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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.
20549





FORM 10-Q



xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

ACT OF 1934

For the quarterly period ended...........March 31, 2003





OR





 ̈TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934.





Commission file number 0-27206





SPACEHAB, Incorporated

601 13thStreet, NW

Suite 900 South

Washington, DC 20005

(202) 488-3500



|Incorporated in the State of Washington |  | IRS Employer Identification
|--------------------------------------- |  | ---------------------------
|                                        |  | Number
91-1273737          



The number of shares of
Common Stock outstanding as of the close of business on April 14, 2003:



|Class        |  | Number of Shares Outstanding
|------------ |  | ----------------------------
|Common Stock |  | 12,415,540                  



Indicate by check mark
whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports,
and (2) has been subject to such filing requirements for the past 90 days.



Yes  X         No



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



Yes      No  X



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SPACEHAB,
INCORPORATED AND SUBSIDIARIES

March 31, 2003 QUARTERLY REPORT ON FORM 10-Q



TABLE OF CONTENTS



|PART 1   |  | FINANCIAL INFORMATION                                                                                                 |  | Page
|--------- |  | --------------------------------------------------------------------------------------------------------------------- |  | ----
|         
|Item 1.   |  | Unaudited Condensed Consolidated Financial Statements                                                                 |  |     
|         
|          |  | Unaudited Condensed Consolidated Balance Sheets as of March 31, 2003 and June 30, 2002                                |  | 2   
|         
|          |  | Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended March 31, 2003 and 2002 |  | 3   
|         
|          |  | Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended March 31, 2003 and 2002           |  | 4   
|         
|          |  | Notes to Unaudited Condensed Consolidated Financial Statements                                                        |  | 5   
|         
|Item 2.   |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                 |  | 12  
|         
|Item 3.   |  | Quantitative and Qualitative Disclosure about Market Risk                                                             |  | 19  
|         
|Item 4.   |  | Controls and Procedures                                                                                               |  | 19  
|         
|PART II  |  | OTHER INFORMATION                                                                                                     |  |     
|         
|Item 1.   |  | Legal Proceedings                                                                                                     |  | 19  
|         
|Item 4.   |  | Submission of Matters to a Vote of Security Holders                                                                   |  | 20  
|         
|Item 6.   |  | Exhibits and Reports on Form 8-K                                                                                      |  | 20  



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PART 1:    FINANCIAL INFORMATION



Item 1.    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SPACEHAB, INCORPORATED AND
SUSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except share data)

|                                                                                                                                |  | March 31, 2003 |         |   | June 30, 2002 |  
|------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------- | - | ------------- | -
|                                                                                                                                |  | (unaudited)    |         |   |               |  
|ASSETS                                                                                                                          |  |                |         |  
|Cash and cash equivalents                                                                                                       |  | $              | 3,716   |   |               | $
|Restricted cash                                                                                                                 |  |                |        |   |               |  
|Accounts receivable, net                                                                                                        |  |                | 11,050  |   |               |  
|Investments                                                                                                                     |  |                | 16,503  |   |               |  
|Prepaid expenses and other current assets                                                                                       |  |                | 724     |   |               |  
|                                                                                                                                |  |                |         |   |               |  
|Total current assets                                                                                                            |  |                | 31,993  |   |               |  
|Property, plant, and equipment, net of                                                                                          |  |                |         |   |               |  
|Accumulated depreciation and amortization of $47,313 and $74,307,
respectively                                                  |  |                | 101,093 |   |               |  
|Goodwill, net of accumulated amortization of $4,553 and $4,553, respectively                                                    |  |                | 8,369   |   |               |  
|Investment in Guigne, net                                                                                                       |  |                | 1,800   |   |               |  
|Other assets, net                                                                                                               |  |                | 5,793   |   |               |  
|                                                                                                                                |  |                |         |   |               |  
|Total assets                                                                                                                    |  | $              | 149,048 |   |               | $
|                                                                                                                                |  |                |         |   |               |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                            |  |                |         |   |               |  
|Loans payable, current portion                                                                                                  |  | $              |        |   |               | $
|Revolving loan payable                                                                                                          |  |                |        |   |               |  
|Accounts payable and accrued expenses                                                                                           |  |                | 15,053  |   |               |  
|Accrued subcontracting services                                                                                                 |  |                | 6,474   |   |               |  
|Convertible notes payable to stockholder                                                                                        |  |                | 1,978   |   |               |  
|Mortgage loan payable                                                                                                           |  |                | 2,172   |   |               |  
|Deferred revenue                                                                                                                |  |                | 6,952   |   |               |  
|                                                                                                                                |  |                |         |   |               |  
|Total current liabilities                                                                                                       |  |                | 32,629  |   |               |  
|Loans payable, net of current portion                                                                                           |  |                |        |   |               |  
|Accrued expenses                                                                                                                |  |                | 597     |   |               |  
|Convertible notes payable to stockholder                                                                                        |  |                |        |   |               |  
|Deferred revenue                                                                                                                |  |                | 9,574   |   |               |  
|Convertible subordinated notes payable                                                                                          |  |                | 63,250  |   |               |  
|Mortgage loan payable                                                                                                           |  |                | 15,432  |   |               |  
|Other long term liability                                                                                                       |  |                | 1,791   |   |               |  
|                                                                                                                                |  |                |         |   |               |  
|Total liabilities                                                                                                               |  |                | 123,273 |   |               |  
|Commitments and contingencies                                                                                                   |  |                |         |   |               |  
|Minority interest in consolidated subsidiary                                                                                    |  |                |        |   |               |  
|Stockholders equity                                                                                                            |  |                |         |   |               |  
|Preferred Stock, authorized 2,500,000 shares, issued and outstanding 1,333,334
shares                                           |  |                | 11,892  |   |               |  
|Common stock, no par value, authorized 30,000,000 shares, issued and outstanding
12,415,540 and 12,154,465 shares, respectively |  |                | 83,420  |   |               |  
|Additional paid-in capital                                                                                                      |  |                | 361     |   |               |  
|Less treasury stock at cost, 36,100 and no shares, respectively                                                                 |  |                | (37     | ) |               |  
|Accumulated other comprehensive loss                                                                                            |  |                | (1,791  | ) |               |  
|Accumulated deficit                                                                                                             |  |                | (68,070 | ) |               |  
|                                                                                                                                |  |                |         |   |               |  
|Total stockholders equity                                                                                                      |  |                | 25,775  |   |               |  
|                                                                                                                                |  |                |         |   |               |  
|Total liabilities and stockholders equity                                                                                      |  | $              | 149,048 |   |               | $
|                                                                                                                                |  |                |         |   |               |  



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)                              |  | (Unaudited) Three Months Ended March 31, |            |   | (Unaudited) Nine Months Ended March 31, |  
|-------------------------------------------------------------- |  | ---------------------------------------- | ---------- | - | --------------------------------------- | -
|                                                               |  | 2003                                     |            |   | 2002                                    |  
|Revenue                                                        |  | $                                        | 26,413     |   |                                         | $
|Costs of revenue                                               |  |                                          | 22,123     |   |                                         |  
|                                                               |  |                                          |            |   |                                         |  
|Gross profit                                                   |  |                                          | 4,290      |   |                                         |  
|                                                               |  |                                          |            |   |                                         |  
|Operating expenses                                             |  |                                          |            |   |                                         |  
|Selling, general and administrative                            |  |                                          | 3,146      |   |                                         |  
|Research and development                                       |  |                                          | 20         |   |                                         |  
|Nonrecurring charge (note 13)                                  |  |                                          | 50,268     |   |                                         |  
|Goodwill impairment (note 12)                                  |  |                                          | 11,925     |   |                                         |  
|                                                               |  |                                          |            |   |                                         |  
|Total operating expenses                                       |  |                                          | 65,359     |   |                                         |  
|                                                               |  |                                          |            |   |                                         |  
|Income (loss) from operations                                  |  |                                          | (61,069    | ) |                                         |  
|Interest expense, net of capitalized interest                  |  |                                          | (1,842     | ) |                                         |  
|Interest and other income (loss), net                          |  |                                          | (26        | ) |                                         |  
|                                                               |  |                                          |            |   |                                         |  
|Income (loss) before income taxes                              |  |                                          | (62,937    | ) |                                         |  
|Income tax benefit (expense)                                   |  |                                          | 218        |   |                                         |  
|                                                               |  |                                          |            |   |                                         |  
|Net income (loss)                                              |  | $                                        | (62,719    | ) |                                         | $
|                                                               |  |                                          |            |   |                                         |  
|Income (loss) per share                                        |  |                                          |            |   |                                         |  
|Net income (loss) per share  basic                            |  | $                                        | (5.06      | ) |                                         | $
|                                                               |  |                                          |            |   |                                         |  
|Shares used in computing net income (loss) per share  basic   |  |                                          | 12,398,775 |   |                                         |  
|                                                               |  |                                          |            |   |                                         |  
|Net income (loss) per share  diluted                          |  | $                                        | (5.06      | ) |                                         | $
|                                                               |  |                                          |            |   |                                         |  
|Shares used in computing net income (loss) per share  diluted |  |                                          | 12,398,775 |   |                                         |  
|                                                               |  |                                          |            |   |                                         |  



See
accompanying notes to unaudited condensed consolidated financial statements.



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SPACEHAB, INCORPORATED AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Cash
Flows



|(In thousands)                                                                 |  | Nine Months Ended March 31, |        
|------------------------------------------------------------------------------ |  | --------------------------- | -------
|                                                                               |  | 2003                        |        
|Operating activities                                                           |  |                             |        
|Net loss                                                                       |  | $                           | (61,638
|Adjustments to reconcile net loss to net cash provided by operating
activities |  |                             |        
|Gain on sale of property and equipment                                         |  |                             |       
|Goodwill impairment                                                            |  |                             | 11,925 
|Nonrecurring charge                                                            |  |                             | 50,268 
|Proceeds from insurance                                                        |  |                             | 17,667 
|Depreciation and amortization                                                  |  |                             | 7,063  
|Changes in assets and liabilities                                              |  |                             |        
|Decrease in accounts receivable                                                |  |                             | 2,752  
|(Increase) decrease in prepaid expenses and other current assets               |  |                             | (261   
|Decrease (increase) in other assets                                            |  |                             | 165    
|(Decrease) in deferred revenue                                                 |  |                             | (8,439 
|Increase (decrease) in accounts payable and accrued expenses                   |  |                             | 220    
|Increase in accrued subcontracting services                                    |  |                             | 3,531  
|                                                                               |  |                             |        
|Net cash provided by operating activities                                      |  |                             | 23,253 
|                                                                               |  |                             |        
|Investing activities                                                           |  |                             |        
|Payments for flight assets under construction                                  |  |                             | (136   
|Payments for building under construction                                       |  |                             |       
|Purchases of property, equipment and leasehold improvements                    |  |                             | (470   
|Proceeds received from sale of property and equipment                          |  |                             | 125    
|Proceeds from state grant                                                      |  |                             | 750    
|Increase in investments                                                        |  |                             | (16,503
|Decrease in restricted cash                                                    |  |                             | 549    
|                                                                               |  |                             |        
|Net cash provided by (used for) investing activities                           |  |                             | (15,685
|                                                                               |  |                             |        
|Financing activities                                                           |  |                             |        
|Payment of loan payable                                                        |  |                             | (218   
|Payment of note payable under credit agreement                                 |  |                             |       
|Proceeds from issuance of common stock                                         |  |                             | 125    
|Purchase of treasury stock                                                     |  |                             | (37    
|Repayment of revolving loan payable, net                                       |  |                             | (2,150 
|Proceeds from mortgage loan                                                    |  |                             |       
|Repayment of mortgage loan                                                     |  |                             | (1,513 
|Payment of convertible note payable to stockholder                             |  |                             | (1,889 
|Payment of minority interest                                                   |  |                             | (315   
|Proceeds from sale of minority interest in consolidated subsidiary             |  |                             |       
|                                                                               |  |                             |        
|Net cash (used for) provided by financing activities                           |  |                             | (5,997 
|                                                                               |  |                             |        
|Net change in cash and cash equivalents                                        |  |                             | 1,571  
|Cash and cash equivalents at beginning of period                               |  |                             | 2,145  
|                                                                               |  |                             |        
|Cash and cash equivalents at end of period                                     |  | $                           | 3,716  
|                                                                               |  |                             |        



See
accompanying notes to unaudited condensed consolidated financial statements



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SPACEHAB,
INCORPORATED AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements



1.    Basis of Presentation



In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting of only normal recurring accruals other than adjustments for a nonrecurring charge and goodwill
impairment, necessary for a fair presentation of the consolidated financial position of SPACEHAB, Incorporated and subsidiaries (SPACEHAB or the Company) as of March 31, 2003, and the results of its operations and cash flows
for the three and nine months periods ended March 31, 2003 and 2002. However, the 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 2003 presentation.



The consolidated results of operations for the three and nine month periods ended March 31, 2003 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, 2002.



2.    Earnings per Share



The following are reconciliations of the numerators and denominators of the basic and diluted earnings per share (EPS) computations for the three and nine month periods ended March 31, 2003 and 2002:



|(in thousands except share and per share data)        |  |                                   |         |   |                                   |            |                  |   |       |                    |  |                      |    |                  |           
|----------------------------------------------------- |  | --------------------------------- | ------- | - | --------------------------------- | ---------- | ---------------- | - | ----- | ------------------ |  | -------------------- | -- | ---------------- | ----------
|                                                      |  | Three months ended March 31, 2003 |         |   | Three months ended March 31, 2002 |           
|                                                      |  | Income (Numerator)                |         |   | Shares (Denominator)              |            | Per Share Amount |   |       | Income (Numerator) |  | Shares (Denominator) |    | Per Share Amount |           
|Basic EPS:                                            |  |                                   |         |   |                                   |            |                  |   |       |                    |  |                      |    |                  |           
|Income (loss) available to                            |  |                                   |         |   |                                   |            |                  |   |       |                    |  |                      |    |                  |           
|common shareholders                                   |  | $                                 | (62,719 | ) |                                   | 12,398,775 |                  | $ | (5.06 | )                  |  | $                    | 66 |                  | 11,971,906
|Effect of dilutive securities:                        |  |                                   |         |   |                                   |            |                  |   |       |                    |  |                      |    |                  |           
|Convertible notes payable                             |  |                                   |        |   |                                   |           |                  |   |      |                    |  |                      |   |                  |          
|Options and warrants, using the treasury stock method |  |                                   |        |   |                                   |           |                  |   |      |                    |  |                      |   |                  | 3,538     
|Convertible preferred shares                          |  |                                   |        |   |                                   |           |                  |   |      |                    |  |                      |   |                  | 1,333,334 
|                                                      |  |                                   |         |   |                                   |            |                  |   |       |                    |  |                      |    |                  |           
|Diluted EPS:                                          |  |                                   |         |   |                                   |            |                  |   |       |                    |  |                      |    |                  |           
|Income (loss) available to common shareholders        |  | $                                 | (62,719 | ) |                                   | 12,398,775 |                  | $ | (5.06 | )                  |  | $                    | 66 |                  | 13,308,778
|                                                      |  |                                   |         |   |                                   |            |                  |   |       |                    |  |                      |    |                  |           



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|                                               |  | Nine months ended March 31, 2003 |         |   | Nine months ended March 31, 2002 |           
|---------------------------------------------- |  | -------------------------------- | ------- | - | -------------------------------- | ----------
|                                               |  | Income (Numerator)               |         |   | Shares (Denominator)             |           
|Basic EPS:                                     |  |                                  |         |   |                                  |           
|Income (loss) available to common shareholders |  | $                                | (61,638 | ) |                                  | 12,263,426
|Effect of dilutive securities:                 |  |                                  |         |   |                                  |           
|Convertible notes payable                      |  |                                  |        |   |                                  |          
|Options and warrants, using                    |  |                                  |        |   |                                  |          
|the treasury stock method                      |  |                                  |        |   |                                  |           
|Convertible preferred shares                   |  |                                  |        |   |                                  |           
|                                               |  |                                  |         |   |                                  |           
|Diluted EPS:                                   |  |                                  |         |   |                                  |           
|Income (loss) available to common shareholders |  | $                                | (61,638 | ) |                                  | 12,263,426
|                                               |  |                                  |         |   |                                  |           



Convertible notes
payable outstanding as of March 31, 2003, convertible into 4,642,202 shares of common stock at $13.625 per share and due October 2007, were not included in the computation of diluted EPS for the three and nine months ended March 31, 2003 and 2002,
as the inclusion of the converted notes would be anti-dilutive for these periods.



Options to purchase 313,000 shares of common stock, at $0.70 per share, were outstanding for the three and nine months ended March 31, 2003 but were not included in diluted EPS as the inclusion of these options would be
anti-dilutive. The options expire on September 17, 2012.



Options
to purchase 1,888,330 shares of common stock, at prices ranging from $0.93 to $12.00 per share, were outstanding for the three and nine months ended March 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 and nine months ended March 31, 2003. The options expire between July 31, 2003 and July 23, 2011.



Options and warrants to purchase 3,025,178 shares of common stock at prices ranging from $1.69 to $24.00 per share were outstanding for the three and nine
months ended March 31, 2002 but were not included in the computation of diluted EPS because the options exercise prices were greater than the average price of the common shares during the three and nine months ended March 31, 2002.



3.    Investments



The Company holds certain investments that are treated as
available-for-sale securities under Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities. These investments are recorded at their fair values. The
Companys investments consists of U.S. Treasuries, Federal sponsored agencies and repurchase agreements collateralized by U.S. Treasury obligations in order to safeguard capital and provide ready liquidity. The investments are classified as
available for sale and recorded as current assets.



4.    Revenue Recognition



SPACEHABs Space Flight Services business units revenue is derived primarily from long-term fixed-price contracts with the U.S. Government and commercial customers. Revenue under these contracts is recognized using the
percentage of completion method of accounting. Such revenues are recorded based on the percentage of costs incurred in the applicable reporting period as compared to the most recent estimates of costs to complete each mission. Estimating future
costs and, therefore, revenues and profits, is a process requiring a high degree of management judgment. Management bases its estimates on historical experience and various assumptions that are believed to be reasonable under the circumstances.
Costs to complete include, when appropriate, material, labor,



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subcontracting costs, lease costs, commissions, insurance and depreciation. Reviews of the status of contracts are performed by business
segment personnel through periodic contract status and performance reviews. In the event of a change in total estimated contract cost or profit, the cumulative effect of such change is recorded in the period in which the change in estimate
occurs.



With respect to its cost-plus award and
incentive fee contract, SPACEHABs subsidiary, Johnson Engineering Corporation (JE), recognizes revenue based on costs incurred plus a proportionate amount of estimated fee earned. Award fees, which provide earnings based on the
Companys contract performance as determined by the National Aeronautics and Space Administration (NASA) evaluations, are recorded when the amounts can be reasonably estimated, or when awarded. Changes in estimated costs to complete
and estimated amounts recognized as award fees are recognized in the period they become known.



Revenue generated from SPACEHABs subsidiary Astrotech Space Operations (Astrotech) payload processing facilities is billed and recognized on a quarterly basis under the terms of its
existing long term contracts for costs incurred.



5.    Statements of Cash FlowsSupplemental Information



(a) Cash paid for interest costs was $3.8 million and $4.3 million for the nine months ended March 31, 2003 and 2002, respectively. The
Company capitalized no interest costs during the nine months ended March 31, 2003 and capitalized $1.4 million during the nine months ended March 31, 2002.



(b) The Company paid no income taxes during the nine months ended March 31, 2003 and March 31, 2002.



6.    Credit Facilities



The Company issued subordinated notes for a portion of the amount due to
Alenia Spazio S.p.A. (Alenia), a shareholder, under a previously completed construction contract for the Companys flight modules. Alenia may elect to convert, in whole or part, the remaining principal amount into equity of
Astrotech Space Operations, Inc., on terms and conditions to be agreed with the Company. On November 15, 2001 the Company entered into an agreement with Alenia to restructure the terms of this debt to provide for a $3.0 million payment of principal
and interest on December 31, 2001 and quarterly amortization of the remaining principal beginning March 2002 through December 2003. In addition, the interest rate was reduced from 10% to 8% beginning January 1, 2002. The obligation is collateralized
by one of the Companys flight assets. The outstanding balance of this note is $2.0 million at March 31, 2003.



In August 2002, the Company entered into a $5.0 million line of credit with a new financial institution. This credit facility replaced a previous credit
facility which was repaid and expired on July 31, 2002. The term of this new credit facility is through August 28, 2005. Covenants under this credit facility include, but are not limited to, tangible net worth, debt to worth and debt service
coverage. The Company had no loans outstanding under this credit facility as of March 31, 2003.



On August 30, 2001, SPACEHABs Astrotech subsidiary completed a $20.0 million financing of its satellite processing facility expansion project in Titusville, Florida with a financial institution.
The proceeds of this financing were used to complete the construction of the payload processing facility and supporting infrastructure. The loan is collateralized primarily by Astrotechs multi-year payload processing contracts with The Boeing
Company and Lockheed Martin Corporation. Interest accrues on the outstanding principal balance at a LIBOR-based rate, adjustable quarterly. The loan matures on January 15, 2011. The loan was converted from a construction loan to a term loan on
December 31, 2001. Amortization of loan principal began on January 15, 2002 and continues on a quarterly basis through the loan maturity date. Interest is payable quarterly on the outstanding principal balance at the rate of 5.62% plus 225 basis
points. During the nine months ended March 31, 2003, $1.5 million of principal was repaid.



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In conjunction with this
financing, a swap agreement was required to be entered into to provide for a fixed rate of interest under the loan commitment beginning January 2002. The objective of the hedge 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 is due to changes in the USD-LIBOR-BBA interest rate. Changes in the cash flows of the interest rate swap are expected to exactly offset the changes in cash flows attributable
to fluctuations in the USD-LIBOR-BBA interest rates on the total variable rate debt. The value of the swap at March 31, 2003, approximately $1.8 million, is recorded in other comprehensive income (loss) on the balance sheet and other long-term
liability. Other comprehensive loss for the three and nine months ended March 31, 2003 was a loss of $0.0 million and $0.8 million respectively. The comprehensive loss for the three and nine months ended March 31, 2003 is $62.7 million and $62.4
million, respectively. Comprehensive income (loss) is the sum of net income (loss) and other comprehensive income (loss).



7.    Asset Sales



On November 30, 2000, Astrium, N.V., a related party, entered into an agreement with the Company to purchase the Companys Integrated Cargo Carrier
(ICC) and Vertical Cargo Carrier (VCC) flight assets. The total purchase price of $15.4 million is comprised of both cash and services payments. The transaction occurred in two phases. The first phase was for the purchase of
the ICC assets and the second phase was for the purchase of the VCC assets. Phase one of the transactions was completed in the quarter ended March 31, 2001. Phase two was completed in the quarter ended June 30, 2002. The Company recognized a minimal
loss on the sale. SPACEHAB has entered into an agreement with Astrium, a related party, to lease these assets for a period of four years with two additional four-year options.



8.     Segment Information



Based on its organization, the Company currently operates in five major business segments: Space Flight Services, JE,
Astrotech, Space Media, Inc. (SMI) and All Other. Space Flight Services was founded to commercially develop space habitat modules and carriers that operate in the cargo bay of the Space Shuttles. Space Flight Services provides a turnkey
service that includes access to the modules and carriers and provides integration and operations support services for both NASA and commercial customers. JE is primarily engaged in providing engineering services and products to the Federal
Government and NASA, primarily under the Flight Crew System Development (FCSD) Contract and the Configuration Management (CM) Contract. Astrotech provides payload processing facilities to serve the satellite manufacturing and
launch services industry. Astrotech currently provides launch site preparation facilities for flight ready satellites of major U.S. space launch companies and satellite manufacturers. SMI was established in April 2000 to develop space themed
commercial business activities. The All Other segment, established in fiscal year 2002, includes start up business units, which are expected to provide services to the Federal Government and NASA.



On April 3, 2003, the Company changed the name of its JE subsidiary to
SPACEHAB Government Services, Incorporated, (SGS) to more appropriately reflect the subsidiarys strategic direction of operating in the government services business sector. As part of a realignment of the Companys operating
units, the Strategic Programs operating unit, which is included in the All Other segment, will be moved into SGS in the fourth quarter of the Companys fiscal year ending June 30, 2003.



The Companys chief operating decision maker utilizes both revenue and
income before taxes, including allocated interest based on the investment in the segment, in assessing performance and making overall operating decisions and resource allocations. As such, other income or expense items including taxes and corporate
overhead have not been allocated to the various segments. Pre-tax income (loss) is calculated by subtracting from business unit revenue the respective business unit cost of revenue, operating expenses (before corporate allocations) and an allocation
of interest expense.



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|(in thousands) Three Months Ended March 31, 2003
|------------------------------------------------
|                                                
|Space Flight Services                           
|Johnson Engineering                             
|Astrotech                                       
|SMI                                             
|All Other                                       
|                                                
|                                                
|                                                
|                                                
|Three Months Ended March 31, 2002               
|                                                
|Space Flight Services                           
|Johnson Engineering                             
|Astrotech                                       
|SMI                                             
|All Other                                       
|                                                
|                                                
|                                                



|(in thousands)                   |  |         |        |                       |   |         |                  |  |                               |         |  |   |       
|-------------------------------- |  | ------- | ------ | --------------------- | - | ------- | ---------------- |  | ----------------------------- | ------- |  | - | ------
|Nine Months Ended March 31, 2003
|                                 |  | Revenue |        | Pre-Tax Income (Loss) |   |         | Net Fixed Assets |  | Depreciation and Amortization
|Space Flight Services            |  | $       | 39,503 |                       | $ | (54,714 | )                |  | $                             | 51,693  |  | $ | 5,021 
|Johnson Engineering              |  |         | 31,197 |                       |   | (9,106  | )                |  |                               | 737     |  |   | 706   
|Astrotech                        |  |         | 9,276  |                       |   | 1,875   |                  |  |                               | 48,629  |  |   | 1,429 
|SMI                              |  |         | 861    |                       |   | (81     | )                |  |                               | 34      |  |   | 226   
|All Other                        |  |         | 438    |                       |   | (339    | )                |  |                               |        |  |   |      
|                                 |  |         |        |                       |   |         |                  |  |                               |         |  |   |       
|                                 |  | $       | 81,275 |                       | $ | (62,365 | )                |  | $                             | 101,093 |  | $ | 7,382 
|                                 |  |         |        |                       |   |         |                  |  |                               |         |  |   |       
|                                
|Nine Months Ended March 31, 2002
|                                 |  | Revenue |        | Pre-Tax Income (Loss) |   |         | Net Fixed Assets |  | Depreciation and Amortization
|Space Flight Services            |  | $       | 37,230 |                       | $ | (2,075  | )                |  | $                             | 129,754 |  | $ | 7,887 
|Johnson Engineering              |  |         | 29,940 |                       |   | 1,717   |                  |  |                               | 1,654   |  |   | 1,233 
|Astrotech                        |  |         | 6,765  |                       |   | 1,877   |                  |  |                               | 47,022  |  |   | 768   
|SMI                              |  |         | 515    |                       |   | (1,357  | )                |  |                               | 75      |  |   | 221   
|All Other                        |  |         | 280    |                       |   | (2,205  | )                |  |                               |        |  |   |      
|                                 |  |         |        |                       |   |         |                  |  |                               |         |  |   |       
|                                 |  | $       | 74,730 |                       | $ | (2,043  | )                |  | $                             | 178,505 |  | $ | 10,109
|                                 |  |         |        |                       |   |         |                  |  |                               |         |  |   |       



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9.
    Minority Investment in Consolidated Subsidiary



Pursuant to a stock purchase agreement entered into as of September 27, 2001, escottVentures II, LLC (ESV), of Melbourne, Florida, purchased 5,914,826 newly issued shares of SMIs Series A redeemable, convertible
preferred stock for $750,000. On June 21, 2002, ESV filed Case Number 1:02CV01236 in the U.S. District Court for the District of Columbia against Space Media, Inc., SPACEHAB, Inc., Shelley A. Harrison and Julia A. Pulzone (collectively,
Defendants). This suit, relating to ESVs investment in Space Media, Inc., sought rescission of the stock purchase agreement and return of its $750,000 investment, plus unspecified expenses, consequential damages, exemplary and
punitive damages, prejudgment interest, and costs and disbursements, including attorney and expert fees. The Defendants and ESV settled the suit through mediation. A stipulation and order of dismissal was filed with the Court by the parties on
January 22, 2003, following the payment of cash and issuance of restricted shares of SPACEHAB common stock to ESV. ESV is no longer a shareholder of SMI.



10.     Recent Accounting Pronouncements



In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142,
Accounting for Goodwill and Other Intangible Assets. The statement eliminates the requirement to amortize costs in excess of net assets acquired (goodwill) under the purchase method of accounting, and sets forth a new methodology for
periodically assessing and, if warranted, recording impairment of goodwill. The Company adopted the new rules effective July 1, 2002. The elimination of amortization of goodwill is expected to increase earnings by approximately $1.0 million for the
fiscal year. The Company will continue to analyze and assess the impairment provisions of the new statement on an ongoing basis.



Goodwill was allocated to Astrotech, JE and The Space Store in accordance with the requirements of Accounting Principles Board Opinion No.16,
Business Combinations Goodwill is the excess of the cost over the fair value of the net tangible assets of the acquired company. Goodwill was allocated to Astrotech, JE and the Space Store as of their date of acquisition which was
February 1997, July 1998 and June 2000, respectively.



In
December 2002, the FASB issued 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 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. The Company has adopted the interim disclosure provisions for its financial reports for the quarter ended March 31, 2003.



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



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|                                                                                                                                                           |  | Three Months Ended March 31 |         |   | Nine Months Ended March 31, |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | --------------------------- | -
|                                                                                                                                                           |  | 2003                        |         |   | 2002                        |  
|Net income (loss), as reported                                                                                                                             |  | $                           | (62,719 | ) |                             | $
|Deduct: Total stock-based compensation income (expense) determined under fair value
based method (SFAS No. 123) for all awards, net of related tax effects |  |                             | 39      |   |                             |  
|                                                                                                                                                           |  |                             |         |   |                             |  
|Pro forma net income                                                                                                                                       |  | $                           | (62,680 | ) |                             | $
|                                                                                                                                                           |  |                             |         |   |                             |  
|Earnings (loss) per share:                                                                                                                                 |  |                             |         |   |                             |  
|Basicas reported                                                                                                                                          |  | $                           | (5.06   | ) |                             | $
|Dilutedas reported                                                                                                                                        |  | $                           | (5.06   | ) |                             | $
|Basicpro forma                                                                                                                                            |  | $                           | (5.06   | ) |                             | $
|Dilutedpro forma                                                                                                                                          |  | $                           | (5.06   | ) |                             | $



11.     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. As of March 31, 2003, the Company had repurchased 36,100 shares at a cost of $36,885.



12.    Goodwill Impairment



JE performs services under a cost-plus award and
incentive-fee contract for government services that are requested and directed by NASA. For the nine months ended March 31, 2003, JE primarily operated under the FCSD Contract and the Configuration Management Contract. The tasks under the contract
were segmented and a recompete for a portion of the tasks was begun in July 2002. On February 7, 2003, the Company was notified that its bid for those portions of the contract under recompete was not accepted and those portions of the contract have
been awarded to another company. As a result of this event, the Company performed a goodwill impairment test of the goodwill at JE in accordance with Financial Accounting Standards No. 142, Accounting for Goodwill and Other Intangible
Assets. The impairment test indicated an impairment of JEs goodwill of approximately $11.9 million which was recorded in the period ended March 31, 2003. The Company utilized discounted cash flows and market valuation techniques to
calculate the fair value of JE. JE, along with Spacehab Flight Services, will be bidding on a number of ISS contracts proposed under the ISS Contact Consolidation Strategy Study. Award dates for those contracts are expected in October 2003.



13.    Nonrecurring Charge



The Company was under contract with NASA to support the
STS-107 mission on its Columbiaorbiter. The mission utilized the Companys Research Double Module (RDM) flight asset. On February 1, 2003 the RDM was lost in the tragic STS-107 accident. The RDM was partially covered by
commercial insurance. The commercial insurance on the module was $17.7 million. The net book value of the RDM was $67.9 million. The Company has filed a



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claim with NASA for indemnification of its loss of the RDM. The claim was filed for approximately $50.3 million, an amount representing the
net book value of the module net of commercial insurance proceeds of $17.7 million. The Company has received the proceeds from its commercial insurance policy.



The Company is currently in discussions with NASA regarding resolution of the pending claim for the loss of the RDM. As there can be no assurance as to
the timing and outcome of the Companys claim with NASA, the Company has recorded a non-cash nonrecurring charge of $50.3 million before taxes in the period ended March 31, 2003. Upon resolution of its claim, any proceeds from NASA will be
recorded in the period in which the claim is resolved.



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



General



This document may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E oftheSecuritiesExchangeActof 1934, including (without
limitation) the General and Liquidity and Capital Resources sections of this Item 2. Such statements are subject to certain risks and uncertainties, including those discussed herein, which 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
U.S. National Aeronautics and Space Administration (NASA) and other customer contracts, the utilization of new commercial space assets, continued deployment of the International Space Station (ISS), technological
difficulties, product demand and market acceptance risks, the effect of economic conditions, uncertainty in government funding, the impact of competition and delays and uncertainties in future space shuttle and ISS programs, and resolution of the
Companys indemnification claim with NASA arising from the loss of the Columbiaorbiter and its crew during the STS-107 mission.



SPACEHAB was incorporated in 1984 to commercially develop space habitat modules to operate in the cargo bay of NASAs Space Shuttles. SPACEHABs
subsidiaries include, Johnson Engineering Corporation (JE) which was changed to SPACEHAB Government Services, Incorported (SGS) subsequent to March 31, 2003, Astrotech Space Operations, Inc. (Astrotech) and Space
Media, Inc. (SMI).



The Company was under contract
with NASA to support the STS-107 mission on its Columbiaorbiter. The mission utilized the Companys Research Double Module (RDM) flight asset. On February 1, 2003 the RDM was lost in the tragic STS-107 accident. The RDM was
partially covered by commercial insurance. The commercial insurance on the module was $17.7 million. The net book value of the RDM was $67.9 million. The Company has filed a claim with NASA for indemnification of its loss of the RDM. The claim was
filed for approximately $50.3 million, an amount representing the net book value of the module net of commercial insurance proceeds of $17.7 million. The Company has received the proceeds from its commercial insurance policy.



The Company is currently in discussions with NASA regarding resolution of the
pending claim for the loss of the RDM. As there can be no assurance as to the timing and outcome of the Companys claim with NASA, the Company has recorded a non-cash nonrecurring charge of approximately $50.3 million before taxes for the three
and nine months ended March 31, 2003. Upon resolution of its claim, any proceeds from NASA will be recorded in the period in which the claim is resolved.



At this time, the Company does not plan to replace the RDM. SPACEHABs Space Flight Services business unit has two additional modules and other
flight assets available to support the Companys current NASA contract. These modules and assets can also be used to support future NASA contracts.



SPACEHABs Space Flight Services business unit is continuing its operations, finalizing preparations for the STS-114 mission. SPACEHAB is providing a
cargo carrier, known as the External Stowage Platform 2, or ESP2, that will be deployed and permanently mounted to the orbiting International Space Station (ISS). The Company continues to support two additional ISS resupply missions,
STS-116 and STS-118. The Company is currently in



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negotiations with NASA for equitable adjustments on its three scheduled missions due to the launch date slippage in accordance with its
REALMS contract. The equitable adjustments available under its contract with NASA will compensate the Company for the additional costs incurred during the extended period of delay in NASAs return to flight.



Revenue



SPACEHABs Space Flight Services business unit generates revenue by providing a turnkey service that includes access to
the modules and unpressurized cargo carriers and integration and operations support to scientists and researchers responsible for the experiments and/or logistics supplies for module missions aboard the Space Shuttle. Revenue generated under the
Research and Logistics Mission Support (REALMS) Contract, currently a $240.8 million contract, and for new contract awards for which the capability to successfully complete the contract can be demonstrated at contract inception, is
recognized under the percentage-of-completion method and is being reported based on costs incurred over the period of the contract.



JE performs services under a cost-plus award and incentive-fee contract for government services that are requested and directed by NASA. JE primarily
operated under the mult-year, multi-task Flight Crew Systems Development (FCSD) Contract which was a $405.5 million multitask cost-plus award and incentive-fee contract. Revenue is recognized on this contract based on costs incurred plus
a proportionate amount of estimated fee earned. The contract commenced in May 1993 and was scheduled to conclude in September 2002. The tasks under the contract were segmented and a recompete for a portion of these tasks was begun in July 2002.
Certain of those tasks were awarded to JE under separate contracts. In August 2002, NASA exercised its option to extend portions of the original contract through December 2002 during the recompete period. In December 2002, NASA further extended the
contract through June 2003, with six one-month extensions. Three of the one-month extensions were exercised.



On February 7, 2003, the Company was notified that its bid for those portions of the FCSD contract under recompete was not accepted. The portions of the contracts under recompete were transitioned to
the successful bidders on April 1, 2003. During the next three months of the Companys fiscal year, JE will recognize revenue on the close out activities of the FCSD contract. As a result of the unsuccessful recompete, the Companys total
manpower level was reduced from approximately 570 as of February 1, 2003 to 288 as of April 1, 2003. Since the inception of the FCSD contract in 1993, JE recognized approximately $377 million of revenue and $21 million of income before interest and
taxes on all tasks associated with the contract. Two of the original seven FCSD tasks remain under new contracts with JE and are expected to generate approximately $10 million of future annual revenue.



On April 22, 2003 the Company announced the reorganization of its government
services business units to more appropriately reflect the business units strategic direction of operating in the government services sector. JE, along with Spacehab Flight Services, will be bidding on a number of the ISS contracts proposed
under the ISS Contact Consolidation Strategy Study. The contracts are expected to be awarded in October 2003.



Astrotech revenue is generated from various multi-year fixed-price contracts with satellite and launch service vehicle providers. The services and facilities Astrotech provides to its customers support
the final assembly, checkout and countdown functions associated with preparing a satellite for launch including transportation of the satellite and launch vehicle payload fairing to the launch pad. Astrotechs facilities are also used by its
customers to encapsulate the satellite in the launch vehicle, and includes a new facility to accommodate the evolved expendable launch vehicles (EELV), the newest class of launch vehicle. Revenue provided by the Astrotech payload
processing facilities is recognized ratably over the occupancy period of the satellites in the Astrotech facilities. Under the multi-year contracts for payload processing services with commercial launch vehicle providers, revenue is billed and
recognized on a quarterly basis as costs are incurred.



On April
11, 2000, SPACEHAB announced the formation of SMI, a majority-owned subsidiary intended to create proprietary space-themed content for education and commerce. In fiscal year 2000, SMI acquired The Space Store, an online retail operation,
anticipating that e-commerce could become an integral part of its Internet business. The Space Store currently offers space-related products through its website, www.spacestore.com, and a retail facility in



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Houston, Texas, near NASAs Johnson Space Center. In fiscal year 2001, SMIs focus was to develop content for STARS Academyand to pursue corporate promotion and advertising opportunities. STARS Academy is a global education program
offering students opportunities to learn about and even participate in research aboard NASAs Shuttle and the ISS. As part of Space Media, the STARS Program supported six student-designed experiments for schools in Australia, China, Israel,
Japan, Liechtenstein and the United States for launch on Space Shuttle mission STS-107. In fiscal year 2002, due to limited funding opportunities in the education industry and a struggling Internet content market, SMI reduced staffing and ended its
marketing program for the STARS Program. SMIs revenue is now generated primarily from internet sales of The Space Store.



Cost of Revenue



Costs of revenue 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 associatedwith the
cost-plus award and incentive-fee contracts are expensed as incurred by JE. 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.



RESULTS OF OPERATIONS



For the three
months ended March 31, 2003 as compared to the three months ended March 31, 2002.



Revenue.    Revenue increased by 7% to approximately $26.4 million as compared to $24.7 million for the three months ended March 31, 2003 and 2002, respectively. For the three months ended
March 31, 2003 revenue of $13.1 million was recognized from Space Flight Services primarily under the REALMS Contract with NASA and commercial customers, $10.0 million from JE primarily under the FCSD Contract, $2.6 million from Astrotech, $0.5
million from SMI, primarily from the Space Store and $0.2 million of other service revenue. In comparison, for the three months ended March 31, 2002 revenue of $12.2 million was recognized from Space Flight Services primarily under the REALMS
Contract with NASA and commercial customers, $9.8 million from JE primarily under the FCSD Contract and Configuration Management Contract (CM), $2.5 million from Astrotech, $0.2 million from SMI, primarily from the Space Store. Revenue
for SPACEHAB Flight Services increased by approximately $0.9 million. Revenue for STS-107 decreased as compared to the same period last year and was offset by the increase in revenue for missions STS-114, STS-116, and STS-118 based on cost incurred.
Revenue at Astrotech was approximately the same for the three months ended March 31, 2003 and 2002. Revenue at JE was approximately the same for the two periods ended March 31, 2003 and 2002. Revenue at SMI increased due primarily to increased Space
Store STS-107 memorabilia sales.



Costs of
Revenue.    Costs of revenue for the three months ended March 31, 2003 increased by 21% to approximately $22.1 million, as compared to $18.2 million for the prior years quarter. For the three months ended March 31,
2003, integration and operations costs of Space Flight Services for the REALMS Contract with NASA and commercial customers were $10.5 million, $9.0 million for JE, $1.2 million for Astrotech payload processing, $0.2 million for SMI and $0.2 million
related to other service revenue. Costs of revenue also includes $1.0 million of depreciation expense. In comparison, for the three months ended March 31, 2002, integration and operations costs of Space Flight Services for the REALMS Contract with
NASA and commercial customers were $6.0 million, $8.8 million for JE, $1.2 million for Astrotech payload processing, and $30,000 for SMI. Costs of revenue also includes $2.1 million of depreciation expense. The change in costs of revenue of Space
Flight Services for the REALMS Contract with NASA and commercial customers is due to increased costs of leased flight assets and increased integration and operations activities for STS-114. JEs costs were based on increased cost for the
closeout of the FCSD contract. The reduction in depreciation expense is primarily related to the change in the useful life of the Companys flight assets from 2012 to 2016 and the loss of the RDM on the Space Shuttle Columbia.





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Operating Expenses.    Operating expenses increased to approximately $65.4
million for the three months ended March 31, 2003 as compared to approximately $4.9 million for the three months ended March 31, 2002. Operating expenses include $11.9 million non-cash nonrecurring charge for impairment of goodwill at JE and a
non-cash nonrecurring charge of $50.3 million for the RDM loss. The decrease in normal operating expenses is attributable to the completion of bid and proposal efforts for the microgravity contract of $0.4 million, refocusing the efforts of SMI of
$0.3 million and elimination of $0.3 million of goodwill expenses as the result of the change in accounting standards. The Companys ongoing cost reductions initiated during the fiscal year ended June 30, 2002 have resulted in savings of
approximately $0.6 million. Facilities related costs decreased $0.2 million, depreciation expense decreased $0.2 million and compensation and benefits decreased $0.2 million.



Research and development expenses decreased slightly for the three months ended March 31, 2003 as compared to the comparable
period last year as the Company continued to emphasize its core operations and limited new investments in research and development.



Interest and Other Expense.    Interest expense was approximately $1.8 million for the three months ended March 31, 2003 and
approximately $1.4 million for the three months ended March 31, 2002. The increase was due primarily to interest on the mortgage loan payable on the Astrotech facility, of which $0.4 million interest was capitalized in conjunction with the
construction of the new facility constructed by Astrotech during the three months ended March 31, 2002.



Interest and Other Income.    Interest and other income was immaterial for the three months ended March 31, 2003 and March 31, 2002. Interest income is earned on the
Companys investments.



Income
Taxes.    The Company recorded a tax refund of $0.2 million during the three months ended March 31, 2003. Based on the Companys projected taxable status for fiscal year 2003, the Company recorded no tax expense for the
three months ended March 31, 2003, as compared to a nominal tax expense for the three months ended March 31, 2002.



Net Income/Loss.    The net loss for the three months ended March 31, 2003 was approximately $62.7 million or $5.06 per share
(basic and diluted EPS) on 12,398,775 shares as compared to a net income of $0.01 million or $0.01 and $0.00 per share (basic and diluted EPS respectively) on 11,971,906 shares and 13,308,778 shares, respectively, for the three months ended March
31, 2002.



For the nine months ended March 31,
2003 as compared to the nine months ended March 31, 2002.



Revenue.    Revenue increased 9% to approximately $81.3 million as compared to $74.7 million for the nine months ended March 31, 2003 and 2002, respectively. For the nine months ended March 31, 2003,
revenue of $39.5 million was recognized from Space Flight Services primarily under the REALMS Contract with NASA and commercial customers, $31.2 million for JE primarily under the FCSD Contract, $9.3 million from Astrotech, $0.9 million from SMI and
$0.4 million of other service revenue. In comparison, for the nine months ended March 31, 2002, revenue of $37.2 million was recognized from Space Flight Services primarily under the REALMS Contract with NASA and commercial customers, $29.9 million
from JE under the FCSD Contract, $6.8 million from Astrotech, $0.5 million for SMI and $0.3 million of other service revenue. The increase in revenue under the REALMS Contract with NASA and commercial customers is attributable to increased
revenue on STS-114, STS-116 & STS-118 based on cost incurred. The increase in revenue at Astrotech is due primarily to an increase in the number of missions completed and processed in the nine months ended March 31, 2003 as compared to the same
period last year and additional payments under its long term contracts. Revenue at JE increased due to increased project work on both the FCSD and CM contracts and reimbursement of excess facilities costs.



Costs of Revenue.    Costs of revenue for the nine
months ended March 31, 2003 increased by 14% to approximately $66.5 million, as compared to $58.6 million for the comparable period last year. For the nine months ended March 31, 2003, integration and operations costs of Space Flight Services for
the REALMS Contract with NASA and commercial customers were $28.4 million, $27.4 million for JE, $4.1 million for Astrotech payload processing, $0.4 million for SMI, and $0.5 million related to other service revenue, $5.7 million of
depreciation expense is also included in cost of revenue. For the nine months ended March 31, 2002, integration and operations costs of Space



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Flight Services for the REALMS Contract with NASA and commercial customers were $20.6 million, $26.1 million for JE, $3.1 million for
Astrotech payload processing, $0.4 million for SMI, and $0.8 million related to other service revenue. $7.6 million of depreciation expense is also included in the cost of revenue. Costs of revenue under the REALMS Contract with NASA and commercial
customers increased primarily due to increased costs of leased flight assets and increased integrations and operations work for STS-114. Astrotechs costs increased due to the increased costs of the missions added over the guaranteed contract
missions and the costs of the EELV facility. JEs costs increased due to closeout of the FCSD contract. The decrease in depreciation expense is related to the extension in the useful life of the Companys flight assets from 2012 to 2016
and the loss of the RDM in the third quarter of fiscal year 2003.



Operating Expenses.    Operating expenses increased to approximately $71.5 million for the nine months ended March 31, 2003 as compared to approximately $15.1 million for the nine months ended March 31,
2002. Operating expenses include $11.9 million non-cash nonrecurring charge for impairment of goodwill at JE and $50.3 million non-cash nonrecurring charge for the RDM loss. Normal operating expenses decreased by $5.6 million. The decrease in
operating expenses is primarily the result of the completion of bid and proposal efforts for the microgravity contract of $2.0 million, refocusing of SMI efforts of $1.4 million, and the elimination of $0.8 million of goodwill amortization
expense as a result of new accounting standards. The Companys ongoing cost reductions initiated during the fiscal year ended June 30, 2002 have resulted in savings of approximately $1.6 million. Legal and insurance costs decreased $0.3
million, facilities related costs decreased $0.4 million, depreciation expense decreased $0.5 million and compensation and benefits decreased $0.4 million.



Research and development expenses decreased by $0.2 million to $0.1 million for the nine months ended March 31, 2003 as compared to $0.3 million for the
comparable period last year as the Company continued to emphasize its core operations and limited new investments in research and development.



Interest and Other Expense.    Interest expense was approximately $5.5 million for the nine months ended March 31, 2003 and
approximately $4.2 million for the nine months ending March 31, 2002. The increase was due primarily to interest on the mortgage loan payable on the Astrotech facility. There was no interest capitalized for the nine months ended March 31, 2003 and
$1.4 million of interest was capitalized for the nine months ended March 31, 2002. Interest was capitalized in conjunction with the construction of the new facility constructed by Astrotech.



Interest and Other Income.    Interest and other
income (expense) was ($0.1) million for the nine months ended March 31, 2003 and was approximately $1.1 million for the nine months ended March 31, 2002. The Company recorded a gain of approximately $1.1 million on the sale of the Oriole
Sounding Rocket assets during the nine months ended March 31, 2002. Interest income is earned on the Companys investments.



Income Taxes.    The Company recorded a tax refund of $0.7 million in the nine months ended March 31, 2001. Based on the
Companys projected taxable status for fiscal year 2003, the Company recorded no tax expense for the nine months ended March 31, 2003, as compared to $0.1 million tax expense recorded for the nine months ended March 31, 2002.



Net Income (Loss).    The net loss for the nine
months ended March 31, 2003 was approximately $61.6 million or $5.03 per share (basic and diluted EPS) on 12,263,426 shares as compared to net loss of $2.1 million or $0.18 per share (basic and diluted EPS) on 11,817,193 shares for the nine months
ended March 31, 2002.



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. The principal uses of cash flow that affect the Companys liquidity position include both operational expenditures and debt service payments.
Management is



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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. As of March 31, 2003, amounts unused and available under this credit facility were $5.0 million.



Cash Flows From Operating Activities.    Cash provided by operations for the nine months ended
March 31, 2003 and 2002 was $23.3 million and $4.5 million, respectively. For the nine months ended March 31, 2003, the Company recorded a $50.3 million nonrecurring charge, net of accumulated depreciation and commercial insurance proceeds, related
to its loss of the RDM as the result of the Space Shuttle Columbiaaccident. The Company also recorded a non-cash charge for impairment of goodwill of $11.9 million at JE due to the current decline in JEs revenue base which the Company
expects to recoup with new contracts. The Company received $17.7 million from its commercial insurance carriers for the loss of the RDM. Deferred flight revenue decreased by $8.4 million due to the completion of the STS-107 mission and the
completion of most tasks related to the STS-114 mission. Depreciation and amortization decreased as compared to the prior year primarily as the result of the loss of the RDM module and the elimination of the amortization of goodwill as per the
requirements of Statement of Financial Accounting Standards No. 142. Accrued subcontracting services increased $3.5 million as the result of the increased in accrued cost for the STS-114 mission and lease cost for the VCC. Cash flows provided by
operating activities for the nine months ended March 31, 2002 were $4.5 million. The significant change during the nine months ended March 31, 2002 was the decrease in deferred flight revenue due primarily to completion of various tasks required
under the REALMS and related commercial contracts. Accounts payable and accrued expenses decreased due to payments made to various vendors. Accounts receivable decreased due to collections from various customers primarily under the REALMS and FCSD
contracts. The increase in depreciation and amortization is primarily the result of the completion of the Research Double Module which was completed in December 2000.



Cash Flows Used in Investing Activities.    For the nine months ended March 31, 2003 and 2002,
cash flows used for investing activities were $15.7 million and $13.3 million, respectively. For the nine months ended March 31, 2003, the Company received $0.8 million of funds from state governmental agencies relative to the construction of
its satellite processing facility. The Company received $17.7 million from its commercial insurance carriers for the loss of the RDM of which $16.5 million has been invested in U.S. Treasuries, Federal sponsored agencies and repurchase agreements
collateralized by U.S. Treasury obligations. Excess machinery and equipment was sold for $0.1 million which was offset by minor capital expenditures. In addition, cash that was restricted at June 30, 2003 has been released for its intended purpose.
For the nine months ended March 31, 2002, $11.7 million was spent on the completion of the payload processing facilities at Astrotech primarily to support the contract extensions with Boeing and Lockheed Martin. In addition, $2.3 million was spent
on various flight assets primarily the VCC. The Company received $0.8 million in cash proceeds from the sale of the Oriole sounding rocket assets and the sale of equipment to Clear Lake Industries.



Cash Flows From Financing Activities.    For the
nine months ended March 31, 2003 and 2002, cash flows (used for) provided by financing activities were ($6.0) million and $9.9 million, respectively. For the nine months ended March 31, 2003, the Company repaid $5.8 million of obligations under
various credit agreement and $0.3 million for a litigation settlement. The Company repaid $11.5 million of debt during the nine months ended March 31, 2002 and $3.1 million of the loan payments was in connection with the Astrotech financing.
The Company received $20.0 million of proceeds from its Astrotech financing. The Company received $750,000 in the form of external equity investment in SMI. See Note 9.



The Companys liquidity has been constrained over the previous two fiscal years.A significant portion of this
constraint arose from funding of new operations and assets to support future Company growth, funding a portion of the construction cost of the Astrotech Florida facility and funding of required debt repayments. In addition, the Company was committed
to capital investments to complete certain flight assets.



Beginning in the third quarter of the fiscal year 2001, management began an aggressive multi-faceted plan to improve the Companys financial position and liquidity. This plan included restructuring and repayment of certain debt
obligations.



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Under this plan, the Company undertook extensive efforts to reduce cash required for both operations and
capital investments. Additionally, the Company completed planned divesting of non-core assets. Development and construction of new assets is currently limited to those assets required to fulfill existing commitments under contracts. The Company has
no further on-going commitments to fund development or construction of any asset. The Company completed the planned restructuring of certain debt obligations and continues to focus on reducing its outstanding debt. Management completed the
implementation of the plan in the fourth quarter of fiscal year 2002.



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. As of March 31, 2003, the Company had repurchased 36,100 shares at a cost of $36,885.
The Company will continue to evaluate the stock repurchase program and the funds authorized for the program.



The Company was under contract with NASA to support the STS-107 mission on its Columbiaorbiter. The mission utilized the Companys RDM flight asset. On February 1, 2003 the RDM was lost in
the tragic STS-107 accident. The RDM was partially covered by commercial insurance. During the three months ended March 31, 2003, the Company received $17.7 million from commercial insurers. The Company does not plan on replacing the RDM. The
Company has two additional modules available to support the Companys current NASA contracts. The Company has invested the majority of the commercial insurance proceeds in U.S. Treasuries, Federal sponsored agencies and repurchase agreements
collateralized by U.S. Treasuries in order to safeguard capital and provide ready liquidity. The Company has filed a claim with NASA for indemnification of its loss of the RDM. The claim was filed for $50.3 million, an amount representing the net
book value of the module net of commercial insurance proceeds of $17.7 million. The Company is currently in discussions with NASA regarding resolution of the pending claim for the loss of the RDM.



Management continues to focus its efforts on improving the overall liquidity
of the Company through reducing operating expenses and limiting cash commitments for future capital investments and new asset development. The Company has sufficient liquidity to meet its short term needs.

Contractual Obligations



|Contractual Obligations                                          |  | At March 31, 2003 |        | Remaining In Fiscal Year 2003 |   | Fiscal Year 2004 |  | Fiscal Year 2005 |       | Fiscal Year 2006 |   | Thereafter
|---------------------------------------------------------------- |  | ----------------- | ------ | ----------------------------- | - | ---------------- |  | ---------------- | ----- | ---------------- | - | ----------
|Long-term Debt                                                   |  | $                 | 65,228 |                               |   | 650              |  |                  | 1,340 |                  |   |          
|Mortgage Loan Payable                                            |  |                   | 17,603 |                               |   | 526              |  |                  | 2,218 |                  |   | 2,412     
|Capital Leases                                                   |  |                   | 304    |                               |   | 25               |  |                  | 212   |                  |   | 67        
|Operating Leases, Net                                            |  |                   | 13,997 |                               |   | 1,417            |  |                  | 4,269 |                  |   | 3,403     
|                                                                 |  |                   |        |                               |   |                  |  |                  |       |                  |   |           
|Total Contractual Cash Obligations (excluding interest payments) |  | $                 | 97,132 |                               | $ | 2,618            |  | $                | 8,039 |                  | $ | 5,882     
|                                                                 |  |                   |        |                               |   |                  |  |                  |       |                  |   |           



Recent Accounting
Pronouncements



In June 2001, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 142, Accounting for Goodwill and Other Intangible Assets. The statement eliminates the requirement to amortize costs in excess of net assets
acquired (goodwill) under the purchase method of accounting, and sets forth a new methodology for periodically assessing and, if warranted, recording impairment of goodwill. The Company adopted the new rules effective July 1, 2002. The elimination
of amortization of goodwill is expected to increase earnings by approximately $1.0 million for the fiscal year. The Company will continue to analyze and



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assess the impairment provisions of the new statement on an ongoing basis. As of the period ended March 31, 2003, the Company recorded an
impairment write down of approximately $11.9 million on goodwill attributable to its JE subsidiary.



In December 2002, the FASB issued 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 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. The Company has adopted the interim disclosure provisions for its financial reports for the quarter ended March 31, 2003.



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,
2002.



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 disclosure controls and procedures within 90 days of the filing date of 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 were no significant changes in the Companys internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.



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 Securities and Exchange Commission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.



PART IIOTHER INFORMATION



ITEM 1.    LEGAL PROCEEDINGS



Pursuant to a stock purchase agreement entered into as of September 27, 2001, escottVentures II, LLC (ESV), of Melbourne, Florida, purchased 5,914,826 newly issued shares of SMIs Series A redeemable, convertible
preferred stock for $750,000. On June 21, 2002, ESV filed Case Number 1:02CV01236 in the U.S. District Court for the District of Columbia against Space Media, Inc., SPACEHAB, Inc., Shelley A. Harrison and Julia A. Pulzone (collectively,
Defendants). This suit, relating to ESVs investment in Space Media, Inc., sought rescission of the stock purchase agreement and return of its $750,000 investment, plus unspecified expenses, consequential damages, exemplary and
punitive damages, prejudgment interest, and costs and disbursements, including attorney and expert fees. The Defendants and ESV settled the suit through mediation. A stipulation and order of dismissal was filed with the Court by the parties on
January 22, 2003, following the payment of cash and issuance of restricted shares of SPACEHAB common stock to ESV. ESV is no longer a shareholder of SMI.



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ITEM
2.    CHANGES IN SECURITIES



NONE



ITEM
3.    DEFAULTS UPON SENIOR SECURITIES



NONE



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



NONE



ITEM 5.    OTHER INFORMATION



NONE



ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K



| |  | a) |  | 99.1 Certification pursuant to 18 U.S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
| |  | -- |  | -----------------------------------------------------------------------------------------------------------------------------
|
| |  |    |  | 99.2 Certification pursuant to 18 U.S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
|
| |  |    |  | 10.119 Employment and Non-Interference Agreement, dated as of April 1, 2003, between the Company and Michael E.
Kearney.     
|
| |  | b) |  | Reports on Form 8-K.                                                                                                         
|
| |  |    |  | The Companys earnings release for the period ended March 31, 2003 was filed on Form 8-K on May 9,
2003.                     















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Signature



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



| |  |                    |  |  |  | SPACEHAB, INCORPORATED
| |  | ------------------ |  |  |  | ----------------------
|
| |  | Date: May 14, 2003 |  |  |  |                       
| |  |                    |  |  |  |                       
| |  |                    |  | 
|
| |  |                    |  |  |  |                       
| |  |                    |  |  |  |                       



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CERTIFICATIONS



I, Michael E. Kearney,
certify that:



| | 1. |  | I have reviewed this report on Form 10-Q of SPACEHAB, Incorporated;
| | -- |  | -------------------------------------------------------------------



| | 2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. |  | Evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report
(the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c. |  | Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent function):
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | d. |  | All significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report the financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | e. |  | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| | 6. |  | The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|
|
|
|



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CERTIFICATIONS



I, Julia A. Pulzone,
certify that:



| | 1. |  | I have reviewed this report on Form 10-Q of SPACEHAB, Incorporated;
| | -- |  | -------------------------------------------------------------------



| | 2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. |  | Evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report
(the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c. |  | Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent function):
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | All significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report the financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. |  | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| | 6. |  | The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|
|
|
|



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