIONS



For the three months ended December 31, 2004 as compared to the three months ended December 31, 2003.



Revenue. Revenue decreased approximately 60% to $13.1 million as compared to $32.8
million for the three months ended December 31, 2004 and 2003, respectively (in millions).



|                             |  |                  |      |                  |   |              |  |   |               |   |  |     |   
|---------------------------- |  | ---------------- | ---- | ---------------- | - | ------------ |  | - | ------------- | - |  | --- | --
|                             |  | December 31,2004 |      | December 31,2003 |   | DollarChange |  |   | PercentChange |  
|SPACEHAB Flight Services     |  | $                | 8.7  |                  | $ | 10.6         |  | $ | (1.9          | ) |  | (18 | %)
|Astrotech Space Operations   |  |                  | 2.5  |                  |   | 18.8         |  |   | (16.3         | ) |  | (87 | %)
|SPACEHAB Government Services |  |                  | 1.6  |                  |   | 3.2          |  |   | (1.6          | ) |  | (50 | %)
|Space Media                  |  |                  | 0.3  |                  |   | 0.2          |  |   | 0.1           |   |  | 50  | % 
|                             |  |                  |      |                  |   |              |  |   |               |   |  |     |   
|                             |  | $                | 13.1 |                  | $ | 32.8         |  | $ | (19.7         | ) |  | (60 | %)
|                             |  |                  |      |                  |   |              |  |   |               |   |  |     |   



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. Even though the shuttle fleet
was grounded for the three months ended December 31, 2004 and three months ended December 31, 2003, there is a significant difference in revenue due to how NASA proceeded with the grounding of the shuttle fleet. For the three months ended December
31, 2003, the Company was 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 December 31, 2004, the Company was required to deliver fewer products and services to NASA due to a deferred return to flight schedule. The following summarizes the significant items:



| |  |  | Decrease in ReALMS revenue of $8.6 million in the three months ended December 31, 2004 compared to the three months ended December 31, 2003 due to the termination of the ReALMS
contract in January 2004
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Increase in Lockheed Martin contract revenue of $6.2 million in the three months ended December 31, 2004 compared to the three months ended December 31, 2003 due to the startup of
the contract in February 2004
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Increase on ESP2 revenue of $1.5 million in the three months ended December 31, 2004 compared to the three months ended December 31, 2003 due to the launch scheduled for May or June
2005
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Increase in revenue from the JETIS contract of $0.3 million that was started in the third quarter of fiscal year 2004
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | Increase in revenue from Concept Exploration and Refinement (CE&R) contract of $0.5 million that was started in the first quarter of fiscal year 2005
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Other contract revenue decrease of $1.8 million, mainly due to the cancellation of the RDMs planned second mission under the ReALMS contract
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



The decrease of revenue at the Astrotech business unit is primarily due to Boeings
termination of the fixed guarantee payments to ASO and the number of satellites processed during the period ending December 31, 2004 and 2003.



| |  |  | Revenue decrease of $17.5 million due to the one time payout received due to the cancellation by Boeing of its financial guarantees
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



| |  |  | Revenue increase of $1.3 million due to two satellite missions being processed for the period ended December 31, 2004 as compared to only one mission that started processing at the
end of the same period last year
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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 2003 partially offset by the PI&C contract which started
in January 2004. The following summarizes the significant items:



| |  |  | Revenue decrease of $2.6 million due to the closeout of the SEDC and CM contracts in December 2003
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | Other contract revenue decrease of $0.3 million
| | - |  | -----------------------------------------------



| |  |  | Revenue increase of $1.3 million under the PI&C contract
| | - |  | --------------------------------------------------------



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Revenue for our SMI business unit increased by $0.1 million from increased advertising efforts and participation through
Amazon.com and other e-retail affiliations.



Costs of Revenue. Costs of
revenue for the three months ended December 31, 2004 decreased by 16% to approximately $10.7 million, as compared to $12.8 million for the prior years quarter (in millions).



|                             |  |                  |      |                  |   |              |  |   |               |   |  |     |   
|---------------------------- |  | ---------------- | ---- | ---------------- | - | ------------ |  | - | ------------- | - |  | --- | --
|                             |  | December 31,2004 |      | December 31,2003 |   | DollarChange |  |   | PercentChange |  
|SPACEHAB Flight Services     |  | $                | 7.3  |                  | $ | 8.1          |  | $ | (0.8          | ) |  | (10 | %)
|Astrotech Space Operations   |  |                  | 2.1  |                  |   | 2.0          |  |   | 0.1           |   |  | 5   | % 
|SPACEHAB Government Services |  |                  | 1.2  |                  |   | 2.6          |  |   | (1.4          | ) |  | (54 | %)
|Space Media                  |  |                  | 0.1  |                  |   | 0.1          |  |   |              |   |  | 0   | % 
|                             |  |                  |      |                  |   |              |  |   |               |   |  |     |   
|                             |  | $                | 10.7 |                  | $ | 12.8         |  | $ | (2.1          | ) |  | (16 | %)
|                             |  |                  |      |                  |   |              |  |   |               |   |  |     |   



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 costs of revenue for shuttle related mission work performed by Boeing of $4.1 million due to subcontract termination
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | Increase in costs of revenue for shuttle related mission work performed by EADS of $2.2 million due to the scheduled launch of STS-114 in May 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 $0.1 million
| | - |  | ------------------------------------------------



Astrotechs increase of $0.1 million in costs of revenue is due to increased mission support costs and increase in the costs of operations at the satellite
processing facilities.



The decrease in costs of revenue at the SGS business
segment is primarily due to the closeout of the SEDC contract in December 2003. The following summarizes the significant items:



| |  |  | Costs of revenue decrease of $1.1 million due to the closeout of the SEDC contract in December 2003
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | Other costs of revenue decreases of $0.3 million due to less contract activities in second quarter 2005 as compared to second quarter of fiscal year 2004
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------



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



Operating Expenses. Operating
expenses decreased to $2.3 million for the three months ended December 31, 2004 as compared to approximately $13.5 million for the three months ended December 31, 2003. The primary factors causing this decrease are the Companys recording a
goodwill write-down of $8.3 million and a asset impairment of $1.8 million for its investment in Guigne during the quarter ended December 31, 2003. Additionally, operating expenses are lower in the quarter ended December 31, 2004 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 December 31, 2004 and
2003 as the Company continued to emphasize utilizing its existing asset base and limiting new investments in research and development. In the three months ended December 31, 2004, 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 December 31, 2004 as compared to approximately $2.9 million for the
three months ended December 31, 2003. 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 resulting in the expensing of $0.8 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 $0.4 million of debt placement costs



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associated with the repayment for the quarter ended December 31, 2003. Due to the $9.5 million payment on the mortgage loan and the subsequent lower interest
rate (5.5%), the cash interest expense was $0.3 million less in this period as compared to the quarter ended December 31, 2003.



Interest and Other Income. Interest and other income was immaterial for the three months ended December 31, 2004 and December 31, 2003. 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, the Company recorded no tax expense for the three months ended December 31, 2004 as compared to a minimal tax expense of $0.2 million during the three months ended December 31,
2003.



Net Income (Loss). Net loss for the three months ended December
31, 2004 was approximately $1.2 million or $0.10 per share basic and diluted on 12,609,863 shares as compared to net income of approximately $3.5 million or $0.28 per share basic and $0.25 per share diluted on 12,401,291 and 13,897,126 shares,
respectively, for the three months ended December 31, 2003.



For the six
months ended December 31, 2004 as compared to the six months ended December 31, 2003.



Revenue. Revenue decreased approximately 49% to $26.2 million as compared to $51.7 million for the six months ended December 31, 2004 and 2003, respectively (in millions).



|                             |  |                  |      |                  |   |              |  |   |               |   |  |     |   
|---------------------------- |  | ---------------- | ---- | ---------------- | - | ------------ |  | - | ------------- | - |  | --- | --
|                             |  | December 31,2004 |      | December 31,2003 |   | DollarChange |  |   | PercentChange |  
|SPACEHAB Flight Services     |  | $                | 18.3 |                  | $ | 22.4         |  | $ | (4.1          | ) |  | (18 | %)
|Astrotech Space Operations   |  |                  | 4.2  |                  |   | 22.1         |  |   | (17.9         | ) |  | (81 | %)
|SPACEHAB Government Services |  |                  | 3.2  |                  |   | 6.8          |  |   | (3.6          | ) |  | (53 | %)
|Space Media                  |  |                  | 0.5  |                  |   | 0.4          |  |   | 0.1           |   |  | 25  | % 
|                             |  |                  |      |                  |   |              |  |   |               |   |  |     |   
|                             |  | $                | 26.2 |                  | $ | 51.7         |  | $ | (25.5         | ) |  | (49 | %)
|                             |  |                  |      |                  |   |              |  |   |               |   |  |     |   



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 the six months ended December 31, 2004 and six months ended December 31, 2003,
there is a significant difference in revenue due to how NASA proceeded with the grounding of the shuttle fleet. For the six months ended December 31, 2003, the Company was 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 December 31, 2004, the Company was 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 $19.2 million in the six months ended December 31, 2004 compared to the six months ended December 31, 2003 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 $11.6 million in the current period
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Increase on ESP2 revenue of $3.6 million in the six months ended December 31, 2004 compared to the six months ended December 31, 2003 due to the anticipated launch in May 2005
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Increase in revenue from the JETIS contract of $2.1 million that was started in the third quarter of fiscal year 2004
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | Revenue from CE&R contract of $0.6 million that was started in the first quarter of fiscal year 2005
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | Other contract revenue decrease of $2.8 million, mainly due to the cancellation of the RDMs planned second mission under the ReALMS contract
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



The decrease of 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 six months ended December 31, 2004, Astrotech underwent scheduled downtime between launches recognizing
contractually guaranteed revenues of $1.7 million and $0.6 million from missions that began in fourth quarter of fiscal year 2004



22



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and were completed in the first quarter of fiscal year 2005, and contract revenue from two missions that began in the second quarter of fiscal year 2005 of
$1.7 million.



The decrease in revenue at the SGS business segment is primarily
due to the closeout of the SEDC and CM contract in December 2003 partially offset by the PI&C contract which started in January 2004. The following summarizes the significant items:



| |  |  | Revenue decrease of $6.6 million due to the closeout of the SEDC and CM contracts in December 2003
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | 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
| | - |  | ---------------------------------------------------------



Costs of Revenue. Costs of revenue for the six months ended December 31, 2004 decreased by 19% to approximately $21.5 million, as compared to $26.4 million for the
prior years quarter (in millions).



|                             |  |                  |      |                  |   |              |  |   |               |   |  |     |   
|---------------------------- |  | ---------------- | ---- | ---------------- | - | ------------ |  | - | ------------- | - |  | --- | --
|                             |  | December 31,2004 |      | December 31,2003 |   | DollarChange |  |   | PercentChange |  
|SPACEHAB Flight Services     |  | $                | 14.9 |                  | $ | 16.9         |  | $ | (2.0          | ) |  | (12 | %)
|Astrotech                    |  |                  | 3.9  |                  |   | 3.6          |  |   | 0.3           |   |  | 8   | % 
|SPACEHAB Government Services |  |                  | 2.5  |                  |   | 5.7          |  |   | (3.2          | ) |  | (56 | %)
|Space Media                  |  |                  | 0.2  |                  |   | 0.2          |  |   |              |   |  | 0   | % 
|                             |  |                  |      |                  |   |              |  |   |               |   |  |     |   
|                             |  | $                | 21.5 |                  | $ | 26.4         |  | $ | (4.9          | ) |  | (19 | %)
|                             |  |                  |      |                  |   |              |  |   |               |   |  |     |   



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 $12.0 million from December 31, 2003 to December 31, 2004 due to the ReALMS contract closeout
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Costs of revenue from Lockheed Martin letter contract of $6.8 million that started in the third quarter of fiscal year 2004
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



| |  |  | Increase in ESP2 costs of revenue of $2.9 million due to the expected launch in May 2005
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | Costs of revenue of $0.5 million from JETIS that was started in the third quarter of fiscal 2004
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | Other costs of revenue decreases of $0.2 million, primarily resulting from the termination of Boeing as a subcontractor for module services
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------



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 2003 partially offset by the PI&C contract. The following summarizes the
significant items:



| |  |  | Costs of revenue decrease of $3.0 million due to the closeout of the SEDC contract in December 2003
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | Costs of revenue decrease of $2.3 million due to the closeout of the CM contract in December 2003
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | Costs of revenue increase of $2.1 million due to the startup of the PI&C contract in January 2004
| | - |  | -------------------------------------------------------------------------------------------------



Operating Expenses. Operating expenses, other than the recovery of a non-recurring charge for the loss of the RDM that was recorded
for the period ended September 30, 2004, and the goodwill and Guigne impairments that were recorded for the period ended December 31, 2003, decreased to $4.3 million for the six months ended December 31, 2004 as compared to approximately $6.3
million for the six months ended December 31, 2003. The primary factors causing this decrease are the Companys on-going reductions in staff and facilities. Research and development expenses were immaterial for the six months ended December 31,
2004 and 2003 as the Company continued to emphasize utilizing its existing asset base and limiting new investments in research and development. For the six months ended December 31, 2004, there were no significant bid and proposal efforts. In the
six months ended December 31, 2003, the Company incurred bid and proposal costs of $0.2 million primarily relating to the Mission Integration Contract (MIC) proposal. During the six months ended December 31, 2004, the Company recognized



23



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legal expenses of $0.5 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 $2.9 million for the six months ended December 31, 2004 as compared to approximately $4.6 million for the six months ended December 31, 2003. 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 resulting in the expensing of $0.8 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 $0.4
million of debt placement costs associated with the repayment for the six months ended December 31, 2003. 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
substantially less ($0.5 million) in the six months ended December 31, 2004 compared to the six months ended December 31, 2003.



Interest and Other Income. Interest and other income was immaterial for the six months ended December 31, 2004 and December 31, 2003. 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 2004, the Company recorded a tax expense of $0.1 million for the six months ended December 31, 2004 as compared to a tax expense of $0.2 million during the six months ended December 31,
2003.



Net Income. Net income for the six months ended December 31, 2004
was approximately $5.7 million or $0.45 per share basic and $0.40 per share diluted on 12,592,044 and 14, 200,519 shares, respectively, as compared to net income of approximately $4.1 million or $0.33 per share basic and $0.30 per share diluted on
12,386,123 and 13,810,998 shares, respectively, for the six months ended December 31, 2003.



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. The Company also completed a private
placement offering of convertible subordinated notes to support capital investments required for development and construction of space flight assets.



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



The Company currently maintains 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 is through August 28, 2005. Covenants include a liquidity ratio and a limited pledge of $5.6 million of the Companys investment account. The
restriction on the Companys investment balance is limited to 111% of the Companys borrowings on the line of credit. As of December 31, 2004, amounts unused and available under this credit facility were $5.0 million. This credit facility
was replaced in February 2005 with a new revolving credit facility from another financial institution. The new revolving credit facility provides for loans up to $5.0 million secured by the Companys 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.



On February 11, 2005 the Company 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 the Company is 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.



Cash Flows From Operating Activities.Cash provided by operations for the six months ended December 31, 2004 and 2003 was $1.9 million and $9.9 million, respectively. The significant items affecting the
differences in cash



24



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##### Table of Contents

flows from operating activities for the six months ended December 31, 2004 as compared to the six months ended December 31, 2003 are discussed below:



| |  |  | Net income for the six months ended December 31, 2004 was $5.7 million as compared to net income for the six months ended December 31, 2003 of $4.1 million. Included in net income
for the six months ended December 31, 2004 is $8.2 million recognized as recovery of a previously reported non-recurring loss
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | For the six months ended December 31, 2003, the Company received $17.5 million due to the Boeing termination. In addition, the Company recorded a non-cash charge of $8.3 million for
impairment of goodwill at Astrotech and SGS. The Company recorded a non-cash valuation allowance charge of $1.8 million for its investment in Guigne. The Company also recorded a non-cash charge of approximately $1.3 million due to the loan repayment
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Depreciation and amortization for the six months ended December 31, 2004 was $2.7 million as compared to $2.8 million for the six months ended December 31, 2003 due to some assets
reaching end of useful life during the six months ended December 31, 2004
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Changes in assets for the six months ended December 31, 2004 provided cash from operations of $0.2 million. This change is due primarily to decreases in deferred mission costs due
to the launch for the JETIS project partially offset by an increase in accounts receivable and prepaid expenses. For the six months ended December 31, 2003 change in assets used cash from operations of $0.3 million primarily from an increase in
prepaid expenses
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Changes in liabilities for the six months ended December 31, 2004 consumed cash from operations of $6.6 million. This change is due primarily to the decreases in accounts payable
and accrued expenses of $2.0 million and the decrease in deferred revenue of $4.6 million. The decrease in deferred revenue is primarily due to the first launch for the JETIS contract during the six months ended December 31, 2004. For the six months
ended December 31, 2003 changes in liabilities used cash in operations of $8.5 million, primarily due to an accounts payable, accrued expenses, and accounts payable EADS decrease of $5.0 million and a deferred revenue decrease of approximately $3.6
million primarily due to revenue recognition for STS-112 and STS-116
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Cash Flows From Investing Activities.For the six months ended December 31, 2004 and 2003, cash flows provided by (used in) investing activities were ($0.1) million and $2.6 million, respectively. The significant items affecting the
differences in cash flows from investing activities for the six months ended December 31, 2004 as compared to the six months ended December 31, 2003 are discussed below:



| |  |  | There were minor purchases of property and equipment of $0.6 million for the six months ended December 31, 2004 as compared to $0.8 million for the six months ended December 31,
2003
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | For the six months ended December 31, 2004, cash flows from investing activities were primarily generated from the sale of short-term investments of $0.6 million as compared to $5.0
million for the six months ended December 31, 2003
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | For the six months ended December 31, 2004, cash flows from investing activities decreased by $0.1 million for restricted cash as compared to a decrease of $1.7 million for the six
months ended December 31, 2003
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Cash Flows From Financing
Activities.For the six months ended December 31, 2004 and 2003, cash flows used in financing activities were $2.3 million and $7.9 million, respectively. The significant items affecting the differences in cash flows from financing activities
for the six months ended December 31, 2004 as compared to the six months ended December 31, 2003 are discussed below:



| |  |  | For the six months ended December 31, 2004, the Company had net repayments of $1.4 million under the revolving credit facility as compared to net borrowings of $4.0 million for the
six months ended December 31, 2003
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | For the six months ended December 31, 2004, the Company paid $1.0 million under various credit agreements as compared to $11.9 million for the six months ended December 31, 2003.
This reduction is primarily due to the payment of $10.6 million on its mortgage loan due to the Boeing termination and the final payment to Alenia Spazio S.P.A during the six months ended December 31, 2003
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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 SEC. As of December 31, 2004, the Company had repurchased 116,100 shares at a cost



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of $117,320 under the program. The Company 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 the Companys core competencies, reducing operating expenses, and limiting cash commitments for future capital investments and new asset development. SGS was pursuing
significant new contracts to provide services for the ISS. On November 5, 2003 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 the result of the loss of these contract awards, the Company has made significant adjustments to its staffing and cost base structure during 2003. The Company reduced staffing
by 67 employees in the quarter ended December 31, 2003 as a result of NASAs award decisions. On October 1, 2003 the Company announced that it would close its corporate office in Washington, D.C. by December 31, 2003 and consolidate those
operations into its headquarters in Houston, Texas. The Company took these actions as part of its 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. The Company has 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.



The Companys cash and short-term investments were approximately $6.6 million as of December 31, 2004. Management believes that the Company has 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 beyond the remainder of this fiscal year.
The Company also expects 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 December 31, 2004 are as follows (in thousands):



|                                    |  |                     |        |                               |   |                 |  |                |       |                  |   |                  |  |            |        |  |   |    |  |   |      
|----------------------------------- |  | ------------------- | ------ | ----------------------------- | - | --------------- |  | -------------- | ----- | ---------------- | - | ---------------- |  | ---------- | ------ |  | - | -- |  | - | -----
|Contractual Obligations             |  | AtDecember 31, 2004 |        | Remaining in Fiscal Year 2005 |   | Fiscal Year2006 |  | FiscalYear2007 |       | Fiscal Year 2008 |   | Fiscal Year 2009 |  | Thereafter
|Long-term Debt                      |  | $                   | 63,250 |                               | $ |                |  | $              |      |                  | $ |                 |  | $          | 63,250 |  | $ |   |  | $ |     
|Mortgage Loan Payable               |  |                     | 4,679  |                               |   | 986             |  |                | 2,057 |                  |   | 1,636            |  |            |       |  |   |   |  |   |     
|V.J.F. Russian Consultant Agreement |  |                     | 255    |                               |   | 90              |  |                | 165   |                  |   |                 |  |            |       |  |   |   |  |   |     
|V.J.F. Russian Subcontract          |  |                     | 1,070  |                               |   | 670             |  |                | 400   |                  |   |                 |  |            |       |  |   |   |  |   |     
|Operating leases1                   |  |                     | 5,946  |                               |   | 454             |  |                | 1,348 |                  |   | 760              |  |            | 441    |  |   | 91 |  |   | 2,852
|                                    |  |                     |        |                               |   |                 |  |                |       |                  |   |                  |  |            |        |  |   |    |  |   |      
|Total Contractual Cash Obligations2 |  | $                   | 75,200 |                               | $ | 2,200           |  | $              | 3,970 |                  | $ | 2,396            |  | $          | 63,691 |  | $ | 91 |  | $ | 2,852



(excluding interest payments)



|1 | - For the remainder of fiscal year 2005, the Company expects to receive net payments of $0.3
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.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|2 | - Does not include commitment to Dayna Justiz, President of The Space Store, 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 retail arm
of SMI. 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 incurred.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|ITEM 3. | Quantitative and Qualitative Disclosures about Market Risk
|------- | ----------------------------------------------------------



The Company has no material changes to the disclosure made on this matter in the Companys 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 the Companys management, including its principal executive officer and principal financial officer, the Company
has evaluated the effectiveness of the design and operation of its



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disclosure controls and procedures as of the end of the period covered by this quarterly report, and, based on its evaluation, the Companys principal
executive officer and principal financial officer have concluded that these controls and procedures are effective. There have been no changes in the Companys internal control over financial reporting that occurred during the Companys
last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.



Disclosure controls and procedures are the Companys controls and other procedures that are designed to ensure that information required to be disclosed by the
Company in the reports that the Company files or submits 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 procedures include, without
limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that we file under the Exchange Act is accumulated and communicated to its management, including its 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 the Company to perform an evaluation of its internal control over financial reporting and have its auditors attest
to such evaluation. The Company has 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. The
Company is not an accelerated filer under the rules of the SEC and, therefore, will not be subject to these requirements until its fiscal year ending June 30, 2006. While the Company anticipates that it will be able to comply on a timely basis with
this requirement, unforeseen delays may occur which could prevent the Company from achieving timely compliance. If the Company fails to complete its evaluation on a timely basis and in a satisfactory manner, or if its auditors are unable to attest
on a timely basis to the adequacy of the Companys internal control, the Company may be subject to additional regulatory scrutiny and to a loss of public confidence in its 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 Companys ReALMS contract in the amount of $87.7 million for the value of the
Companys 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 January 2005 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.



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 Company believes that Lloyds complaint is without merit and will
continue to respond to the complaint accordingly.



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 Companys claim represents its loss of $87.7 million less the $8.0 million recovered from NASA. Under federal tort claim procedures, NASA has statutory deadlines for responding to such claims. In the
event that the Companys administrative claim is denied, the Company would have the right to pursue the claim in Federal District Court.



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##### Table of Contents

|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|------- | ---------------------------------------------------



The Annual Meeting of Shareholders was held on December 1, 2004. A quorum of at least one-third of the issued and outstanding common stock and Series B Senior Convertible
Preferred Stock of the Company, voting together, was present and voting.



| | (a) | At the Annual Meeting of Shareholders, candidates for the Board of Directors stood for and were duly elected, with each nominee receiving a vote of at least 9,664,651 votes:
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The directors elected by the
holders of the Common Stock are:



|                          |  |            |  |          
|------------------------- |  | ---------- |  | ---------
|                          |  | For        |  | Withheld 
|Richard S. Bodman         |  | 9,687,612  |  | 1,408,396
|Dr. Edward E. David, Jr.  |  | 9,694,505  |  | 1,401,503
|Richard M. Fairbanks      |  | 9,696,550  |  | 1,399,458
|Dr. Shelley A. Harrison   |  | 9,695,605  |  | 1,400,403
|Michael E. Kearney        |  | 9,687,013  |  | 1,408,995
|Roscoe M. Moore, III      |  | 10,320,762 |  | 775,246  
|Thomas Boone Pickens, III |  | 10,319,962 |  | 776,046  
|James R. Thompson         |  | 9,664,661  |  | 1,431,347
|Barry A. Williamson       |  | 10,320,952 |  | 775,056  



The
director elected by the holder of the Series B Senior Convertible Preferred Stock is:



|                       |  |           |  |         
|---------------------- |  | --------- |  | --------
|                       |  | For       |  | Withheld
|Dr. Stefan Fritz Graul |  | 1,333,334 |  | 0       



The following matter was brought to a
vote of the shareholders at the meeting:



| | (b) | The ratification of the appointment of Grant Thornton LLP as the Companys independent auditors for fiscal year 2005.
| | --- | ---------------------------------------------------------------------------------------------------------------------



|                 |  |                
|---------------- |  | ---------------
|                 |  | Number of Votes
|For              |  | 11,880,082     
|Against          |  | 3,400          
|Abstain          |  | 545,860        
|Broker Non-Votes |  | 0              



|ITEM 6. | EXHIBITS
|------- | --------



The following exhibits are filed herewith:

|  |   |  |        |  |                                                                                                                        
|- | - |  | ------ |  | -----------------------------------------------------------------------------------------------------------------------
|  |   | 
|a | ) |  | 10.125 |  | Loan agreement dated as of February 11, 2005 by and between SPACEHAB, Inc. and First American Bank, SSB.               
|  |   | 
|  |   |  | 31.1   |  | Certification of Chief Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934.               
|  |   | 
|  |   |  | 31.2   |  | Certification of Chief Financial Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934.               
|  |   | 
|  |   |  | 32     |  | Certification pursuant to 18 U.S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



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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: February 11, 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



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