10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended December 31, 2004

OR

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

For the transition period from                      to                     

Commission File No. 0-27206

SPACEHAB, Incorporated

(Exact name of registrant as specified in this charter)

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

12130 Highway 3, Building 1

Webster, Texas 77598-1504

(713) 558-5000

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

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

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

Yes  þ    No  ¨

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

Yes  ¨    No  þ

SPACEHAB, INCORPORATED AND SUBSIDIARIES

DECEMBER 31, 2004 QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

		Page
DEFINITIONS		2
PART 1 -	FINANCIAL INFORMATION
Item 1.	Unaudited Condensed Consolidated Financial Statements	3
	Unaudited Condensed Consolidated Balance Sheets as of December 31, 2004 and June 30, 2004	3
	Unaudited Condensed Consolidated Statements of Operations for the three and six months ended December 31, 2004 and 2003	4
	Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2004 and 2003	5
	Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	26
Item 4.	Controls and Procedures	26
PART II -	OTHER INFORMATION
Item 1.	Legal Proceedings	27
Item 4.	Submission of Matters to a Vote of Security Holders	28
Item 6.	Exhibits	28

1

DEFINITIONS

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

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

2

PART 1: FINANCIAL INFORMATION

ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SPACEHAB, INCORPORATED AND SUBSIDIARIES

Unaudited Condensed Consolidated Balance Sheets

(In thousands, except share data)

	December 31, 2004 (unaudited)			June 30, 2004
ASSETS
Cash and cash equivalents	$	—		$	506
Restricted cash		558			430
Short-term investments		6,056			5,037
Restricted short-term investments		—			1,604
Accounts receivable, net		8,109			7,878
Prepaid expenses and other current assets		957			495
Total current assets		15,680			15,950
Property and equipment, net of accumulated depreciation and amortization of $52,332 and $49,755, respectively		77,598			79,600
Deferred financing costs, net		1,019			1,163
Other assets, net		2,356			3,212
Total assets	$	96,653		$	99,925
LIABILITIES AND STOCKHOLDERS’ EQUITY
Revolving loan payable	$	—		$	1,445
Mortgage loan payable, current portion		1,946			1,946
Accounts payable		2,009			2,424
Accounts payable-EADS		2,215			3,262
Accrued interest		1,098			1,108
Accrued expenses		2,345			3,600
Accrued subcontracting services		2,991			2,176
Deferred revenue, current portion		2,643			6,340
Total current liabilities		15,247			22,301
Accrued contract cost and other		264			372
Deferred revenue, net of current portion		—			900
Mortgage loan payable, net of current portion		2,733			3,692
Convertible subordinated notes payable		63,250			63,250
Total liabilities		81,494			90,515
Commitments and contingencies
Stockholders’ equity
Preferred Stock, no par value, convertible, 2,500,000 shares authorized, 1,333,334 shares issued and outstanding, (liquidation preference of $12,000)		11,892			11,892
Common stock, no par value, 30,000,000 shares authorized, 12,625,928 and 12,688,062 shares issued, respectively		83,827			83,751
Less treasury stock, 116,100 and 116,100 shares, respectively		(117	)		(117	)
Unrealized loss on available-for-sale securities		(38	)		—
Additional paid-in capital		16			16
Accumulated deficit		(80,421	)		(86,132	)
Total stockholders’ equity		15,159			9,410
Total liabilities and stockholders’ equity	$	96,653		$	99,925

See accompanying notes to unaudited condensed consolidated financial statements.

3

SPACEHAB, INCORPORATED AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Operations

(In thousands, except share data)

	Three Months Ended December 31,						Six Months Ended December 31,
	2004			2003			2004			2003
Revenue	$	13,138		$	32,816		$	26,171		$	51,666
Costs of revenue		10,721			12,830			21,507			26,357
Gross profit		2,417			19,986			4,664			25,309
Operating expenses
Selling, general and administrative		2,269			3,403			4,235			6,335
Research and development		8			2			16			2
Goodwill impairment		—			8,274			—			8,274
Impairment of investment in Guigne		—			1,800			—			1,800
Recovery of nonrecurring charge, loss of Research Double Module		—			—			(8,244	)		—
Total operating expenses		2,277			13,479			(3,993	)		16,411
Income from operations		140			6,507			8,657			8,898
Interest expense		(1,428	)		(2,859	)		(2,886	)		(4,599	)
Interest and other income, net		39			42			81			75
Income (loss) before income taxes		(1,249	)		3,690			5,852			4,374
Income tax expense		—			(222	)		(142	)		(240	)
Net income (loss)	$	(1,249	)	$	3,468		$	5,710		$	4,134
Income (loss) per share:
Net income (loss) per share – basic	$	(0.10	)	$	0.28		$	0.45		$	0.33
Shares used in computing net income (loss) per share – basic		12,609,863			12,401,291			12,592,044			12,386,123
Net income (loss) per share – diluted	$	(0.10	)	$	0.25		$	0.40		$	0.30
Shares used in computing net income (loss) per share – diluted		12,609,863			13,897,126			14,200,519			13,810,998

See accompanying notes to unaudited condensed consolidated financial statements.

4

SPACEHAB, INCORPORATED AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Cash Flows

(In thousands)

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

See accompanying notes to unaudited condensed consolidated financial statements.

5

SPACEHAB, INCORPORATED AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

1. The Company

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

• Access to space through the use of research and logistics modules and carriers

• Expertise on space architectures, habitability and occupational challenges of space

• Facility operations and spacecraft processing services

• Engineering, analysis, and space payload transportation services

• Program integration and control

• Space equipment and product design and development

• Space media, education, and retail goods

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

The Company sells research and logistics services to NASA and commercial customers who want to use the modules and carriers in space. In addition to our flight assets, we offer a full range of ground-based pre- and post-flight experiment and payload processing services and in-flight operations support. As of December 31, 2004, SPACEHAB modules and ICCs have flown on 18 missions on the space shuttle, including 12 logistics missions (five to the ISS and seven to the Russian space station Mir).

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

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

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

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2. Basis of Presentation

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting of only normal recurring accruals, except as discussed elsewhere within, necessary for a fair presentation of the consolidated financial position of SPACEHAB, Incorporated and subsidiaries (“SPACEHAB” or the “Company”) as of December 31, 2004, and the results of its operations and cash flows for the periods ended December 31, 2004 and 2003. However, the condensed consolidated financial statements are unaudited and do not include all related footnote disclosures. Certain amounts presented for prior periods have been reclassified to conform with the fiscal year 2005 presentation.

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

The Company’s cash and short-term investments were approximately $6.6 million, of which $0.6 million is restricted, as of December 31, 2004. Management believes that the Company has sufficient liquidity, including cash and short-term investments, advances available under the Company’s revolving credit facility, and cash anticipated or expected to be generated from operations to fund ongoing operations beyond the remainder of this fiscal year. We also expect to utilize existing cash and cash anticipated from future operations, to support strategies for new business initiatives and reduce long-term debt.

3. Earnings per Share

The following are reconciliations of the numerators and denominators of the basic and diluted earnings per share (“EPS”) computations for the three and six month periods ended December 31, 2004 and 2003 (in thousands, except per share data):

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

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

Convertible notes payable outstanding as of December 31, 2004, convertible into 4,642,202 shares of common stock at $13.625 per share and due October 2007, were not included in the computation of diluted EPS for the three and six months ended December 31, 2004 and 2003, as the conversion price of the convertible notes payable per share were greater than the average market price of the common shares during the periods.

Options to purchase 1,383,559 shares of common stock, at prices ranging from $1.75 to $11.75 per share, were outstanding at December 31, 2004 but were not included in diluted EPS for the three months ended December 31, 2004 as they were anti-dilutive to the Company’s net loss. The options expire between July 2, 2005 and August 16, 2014.

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

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

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

4. Revenue Recognition

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

8

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

A Summary of Revenue Recognition Methods Follows:

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

For the three and six months ended December 31, 2004, the Company recognized revenue of approximately $0.3 million and $2.1 million, respectively under the Japanese Experiment Thermal Incubator Service (“JETIS”) contract with the Mitsubishi Corporation, representing the Japanese Aerospace Exploration Agency (“JAXA”), that was entered into in 2000. Subsequent to the suspension of the space shuttle flights and destruction of SPACEHAB’s RDM, we contracted for construction of certain space research equipment, for research space aboard the ISS, and for up to three Russian Progress cargo missions with V.J.F. Russian Consulting who is representing RSC Energia, a major Russian aerospace manufacturer and mission operator. Revenue on this contract is recognized on the percentage-of-completion method as costs are incurred.

The ReALMS contract expired January 31, 2004 and support for STS-121, 116, and 118 will continue under a subcontract with Lockheed Martin Corporation (“Lockheed Martin”), effective February 1, 2004. SPACEHAB is currently providing these services under letter contract and is in final contract negotiations with Lockheed Martin for this new contract. Pending finalization of contract negotiations with Lockheed Martin, the Company is providing asset maintenance and continuing services in anticipation of the contractual missions under letter agreements, generally entered into on a month-to-month basis. Revenues for the Lockheed Martin agreement are being accounted for under the percentage-of-completion method based on costs incurred over the period of the agreement.

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

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5. Statements of Cash Flows - Supplemental Information

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

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

6. Credit Facilities

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

On August 30, 2001 our Astrotech subsidiary completed a $20.0 million financing of its Spacecraft Processing Facility (“SPF”) expansion project in Titusville, Florida (the “term loan”) with a financial institution. The proceeds of this financing were used to complete the construction of the SPF and supporting infrastructure. The term loan was collateralized primarily by the multi-year payload processing contracts with The Boeing Company (“Boeing”) and Lockheed Martin and by the building. The net book value of the building as of December 31, 2004 was $37.4 million. Interest accrued on the outstanding principal balance at a LIBOR-based rate, adjusted quarterly. The term loan was scheduled to mature on January 15, 2011. The term loan was converted from a construction loan to a term loan on December 31, 2001. Amortization of term loan principal began on January 15, 2002 on a quarterly basis through the maturity date.

On October 1, 2003 Astrotech was notified by Boeing that it was exercising its termination rights with regards to its financial guarantees under the contract agreement with Astrotech for payload processing support services for the Delta launch vehicle program. Boeing indicated that the decision to terminate its guarantees for future Astrotech services was based on the downturn of the commercial expendable launch market rather than performance related considerations. Astrotech was in full compliance with the contract terms at the time of the termination. Under the contract provision related to termination of its financial guarantees, Boeing paid Astrotech $17.5 million representing consideration of future contract payments previously used to collateralize the obligation. On December 31, 2003 the Company repaid $9.5 million of principal on the term loan.

In conjunction with the original financing, a swap agreement was required to be entered into to provide for a fixed rate of interest under the term loan commitment beginning January 15, 2002. The fixed rate of interest on the outstanding principal balance was 5.62% plus 225 basis points. The objective of the swap was to eliminate the variability of cash flows in the interest payments for the total amount of the variable rate debt, the sole source of which are changes in the USD-LIBOR-BBA interest rate. Due to the repayment of the Boeing portion of the term loan and the subsequent amendment of the loan agreement, the swap was no longer effective as a hedge. The unrealized loss in other comprehensive loss for the portion of the debt that was repaid in December 2003 was recorded as interest expense in the period ended December 31, 2003 in the amount of $0.8 million. The Company recognized interest expense of $0.4 million for the unamortized debt placement costs related to the debt repayment in the period ended December 31, 2003. The Company recognized as additional interest expense the unamortized debt placement costs of $0.2 million and the balance of the deferred loss on the swap in other comprehensive loss of $0.5 million in the third quarter of fiscal year 2004 in connection with the amendment of the loan agreement.

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

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

7. Segment Information

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

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

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

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

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

8. Stock – Based Compensation

In December 2002 the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of SFAS No. 123.” This statement amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board (“APB”) Opinion No. 25 and related interpretations. Accordingly, compensation expense for stock options is measured as the excess, if any, of the fair market value of the Company’s stock at the date of the grant over the exercise price of the related option.

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

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

9. Stock Repurchase

On March 25, 2003 the Board of Directors authorized the Company to repurchase up to $1.0 million of the Company’s outstanding common stock at market prices. Any purchases under the Company’s stock repurchase program may be made from time to time, in the open market, through block trades or otherwise in accordance with applicable regulations of the Securities and Exchange Commission (“SEC”). For the three and six months ended December 31, 2004, the Company did not repurchase any shares. As of December 31, 2004, the Company had repurchased 116,100 shares at a cost of $117,320 under the program.

10. Related Party Transaction

The Company engaged in certain transactions with directors, executive officers, shareholders, and certain former officers during the three months ended December 31, 2004. Following is a description of these transactions:

EADS Space Transportation

Dr. Graul, a member of SPACEHAB’s Board of Directors, is the Executive Vice President for EADS Space Transportation.

EADS provides unpressurized payload and integration efforts to SPACEHAB on a fixed-price basis in addition to providing engineering services as required. For the three months ended December 31, 2004 and 2003, EADS’s payload and integration services included in cost of revenue were approximately $2.9 million and $2.0 million, respectively.

V.J.F. Russian Consulting

On January 30, 2004 the Company entered into a subcontract agreement with V.J.F. Russian Consulting. The president of V.J.F. Russian Consulting, Vladimir Fishel, is a former Vice President of SPACEHAB who at the time of entering into a part-time employment agreement for other consulting activities was receiving severance payments from the Company on a part-time employment arrangement for other consulting activities. The services being provided under the subcontract agreement (valued at $2.6 million) is in support of a contract that SPACEHAB has with the Mitsubishi Corporation in support of JAXA. The amount paid for the three months ended December 31, 2004 was $0.1 million.

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

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

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

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

Total commitments under the consulting agreement are $0.4 million, of which $0.1 million was paid in the three months ended December 31, 2004.

11. Recent Accounting Pronouncement

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

12. Subsequent Events

Bank Credit Facility. On February 11, 2005 the Company entered into a revolving credit facility with a bank providing for loans up to $5.0 million secured by the Company’s accounts receivable. Funds available under the revolving credit facility are limited to 80% of eligible accounts receivable and the Company is subject to various financial and other covenants including a minimum tangible net worth covenant, a cash flow coverage covenant, and a secured debt coverage covenant.

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

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

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

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

OVERVIEW

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

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

We believe the impacts of this vision will materialize over time, and SPACEHAB management will continue to align its business direction to remain a constructive force in the human spaceflight program. In the long term, management believes that the Company’s core competencies offer opportunities to continue to provide high-value services as well as to design, build, and operate assets that could support initiatives beyond low earth orbit. SPACEHAB plans to pursue these new opportunities aggressively. In the near term, SPACEHAB’s primary objective is to continue providing services to NASA and the space community in support of the space shuttle and ISS programs. Even with the renewed vision, the Company expects that the space shuttle and ISS will remain an integral part of the human spaceflight program through at least 2010. SPACEHAB is currently supporting four of the next six scheduled space shuttle flights and is pursuing additional missions that will be important for completing the final assembly and beginning operation of the ISS. In January 2005 SPACEHAB received authorization to proceed on integration and operations activities for the STS-116 mission currently manifested for February 2006. In addition, the Company was authorized new contract work to add a deployable stowage platform to STS-118 scheduled to launch in July 2006 that will hold spare parts on the International Space Station.

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

During the six months ended December 31, 2004, the SFS Space Commerce Development group was awarded a six-month NASA study contract valued at approximately $1.0 million to support the space agency’s new exploration initiatives. As one of a handful of the proposals selected from the multitude submitted, SPACEHAB will define concepts for accomplishing human lunar exploration with a focus on innovative solutions and commercial

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

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

Business Segments

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

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

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

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

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

• Congress’ funding for NASA and the allocation of that funding to ISS operations and space shuttle cargo missions

• The return to flight of the U.S. Space Shuttle

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

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

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

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

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

• Our ability to control our capital expenditures, which primarily are limited to maintenance and safety, environmental and reliability projects, and other costs through disciplined management and safe, efficient operations

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

SPACEHAB Government Services, Inc. expands SPACEHAB’s core business of supporting people living and working in space. Specifically, SGS has proven capabilities supporting the Government in the areas of large-scale configuration and data management programs such as the ISS; specialized hardware design, development, and fabrication; low- to high-fidelity mockup design and construction; and safety and quality support services. This business unit offers a wide array of products and services in these varied fields and brings over thirty years of advanced ideas and solid execution of these innovations to its customers. SGS is currently under contract to provide configuration management services within the Program Integration and Control (“PI&C”) contract of which ARES Corporation is the prime contractor.

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

• Continuation through 2008 of our PI&C contract with the ISS Program

• Our ability to maintain small business qualification under NASA contracting rules

• Our ability to control costs within our budget commitments

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

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

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

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

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

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

Liquidity. As of December 31, 2004 we had cash on hand and in short-term investments of $6.6 million. Our $5.0 million revolving credit facility had a balance drawn of $0.0 million as of December 31, 2004. Our ability to maintain sufficient liquidity in the future will depend on a number of factors including our ability to acquire future

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business, control our costs and manage capital expenditures, the return to flight of the space shuttle, and the continued activity in the commercial and governmental satellite launch industry.

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

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

Revenue

The Company’s revenue for the six months ended December 31, 2004 and 2003 was generated primarily from the ReALMS contract, Lockheed Martin letter contract, and contracts with related commercial customers in the SFS segment; the remaining contracts under the Flight Crew Systems Development (“FCSD”) contract and the PI&C contract in the SGS segment; and its contract with Lockheed Martin in the Astrotech segment and other commercial satellite providers. Revenue for SMI was immaterial for the six months ended December 31, 2004 and 2003. Astrotech recognized scheduled idle time at its facilities during the six months ended December 31, 2004, recognizing revenue primarily from the pro-rata guarantee under its contract with Lockheed Martin. Also, during the period, there were launch delays that affected planned revenue that is expected to materialize in the upcoming months.

SPACEHAB’s SFS business segment is supporting NASA’s return-to-flight activities and is continuing its operations in preparation for shuttle missions including STS-114, 121, 116, and 118 (in order of their anticipated flight sequence). SFS is preparing a cargo carrier for STS-114, the External Stowage Platform 2 (“ESP2”), that will be deployed and permanently mounted to the ISS. SPACEHAB contracted directly with NASA’s prime ISS contractor, Boeing, for the STS-114 mission. For STS-121, a new mission added to the NASA ReALMS contract during the period ended December 31, 2003, SPACEHAB is scheduled to provide its non-deployable unpressurized carrier to NASA for transport of several critical ISS Orbital Replacement Unit (“ORU”) spares. For both STS-116 and 118, missions previously placed under ReALMS, SPACEHAB is scheduled to provide its pressurized single module and its unpressurized non-deployable carrier for transport of critical cargo and ORUs to and from the ISS. The Company has successfully completed negotiations with Boeing and Lockheed Martin for the respective contract equitable adjustments required to continue uninterrupted support to ongoing STS-114, 121, 116 and 118 mission preparation activities during the shuttle down period following the Columbia tragedy. As previously described, the ReALMS contract expired January 31, 2004 and support for missions STS-121, 116 and 118 is continuing under a subcontract agreement to Lockheed Martin, effective February 1, 2004. SPACEHAB is currently providing these services under a letter contract and is in final contract negotiations with Lockheed Martin for this new contract. Additionally, after approximately April 15, 2004, SFS no longer is subcontracting its module mission integration, operations and sustaining engineering technical support to Boeing. Most module mission tasks previously performed by Boeing personnel are now being performed by SPACEHAB’s SFS personnel and selected NASA cargo integration tasks on SPACEHAB module missions are now being performed by Lockheed Martin as a part of their CMC with NASA. This decision enables SFS to continue to provide services to NASA and is consistent with the direction of the ISS Program Office.

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In January 2004 the Company initiated activity under the JETIS contract with the Mitsubishi Corporation, representing JAXA, that was entered into in 2000 and originally scheduled to fly aboard SPACEHAB’s RDM. Subsequent to the suspension of the space shuttle flights and destruction of SPACEHAB’s RDM, the Company contracted for construction of certain space research equipment and for research space aboard the ISS and up to three Russian Progress cargo missions with V.J.F. Russian Consulting, representing RSC Energia, a major Russian aerospace manufacturer and mission operator. The first experiment was successfully launched on the Russian Progress spacecraft on August 11, 2004.

During the three and six months ended December 31, 2004, deferred revenue decreased by $1.6 million and $4.6 million, respectively, as the Company recognized revenue on contracts where milestone payments had been received in prior periods. Management expects further reduction of deferred revenue through the remainder of the next fiscal year which will result in revenue recognition on contracts for which the related cash was received in a prior period.

Costs of Revenue

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

Non Recurring Charge

On February 1, 2003 the Company’s RDM was lost in the STS-107 tragedy. The net book value of the RDM was $67.9 million, which, net of insurance proceeds of $17.7 million, was recognized as a loss in the third quarter of fiscal year 2003. The $8.0 million plus interest of $0.2 million paid by NASA as indemnification for the Company’s loss of the RDM is recognized as a recovery of previously recognized loss in the quarter ended September 30, 2004. At this time the Company does not plan to replace the RDM. SPACEHAB’s SFS business segment has two additional modules and other flight assets available to support the Company’s current NASA requirements. These modules and assets can also be used to support future NASA requirements. Based on public statements made by NASA, the Company believes the shuttle will return to flight; however, that return is currently expected to be no earlier than May 2005.

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RESULTS OF OPERATIONS

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

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

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

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

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

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

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

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

• Increase in revenue from Concept Exploration and Refinement (“CE&R”) contract of $0.5 million that was started in the first quarter of fiscal year 2005

• Other contract revenue decrease of $1.8 million, mainly due to the cancellation of the RDM’s planned second mission under the ReALMS contract

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

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

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

The decrease in revenue at the SGS business segment is primarily due to the closeout of the Stowage, Engineering and Decal Contract (“SEDC”) and Configuration Management (“CM”) contract in December 2003 partially offset by the PI&C contract which started in January 2004. The following summarizes the significant items:

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

• Other contract revenue decrease of $0.3 million

• Revenue increase of $1.3 million under the PI&C contract

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

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

	December 31, 2004		December 31, 2003		Dollar Change			Percent Change
SPACEHAB Flight Services	$	7.3	$	8.1	$	(0.8	)	(10	%)
Astrotech Space Operations		2.1		2.0		0.1		5	%
SPACEHAB Government Services		1.2		2.6		(1.4	)	(54	%)
Space Media		0.1		0.1		—		0	%
	$	10.7	$	12.8	$	(2.1	)	(16	%)

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

• Decrease in costs of revenue for shuttle related mission work performed by Boeing of $4.1 million due to subcontract termination

• Increase in costs of revenue for shuttle related mission work performed by EADS of $2.2 million due to the scheduled launch of STS-114 in May 2005

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

• Other costs of revenue decreases of $0.1 million

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

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

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

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

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

Operating Expenses. Operating expenses decreased to $2.3 million for the three months ended December 31, 2004 as compared to approximately $13.5 million for the three months ended December 31, 2003. The primary factors causing this decrease are the Company’s recording a goodwill write-down of $8.3 million and a asset impairment of $1.8 million for its investment in Guigne during the quarter ended December 31, 2003. Additionally, operating expenses are lower in the quarter ended December 31, 2004 compared to last year’s quarter due to the Company’s ongoing cost reduction efforts and staffing reductions in selling, general and administrative expenses. Research and development expenses were immaterial for the three months ended December 31, 2004 and 2003 as the Company continued to emphasize utilizing its existing asset base and limiting new investments in research and development. In the three months ended December 31, 2004, the Company recognized legal expenses of $0.3 million relating to its claims against NASA for loss of the RDM and response to Lloyd’s complaint regarding its payment of insurance proceeds on the accident.

Interest Expense. Interest expense was approximately $1.4 million for the three months ended December 31, 2004 as compared to approximately $2.9 million for the three months ended December 31, 2003. The decrease in interest expense is primarily due to the loss of hedge accounting on a portion of the interest rate swap for the mortgage loan resulting in the expensing of $0.8 million of unrealized losses previously in other comprehensive loss upon repayment of $9.5 million of the mortgage loan, as well as the acceleration of $0.4 million of debt placement costs

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

Interest and Other Income. Interest and other income was immaterial for the three months ended December 31, 2004 and December 31, 2003. Interest income is earned on the Company’s short-term investments.

Income Taxes. Based on the Company’s projected effective tax rate for fiscal year 2005, the Company recorded no tax expense for the three months ended December 31, 2004 as compared to a minimal tax expense of $0.2 million during the three months ended December 31, 2003.

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

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

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

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

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

• Decrease in ReALMS revenue of $19.2 million in the six months ended December 31, 2004 compared to the six months ended December 31, 2003 due to the termination of the ReALMS contract in January 2004

• Increase in Lockheed Martin contract revenue which replaced the ReALMS contract in February 2004, of $11.6 million in the current period

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

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

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

• Other contract revenue decrease of $2.8 million, mainly due to the cancellation of the RDM’s planned second mission under the ReALMS contract

The decrease of revenue at the Astrotech business unit is primarily due to Boeing’s termination of its contractually fixed guarantee payments to ASO and the one time payment in the amount of $17.5 million. During the six months ended December 31, 2004, Astrotech underwent scheduled downtime between launches recognizing contractually guaranteed revenues of $1.7 million and $0.6 million from missions that began in fourth quarter of fiscal year 2004

22

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

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

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

• Other contract revenue decrease of $0.3 million due to less contract activity

• Revenue increase of $2.7 million due to the PI&C contract

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

	December 31, 2004		December 31, 2003		Dollar Change			Percent Change
SPACEHAB Flight Services	$	14.9	$	16.9	$	(2.0	)	(12	%)
Astrotech		3.9		3.6		0.3		8	%
SPACEHAB Government Services		2.5		5.7		(3.2	)	(56	%)
Space Media		0.2		0.2		—		0	%
	$	21.5	$	26.4	$	(4.9	)	(19	%)

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

• Decrease in ReALMS costs of revenue of $12.0 million from December 31, 2003 to December 31, 2004 due to the ReALMS contract closeout

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

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

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

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

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

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

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

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

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

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

23

legal expenses of $0.5 million relating to its claims against NASA for loss of the RDM and response to Lloyd’s complaint regarding its payment of insurance proceeds on the accident.

Interest Expense. Interest expense was approximately $2.9 million for the six months ended December 31, 2004 as compared to approximately $4.6 million for the six months ended December 31, 2003. The decrease in interest expense is primarily due to the loss of hedge accounting on a portion of the interest rate swap for the mortgage loan resulting in the expensing of $0.8 million of unrealized losses previously in other comprehensive loss upon repayment of $9.5 million of the mortgage loan, as well as the acceleration of $0.4 million of debt placement costs associated with the repayment for the six months ended December 31, 2003. Due to the $9.5 million payment on the mortgage loan and the subsequent lower interest rate (5.5%), the interest expense on the loan is substantially less ($0.5 million) in the six months ended December 31, 2004 compared to the six months ended December 31, 2003.

Interest and Other Income. Interest and other income was immaterial for the six months ended December 31, 2004 and December 31, 2003. Interest income is earned on the Company’s short-term investments.

Income Taxes. Based on the Company’s projected effective tax rate for fiscal year 2004, the Company recorded a tax expense of $0.1 million for the six months ended December 31, 2004 as compared to a tax expense of $0.2 million during the six months ended December 31, 2003.

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

Liquidity and Capital Resources

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

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

The Company currently maintains a working capital line of credit facility totaling $5.0 million in order to ensure appropriate levels of liquidity. The term of this credit facility is through August 28, 2005. Covenants include a liquidity ratio and a limited pledge of $5.6 million of the Company’s investment account. The restriction on the Company’s investment balance is limited to 111% of the Company’s borrowings on the line of credit. As of December 31, 2004, amounts unused and available under this credit facility were $5.0 million. This credit facility was replaced in February 2005 with a new revolving credit facility from another financial institution. The new revolving credit facility provides for loans up to $5.0 million secured by the Company’s accounts receivable and is subject to various financial and other covenants, including a minimum tangible net worth covenant, a cash flow covenant, and a secured debt coverage covenant.

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

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

24

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

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

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

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

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

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

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

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

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

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

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

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

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

On March 25, 2003 the Board of Directors authorized the Company to repurchase up to $1.0 million of the Company’s outstanding common stock at market prices. Any purchases under the Company’s stock repurchase program may be made from time to time, in the open market, through block trades or otherwise in accordance with applicable regulations of the SEC. As of December 31, 2004, the Company had repurchased 116,100 shares at a cost

25

of $117,320 under the program. The Company will continue to evaluate the stock repurchase program and the funds authorized for the program.

Management continues to focus its efforts on improving the overall liquidity of the Company through identifying new business opportunities within the areas of the Company’s core competencies, reducing operating expenses, and limiting cash commitments for future capital investments and new asset development. SGS was pursuing significant new contracts to provide services for the ISS. On November 5, 2003 NASA notified the Company that it was not awarded the ISS Mission Integration contract. Additionally, the Boeing team’s bid for the Cargo Mission contract with NASA, of which SGS was a subcontractor, was not selected for contract award. As the result of the loss of these contract awards, the Company has made significant adjustments to its staffing and cost base structure during 2003. The Company reduced staffing by 67 employees in the quarter ended December 31, 2003 as a result of NASA’s award decisions. On October 1, 2003 the Company announced that it would close its corporate office in Washington, D.C. by December 31, 2003 and consolidate those operations into its headquarters in Houston, Texas. The Company took these actions as part of its continuing efforts to further reduce operating expenses and improve profitability. The Company subleased its Washington, D.C. facility for the remaining lease period which is under lease through May 31, 2006. The Company has continued to restrict new capital investment and new asset development, limiting projects to those required to support current contracts and facility maintenance. Additionally, management continues to evaluate operating expenses in an effort to reduce or eliminate costs not required to effectively operate the Company.

The Company’s cash and short-term investments were approximately $6.6 million as of December 31, 2004. Management believes that the Company has sufficient liquidity, including cash and short-term investments, advances available under the Company’s revolving credit facility, and cash anticipated or expected to be generated from operations to fund ongoing operations beyond the remainder of this fiscal year. The Company also expects to utilize existing cash, cash anticipated from future operations to support strategies for new business initiatives and reduce long-term debt.

The Company’s contractual obligations as of December 31, 2004 are as follows (in thousands):

Contractual Obligations	At December 31, 2004		Remaining in Fiscal Year 2005		Fiscal Year 2006		Fiscal Year 2007		Fiscal Year 2008		Fiscal Year 2009		Thereafter
Long-term Debt	$	63,250	$	—	$	—	$	—	$	63,250	$	—	$	—
Mortgage Loan Payable		4,679		986		2,057		1,636		—		—		—
V.J.F. Russian Consultant Agreement		255		90		165		—		—		—		—
V.J.F. Russian Subcontract		1,070		670		400		—		—		—		—
Operating leases1		5,946		454		1,348		760		441		91		2,852
Total Contractual Cash Obligations2	$	75,200	$	2,200	$	3,970	$	2,396	$	63,691	$	91	$	2,852

(excluding interest payments)

¹ - For the remainder of fiscal year 2005, the Company expects to receive net payments of $0.3 million for subleases. For fiscal years 2006, 2007, and 2008, the Company expects to receive net payments of approximately $0.7 million, $0.5 million, and $0.3 million, respectively, for subleases.

² - Does not include commitment to Dayna Justiz, President of The Space Store, for compensation that can be earned as a result of the agreement dated June 19, 2000. The agreement states that Dayna Justiz can earn up to $375,000 as additional compensation if she meets certain financial goals in the management of The Space Store, the retail arm of SMI. The yearly amount is equal to five percent of The Space Store’s “net after-tax operating income” during each fiscal year until such time an aggregate amount of $375,000 has been earned. At this time, we have not recorded a liability for this obligation due to the uncertainty of the obligation being incurred.

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

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

ITEM 4. Controls and Procedures

Under the supervision and with the participation of the Company’s management, including its principal executive officer and principal financial officer, the Company has evaluated the effectiveness of the design and operation of its

26

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

Disclosure controls and procedures are the Company’s controls and other procedures that are designed to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that we file under the Exchange Act is accumulated and communicated to its management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

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

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

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

Tort Claim. On November 8, 2004 the Company filed a second claim with NASA seeking damages of $79.7 million under the Federal Tort Claims Act for the loss of the RDM resulting from NASA’s alleged negligence leading to the destruction of the Space Shuttle Columbia and the loss of the RDM. The Company’s claim represents its loss of $87.7 million less the $8.0 million recovered from NASA. Under federal tort claim procedures, NASA has statutory deadlines for responding to such claims. In the event that the Company’s administrative claim is denied, the Company would have the right to pursue the claim in Federal District Court.

27

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

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

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

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

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

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

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

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

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

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

ITEM 6. EXHIBITS

The following exhibits are filed herewith:

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

28

SIGNATURE

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

	SPACEHAB, INCORPORATED
Date: February 11, 2005	/s/ Michael E. Kearney
	Michael E. Kearney President and Chief Executive Officer
	/s/ Brian K. Harrington
	Brian K. Harrington Senior Vice President and Chief Financial Officer

29

EX-10.125

SPACEHAB, INCORPORATED

LOAN AGREEMENT

Dated as of February 11, 2005

$5,000,000.00

FIRST AMERICAN BANK

Table of Contents

			Page
I	Definitions		1
	1.1	Definitions	1
II	Advances		1
	2.1	Advances	1
	2.2	The Revolving Credit Note	1
	2.3	Repayment of Advances	2
	2.4	Interest	2
	2.5	Borrowing Procedure	2
	2.6	Use of Proceeds	2
	2.7	Unused Facility Fee	2
III	Payments		3
	3.1	Method of Payment	3
	3.2	Voluntary Prepayment	3
	3.3	Mandatory Prepayment	3
	3.4	Computation of Interest	3
	3.5	Capital Adequacy	3
IV	Security		4
	4.1	Collateral	4
	4.2	Setoff	4
V	Conditions Precedent		5
	5.1	Initial Extension of Credit	5
	5.2	All Extensions of Credit	6
VI	Representations and Warranties		7
	6.1	Corporate Existence	7
	6.2	Financial Statements	7
	6.3	Action; No Breach	7
	6.4	Operation of Business	7
	6.5	Litigation and Judgments	8
	6.6	Rights in Properties; Liens	8
	6.7	Enforceability	8
	6.8	Approvals	8
	6.9	Debt	8
	6.10	Taxes	8
	6.11	Use of Proceeds; Margin Securities	8
	6.12	ERISA	9
	6.13	Disclosure	9
	6.14	Subsidiaries	9
	6.15	Agreements	9
	6.16	Compliance with Laws	9

i

Table of Contents

(continued)

			Page
	6.17	Inventory	9
	6.18	Investment Company Act	9
	6.19	Public Utility Holding Company Act	10
	6.20	Environmental Matters	10
VII	Affirmative Covenants		11
	7.1	Reporting Requirements	11
	7.2	Maintenance of Existence; Conduct of Business	13
	7.3	Maintenance of Properties	13
	7.4	Taxes and Claims	13
	7.5	Insurance	13
	7.6	Audit and Inspection Rights	13
	7.7	Keeping Books and Records	14
	7.8	Compliance with Laws	14
	7.9	Compliance with Agreements	14
	7.10	Further Assurances	14
	7.11	ERISA	14
	7.12	Subordinated Indenture	14
	7.13	UCC-3 Termination Statements	14
VIII	Negative Covenants		14
	8.1	Debt	14
	8.2	Limitation on Liens	15
	8.3	Mergers, Etc	15
	8.4	Restricted Payments	16
	8.5	Loans and Investments	16
	8.6	Intentionally Deleted.	16
	8.7	Transactions With Affiliates	16
	8.8	Disposition of Assets	16
	8.9	Sale and Leaseback	17
	8.10	Prepayment of Debt	17
	8.11	Nature of Business	17
	8.12	Environmental Protection	17
	8.13	Accounting	17
IX	Financial Covenants		17
X	Default		17
	10.1	Events of Default	17
	10.2	Remedies Upon Default	19
	10.3	Performance by the Lender	20
XI	Miscellaneous		20
	11.1	Expenses	20

ii

Table of Contents

(continued)

		Page
11.2	INDEMNIFICATION	20
11.3	Limitation of Liability	21
11.4	No Duty	21
11.5	Lender Not Fiduciary	21
11.6	Equitable Relief	21
11.7	No Waiver; Cumulative Remedies	22
11.8	Successors and Assigns	22
11.9	Survival	22
11.10	ENTIRE AGREEMENT; AMENDMENT; WAIVERS	22
11.11	Maximum Interest Rate	22
11.12	Notices	23
11.13	Governing Law; Venue; Service of Process	23
11.14	Counterparts	23
11.15	Severability	23
11.16	Headings	23
11.17	Non-Application of Chapter 346 of Texas Finance Code	23
11.18	Participations	24
11.19	Construction	24
11.20	Independence of Covenants	24
11.21	WAIVER OF JURY TRIAL	24

iii

LOAN AGREEMENT

THIS LOAN AGREEMENT (the “Agreement”), dated as of February 11, 2005, is between SPACEHAB, INCORPORATED, a Washington corporation (the “Borrower”), and FIRST AMERICAN BANK, SSB, a statement savings bank organized under the laws of the State of Texas (the “Lender”).

R E C I T A L S:

The Borrower has requested the Lender to extend credit to the Borrower in the form described in this Agreement the Lender is willing to make such extensions of credit to the Borrower upon the terms and conditions hereinafter set forth.

NOW THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto agree as follows:

I

Definitions

1.1 Definitions. As used in this Agreement, the capitalized terms shall have the meanings given such terms in Annex I (and as defined in any other Annex) to this Agreement, except as may be defined above. In the event of any conflict between a particular definition in Annex I and any other Annex, the definitions set forth in Annex I shall control unless the definition outside Annex I specifically states that it is intended to control over the equivalent Annex I definition. Any Annex page containing the words “NOT APPLICABLE” shall constitute the agreement of the Lender and the Borrower that the subject matter of such Annex is inapplicable and of no effect with respect to this Agreement.

II

Advances

2.1 Advances. Subject to the terms and conditions of this Agreement, the Lender agrees to make one or more revolving credit Advances to the Borrower from time to time from the date hereof to and including the Termination Date in an aggregate principal amount at any time outstanding up to but not exceeding the amount of the Commitment, provided that the aggregate amount of all revolving credit Advances at any time outstanding shall not exceed the lesser of (a) the amount of the Commitment or (b) the Borrowing Base. Subject to the foregoing limitations, and the other terms and provisions of this Agreement, the Borrower may borrow, repay, and reborrow hereunder. The Lender shall be under no obligation to make an Advance hereunder any time Default exists.

2.2 The Revolving Credit Note. The obligation of the Borrower to repay the revolving credit Advances and interest thereon shall be evidenced by the Revolving Credit Note executed by the Borrower, payable to the order of the Lender, in the principal amount of the Commitment as originally in effect, and dated the date hereof.

2.3 Repayment of Advances. The Borrower shall repay the unpaid principal amount of all revolving credit Advances on the Termination Date.

2.4 Interest. The unpaid principal amount of the revolving credit Advances shall bear interest prior to maturity at a varying rate per annum equal from day to day to the lesser of (a) the Maximum Rate, or (b) the Applicable Rate. If at any time the rate of interest specified in clause (b) above shall exceed the Maximum Rate, thereby causing the interest accruing on the Advances to be limited to the Maximum Rate, then any subsequent reduction in the Applicable Rate shall not reduce the rate of interest on the Advances below the Maximum Rate until the aggregate amount of interest accrued on the revolving credit Advances equals the aggregate amount of interest which would have accrued on the revolving credit Advances if the interest rate specified in clause (b) above had at all times been in effect. Accrued and unpaid interest on the revolving credit Advances shall be payable on each Payment Date and on the Termination Date. Notwithstanding the foregoing, any outstanding principal of any Advance and (to the fullest extent permitted by law) any other amount payable by the Borrower under this Agreement or any other Loan Document that is not paid in full when due (whether at stated maturity, by acceleration, or otherwise) shall bear interest at the Default Rate for the period from and including the due date thereof to but excluding the date the same is paid in full. Additionally, upon the occurrence of an Event of Default (and from the date of such occurrence) all outstanding and unpaid principal amounts of all of the Obligations shall, to the extent permitted by law, bear interest at the Default Rate until such time as the Lender shall waive in writing the application of the Default Rate to such Event of Default situation. Interest payable at the Default Rate shall be payable from time to time on demand.

2.5 Borrowing Procedure. The Borrower shall give the Lender notice of each such Advance by means of an Advance Request Form containing the information required therein and delivered (by hand or by mechanically confirmed facsimile) to the Lender no later than 1:00 p.m. (Texas time) on the day on which the Advance is desired to be funded. The Lender at its option may accept telephonic requests for Advances, provided that such acceptance shall not constitute a waiver of the Lender’s right to require delivery of an Advance Request Form in connection with subsequent revolving credit Advances. Any telephonic request for a revolving credit Advance by the Borrower shall be promptly confirmed by submission of a properly completed Advance Request Form to the Lender. Subject to the terms and conditions of this Agreement, each Advance shall be made available to the Borrower by depositing the same, in immediately available funds, in an account of the Borrower maintained with the Lender at the Principal Office designated by the Borrower.

2.6 Use of Proceeds. The proceeds of revolving credit Advances shall be used by the Borrower for working capital and/or capital expenditures incurred in the ordinary course of business.

2.7 Unused Facility Fee. The Borrower agrees to pay to the Lender an unused facility fee on the daily average unused amount of the Commitment for the period from and including the date of this Agreement to and including the Termination Date, at the rate of one half of one percent (.50%) per annum based on a 360-day year and the actual number of days elapsed. For the purpose of calculating the commitment fee hereunder, the Commitment shall be deemed utilized by the amount of all outstanding revolving credit Advances. Accrued commitment fees

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shall be payable in arrears on each consecutive Quarterly Payment Date and on the Termination Date. In the event that the Borrower maintains, on average, collected balances of $5,000,000 or more for each period the unused commitment fee is charged, the fee shall be reduced from one half of one percent (.50%) per annum to one quarter of one percent (.25%) per annum. The Borrower acknowledges that it is not required to maintain any deposits as compensating balances with the Lender or as a condition precedent to the credit being made available hereunder.

III

Payments

3.1 Method of Payment. All payments of principal, interest, and other amounts to be made by the Borrower under this Agreement and the other Loan Documents shall be made to the Lender at the Principal Office in Dollars and immediately available funds, without setoff, deduction, or counterclaim, not later than 11:00 A.M., Texas time, on the date on which such payment shall become due (each such payment made after such time on such due date to be deemed to have been made on the next succeeding Business Day). The Borrower shall, at the time of making each such payment, specify to the Lender the sums payable by the Borrower under this Agreement and the other Loan Documents to which such payment is to be applied (and in the event the Borrower fails to so specify, or if an Event of Default has occurred and is continuing, the Lender may apply such payment to the Obligations in the order set forth in Section 3.2 of the Revolving Credit Note or in such order and manner as it may elect in its sole discretion). Whenever any payment under this Agreement or any other Loan Document shall be stated to be due on a day that is not a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of the payment of interest and commitment fee, as the case may be.

3.2 Voluntary Prepayment. The Borrower may prepay the Advances in whole at any time or from time to time in part without premium or penalty but with accrued interest to the date of prepayment on the amount so prepaid, provided that each partial prepayment shall be in the principal amount of $10,000.00 or an integral multiple thereof.

3.3 Mandatory Prepayment. If at any time the outstanding principal amount of the Advances exceeds the Borrowing Base, the Borrower shall, within five (5) days, prepay the outstanding Advances by the amount of the excess.

3.4 Computation of Interest. Interest on the Advances and all other amounts payable by the Borrower hereunder shall be computed on the basis of a year of 360 days and the actual number of days elapsed (including the first day but excluding the last day) unless such calculation would result in a usurious rate, in which case interest shall be calculated on the basis of a year of 365 or 366 days, as the case may be.

3.5 Capital Adequacy. If after the date hereof, the Lender shall have determined that the adoption or implementation of any applicable law, rule, or regulation regarding capital adequacy (including, without limitation, any law, rule, or regulation implementing the Basle Accord), or any change therein, or any change in the interpretation or administration thereof by any central bank or other Governmental Authority charged with the interpretation or

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administration thereof, or compliance by the Lender (or its parent) with any guideline, request, or directive regarding capital adequacy (whether or not having the force of law) of any such central bank or other Governmental Authority (including, without limitation, any guideline or other requirement implementing the Basle Accord), has or would have the effect of reducing the rate of return on the Lender’s (or its parent’s) capital as a consequence of its obligations hereunder or the transactions contemplated hereby to a level below that which the Lender (or its parent) could have achieved but for such adoption, implementation, change, or compliance (taking into consideration the Lender’s policies with respect to capital adequacy) by an amount deemed by the Lender to be material, then from time to time, within ten (10) Business Days after demand by the Lender, the Borrower shall pay to the Lender (or its parent) such additional amount or amounts as will compensate the Lender for such reduction. A certificate of the Lender claiming compensation under this Section and setting forth the additional amount or amounts to be paid to it hereunder shall be conclusive, provided that the determination thereof is made on a reasonable basis. In determining such amount or amounts, the Lender may use any reasonable averaging and attribution methods.

IV

Security

4.1 Collateral. To secure full and complete payment and performance of the Obligations, the Borrower shall execute and deliver or cause to be executed and delivered the documents described below covering the property and collateral described in this Section 4.1 (which, together with any other property and collateral which may now or hereafter secure the Obligations or any part thereof, is sometimes herein called the “Collateral”):

(a) The Borrower, Astrotech Space Operations, Inc. and SPACEHAB Government Services, Incorporated shall each grant to the Lender a first priority security interest in all of their accounts and all general intangibles related thereto, whether now owned or hereafter acquired, and all products and proceeds thereof, pursuant to the Security Agreement.

(b) The Borrower, Astrotech Space Operations, Inc. and SPACEHAB Government Services, Incorporated shall each execute and cause to be executed such further documents and instruments, including without limitation, lien and security interest releases and terminations, and Uniform Commercial Code financing statements, as the Lender, in its sole discretion, deems necessary or desirable to create, evidence, preserve, and perfect its liens and security interests in the Collateral.

4.2 Setoff. If an Event of Default shall have occurred and be continuing, the Lender shall have the right to set off and apply against the Obligations in such manner as the Lender may determine, at any time and without notice to the Borrower, any and all deposits (general or special, time or demand, provisional or final) or other sums at any time credited by or owing from the Lender to the Borrower whether or not the Obligations are then due. As further security for the Obligations, the Borrower hereby grants to the Lender a security interest in all money, instruments, and other property of the Borrower now or hereafter held by the Lender, including, without limitation, property held in safekeeping. In addition to the Lender’s right of setoff and as

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further security for the Obligations, the Borrower hereby grants to the Lender a security interest in all deposits (general or special, time or demand, provisional or final) and other accounts of the Borrower now or hereafter on deposit with or held by the Lender and all other sums at any time credited by or owing from the Lender to the Borrower. The rights and remedies of the Lender hereunder are in addition to other rights and remedies (including, without limitation, other rights of setoff) which the Lender may have.

V

Conditions Precedent

5.1 Initial Extension of Credit. The obligation of the Lender to make the initial Advance is subject to the condition precedent that the Lender shall have received on or before the day of such Advance all of the following, each dated (unless otherwise indicated) the date hereof, in form and substance satisfactory to the Lender:

(a) Resolutions. Resolutions of the Board of Directors of the Borrower and each of the Applicable Subsidiaries certified by the Secretary or an Assistant Secretary of the Borrower and each of the Applicable Subsidiaries which authorize the execution, delivery, and performance by the Borrower and each of the Applicable Subsidiaries of this Agreement and the other Loan Documents to which the Borrower and each of the Applicable Subsidiaries is or is to be a party;

(b) Incumbency Certificate. A certificate of incumbency certified by the Secretary or an Assistant Secretary of the Borrower and each of the Applicable Subsidiaries certifying the names of the officers of the Borrower and each of the Applicable Subsidiaries authorized to sign this Agreement and each of the other Loan Documents to which the Borrower and each of the Applicable Subsidiaries is or is to be a party (including the certificates contemplated herein) together with specimen signatures of such officers;

(c) Articles of Incorporation. The articles of incorporation of the Borrower and each of the Applicable Subsidiaries certified by the Secretary of the Borrower and each of the Applicable Subsidiaries and as of a date acceptable to the Lender;

(d) Bylaws. The bylaws of the Borrower and each of the Applicable Subsidiaries certified by the Secretary or an Assistant Secretary of the Borrower and each of the Applicable Subsidiaries;

(e) Governmental Certificates. Certificates of the appropriate government officials of the state of incorporation of the Borrower and each of the Applicable Subsidiaries as to the existence and good standing of the Borrower and each of the Applicable Subsidiaries, each dated within ten (10) days prior to the date of the initial Advance;

(f) Note. The Revolving Credit Note executed by the Borrower;

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(g) Security Agreement. A Security Agreement executed by the Borrower and each of the Applicable Subsidiaries;

(h) Intentionally Deleted.

(i) Insurance Policies. Copies of the insurance certificates relating to the insurance required by Section 7.5;

(j) UCC Search. The results of a Uniform Commercial Code search showing all financing statements and other documents or instruments on file against the Borrower and Applicable Subsidiaries in the office of the Secretary of State of Texas, such search to be as of a date acceptable to the Lender;

(k) Attorneys’ Fees and Expenses. Evidence that the costs and expenses (including reasonable attorneys’ fees) referred to in Section 11.1, to the extent incurred, shall have been paid in full by the Borrower.

(l) Lock Box Agreement. Executed agreements establishing Lock Box arrangements with Lender for collection of accounts receivable payments.

5.2 All Extensions of Credit. The obligation of the Lender to make any Advance (including the initial Advance) is subject to the following additional conditions precedent:

(a) Request for Advance. The Lender shall have received in accordance with this Agreement, as the case may be, an Advance Request Form dated the date of such Advance and executed by an authorized officer of the Borrower;

(b) No Default. No Default shall have occurred and be continuing, or would result from such Advance;

(c) Representations and Warranties. All of the representations and warranties contained in Article VI hereof and in the other Loan Documents shall be true and correct in all material respects on and as of the date of such Advance with the same force and effect as if such representations and warranties had been made on and as of such date; provided, however, judgments taken against the Borrower or any of its Subsidiaries after the date hereof which are individually in an amount under $25,000.00 or are discharged or stayed within the period provided in Section 10.1(g) hereof shall not constitute a breach of the representation and warranty contained in Section 6.5 hereof; and

(d) Additional Documentation. The Lender shall have received such additional approvals, opinions, or documents as the Lender or its legal counsel may reasonably request.

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VI

Representations and Warranties

To induce the Lender to enter into this Agreement, the Borrower represents and warrants to the Lender that:

6.1 Corporate Existence. The Borrower and each Subsidiary (a) is a corporation duly organized, validly existing, and in good standing under the laws of the jurisdiction of its incorporation; (b) has all requisite corporate power and authority to own its assets and carry on its business as now being or as proposed to be conducted; and (c) is qualified to do business in all jurisdictions in which the nature of its business makes such qualification necessary and where failure to so qualify would have a Material Adverse Effect. The Borrower and each Subsidiary have the corporate power and authority to execute, deliver, and perform its obligations under this Agreement and the other Loan Documents to which it is or may become a party.

6.2 Financial Statements. The Borrower has delivered to the Lender audited consolidated financial statements and/or projections of the Borrower and its Subsidiaries. Such financial statements are true and correct in all material respects, and such projections represent the Borrower’s fair estimate of future results, and have been prepared in accordance with GAAP, and fairly and accurately present, on a consolidated basis, the financial condition of the Borrower and its Subsidiaries as of the respective dates indicated therein and the results of operations for the respective periods indicated therein. Neither the Borrower nor any of its Subsidiaries has any material (a) contingent liabilities; (b) liabilities for taxes; (c) unusual forward or long-term commitments; or (d) unrealized or anticipated losses from any unfavorable commitments except as referred to or reflected in such financial statements. There has been no Material Adverse Effect to the business and/or condition (financial or otherwise), operations, prospects, or properties of the Borrower and its Subsidiaries, taken as a whole, since the effective date of the most recent financial statements referred to in this Section.

6.3 Action; No Breach. The execution, delivery, and performance by the Borrower of this Agreement and the other Loan Documents to which the Borrower or Subsidiary are or may become a party and compliance with the terms and provisions hereof and thereof have been duly authorized by all requisite corporate action on the part of the Borrower or Subsidiary and do not and will not (a) violate or conflict with, or result in a breach of, or require any consent under (i) the articles of incorporation or bylaws of the Borrower or any of the Subsidiaries, (ii) any applicable law, rule, or regulation or any order, writ, injunction, or decree of any Governmental Authority or arbitrator, or (iii) any agreement or instrument to which the Borrower or any of the Subsidiaries is a party or by which any of them or any of their property is bound or subject, or (b) constitute a default under any such agreement or instrument, or result in the creation or imposition of any Lien (except as provided in Article IV) upon any of the revenues or assets of the Borrower or any Subsidiary.

6.4 Operation of Business. The Borrower and each of its Subsidiaries possess all licenses, permits, franchises, patents, copyrights, trademarks, and tradenames, or rights thereto, necessary to conduct their respective businesses substantially as now conducted and as presently proposed to be conducted, and the Borrower and each of its Subsidiaries are not in violation of

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any valid rights of others with respect to any of the foregoing where such violation would reasonably be expected to have a Material Adverse Effect.

6.5 Litigation and Judgments. Except as disclosed on Schedule 6.5 hereto, there is no action, suit, investigation, or proceeding before or by any Governmental Authority or arbitrator pending, or to the knowledge of the Borrower, threatened against or affecting the Borrower or any Subsidiary, that would, if adversely determined, reasonably be expected to have a Material Adverse Effect. As of the date hereof, there are no outstanding judgments against the Borrower or any Subsidiary.

6.6 Rights in Properties; Liens. The Borrower and each Subsidiary have good and indefeasible title to or valid leasehold interests in their respective properties and assets, real and personal, including the properties, assets, and leasehold interests reflected in the financial statements described in Section 6.2, except for such defect in title as could not reasonably be expected to have a Material Adverse Effect, and none of the properties, assets, or leasehold interests of the Borrower or any Subsidiary is subject to any Lien, except as permitted by Section 8.2.

6.7 Enforceability. This Agreement constitutes, and the other Loan Documents to which the Borrower or any Subsidiary is a party, when delivered, shall constitute legal, valid, and binding obligations of the Borrower and/or Subsidiary, enforceable against the Borrower and/or Subsidiary in accordance with their respective terms, except as limited by bankruptcy, insolvency, or other laws of general application relating to the enforcement of creditors’ rights.

6.8 Approvals. No authorization, approval, or consent of, and no filing or registration with, any Governmental Authority or third party is or will be necessary for the execution, delivery, or performance by the Borrower of this Agreement and the other Loan Documents to which the Borrower or Subsidiary is or may become a party or the validity or enforceability thereof.

6.9 Debt. As of the date hereof, the Borrower and its Subsidiaries have no Debt, except as disclosed on Schedule 6.9 hereto.

6.10 Taxes. The Borrower and each Subsidiary have filed all tax returns (federal, state, and local) required to be filed, including all income, franchise, employment, property, and sales tax returns, and have paid all of their respective liabilities for taxes, assessments, governmental charges, and other levies that are due and payable. The Borrower knows of no pending investigation of the Borrower or any Subsidiary by any taxing authority or of any pending but unassessed tax liability of the Borrower or any Subsidiary that would, if assessed, have a Material Adverse Effect.

6.11 Use of Proceeds; Margin Securities. Neither the Borrower nor any Subsidiary is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulations G, T, U, or X of the Board of Governors of the Federal Reserve System), and no part of the proceeds of any Advance will be used to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying margin stock.

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6.12 ERISA. The Borrower and each Subsidiary are in compliance in all material respects with all applicable provisions of ERISA. Neither a Reportable Event nor a Prohibited Transaction has occurred and is continuing with respect to any Plan. No notice of intent to terminate a Plan has been filed, nor has any Plan been terminated. No circumstances exist which constitute grounds entitling the PBGC to institute proceedings to terminate, or appoint a trustee to administer, a Plan, nor has the PBGC instituted any such proceedings. Neither the Borrower nor any ERISA Affiliate has completely or partially withdrawn from a Multiemployer Plan. The Borrower and each ERISA Affiliate have met their minimum funding requirements under ERISA with respect to all of their Plans, and the present value of all vested benefits under each Plan do not exceed the fair market value of all Plan assets allocable to such benefits, as determined on the most recent valuation date of the Plan and in accordance with ERISA. Neither the Borrower nor any ERISA Affiliate has incurred any liability to the PBGC under ERISA.

6.13 Disclosure. No statement, information, report, representation, or warranty made by the Borrower in this Agreement or in any other Loan Document or furnished to the Lender in connection with this Agreement or any of the transactions contemplated hereby contains any untrue statement of a material fact or omits to state any material fact necessary to make the statements herein or therein not misleading. There is no fact known to the Borrower which has a Material Adverse Effect, or which might in the future reasonably be expected to have a Material Adverse Effect.

6.14 Subsidiaries. As of the date hereof, the Borrower has no Subsidiaries other than those listed on Schedule 6.14, which sets forth the jurisdiction of incorporation of each Subsidiary and the percentage of the Borrower’s ownership of the outstanding voting stock of each Subsidiary. All of the outstanding capital stock of each Subsidiary has been validly issued, is fully paid, and is nonassessable.

6.15 Agreements. Neither the Borrower nor any Subsidiary is a party to any indenture, loan, or credit agreement, or to any lease or other agreement or instrument, or subject to any charter or corporate restriction which could have a Material Adverse Effect. Neither the Borrower nor any Subsidiary is in default in any respect in the performance, observance, or fulfillment of any of the obligations, covenants, or conditions contained in any agreement or instrument material to its business to which it is a party.

6.16 Compliance with Laws. Neither the Borrower nor any Subsidiary is in violation in any material respect of any law, rule, regulation, order, or decree of any Governmental Authority or arbitrator.

6.17 Inventory. All inventory of the Borrower has been and will hereafter be produced in compliance with all applicable laws, rules, regulations, and governmental standards, including, without limitation, the minimum wage and overtime provisions of the Fair Labor Standards Act, as amended (29 U.S.C. §§ 201-219), and the regulations promulgated thereunder.

6.18 Investment Company Act. Neither the Borrower nor any Subsidiary is an “investment company” within the meaning of the Investment Company Act of 1940, as amended.

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6.19 Public Utility Holding Company Act. Neither the Borrower nor any Subsidiary is a “holding company” or a “subsidiary company” of a “holding company” or an “affiliate” of a “holding company” or a “public utility” within the meaning of the Public Utility Holding Company Act of 1935, as amended.

6.20 Environmental Matters. Except as disclosed on Schedule 6.20 hereto:

(a) The Borrower, each Subsidiary, and all of their respective properties, assets, and operations are in compliance in all material respects with all Environmental Laws. The Borrower is not aware of, nor has the Borrower received notice of, any past, present, or future conditions, events, activities, practices, or incidents which may interfere with or prevent the compliance or continued compliance of the Borrower and the Subsidiaries in all material respects with all Environmental Laws;

(b) The Borrower and each Subsidiary have obtained all permits, licenses, and authorizations that are required under applicable Environmental Laws, and all such permits are in good standing and the Borrower and its Subsidiaries are in compliance in all material respects with all of the terms and conditions of such permits;

(c) Other than as may be used in the ordinary course of the Borrower’s business and in compliance in all material respects with all applicable Environmental Laws, no Hazardous Materials exist on, about, or within or have been used, generated, stored, transported, disposed of on, or Released from any of the properties or assets of the Borrower or any Subsidiary;

(d) Neither the Borrower nor any of its Subsidiaries nor any of their respective currently or previously owned or leased properties or operations is subject to any outstanding or threatened order from or agreement with any Governmental Authority or other Person or subject to any judicial or docketed administrative proceeding with respect to (i) failure to comply with Environmental Laws, (ii) Remedial Action, or (iii) any Environmental Liabilities arising from a Release or threatened Release which could reasonably be expected to have a Material Adverse Effect;

(e) There are no conditions or circumstances associated with the currently or previously owned or leased properties or operations of the Borrower or any of its Subsidiaries that could reasonably be expected to give rise to any material Environmental Liabilities;

(f) Neither the Borrower nor any of its Subsidiaries is a treatment, storage, or disposal facility requiring a permit under the Resource Conservation and Recovery Act, 42 U.S.C. § 6901 et seq., regulations thereunder or any comparable provision of state law. The Borrower and its Subsidiaries are in compliance in all material respects with all applicable financial responsibility requirements of all Environmental Laws;

(g) Neither the Borrower nor any of its Subsidiaries has filed or failed to file any notice required under applicable Environmental Law reporting a Release except where doing so could not reasonably be expected to have a Material Adverse Effect; and

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(h) No Lien arising under any Environmental Law has attached to any property or revenues of the Borrower or its Subsidiaries which could reasonably be expected to have a Material Adverse Effect.

VII

Affirmative Covenants

The Borrower covenants and agrees that, as long as the Obligations or any part thereof are outstanding or the Lender has any Commitment hereunder, the Borrower will perform and observe the following positive covenants, unless the Lender shall otherwise consent in writing:

7.1 Reporting Requirements. The Borrower will furnish to the Lender:

(a) Annual Financial Statements. As soon as available, and in any event within ninety (90) days after the end of each fiscal year of the Borrower, beginning with the fiscal year ending June 30, 2004, a copy of the annual audit report of the Borrower and the Subsidiaries for such fiscal year containing, on a consolidated basis, balance sheets and statements of income, retained earnings, and cash flow as at the end of such fiscal year and for the 12-month period then ended, in each case setting forth in comparative form the figures for the preceding fiscal year, all in reasonable detail and audited and certified by independent certified public accountants of recognized standing acceptable to the Lender, to the effect that such report has been prepared in accordance with GAAP;

(b) Quarterly Financial Statements. As soon as available, and in any event within forty-five (45) days after the end of each fiscal quarter of the fiscal year of the Borrower, a copy of an unaudited financial report of the Borrower and the Subsidiaries as of the end of such fiscal quarter and for the portion of the fiscal year then ended, containing, on a consolidated basis, balance sheets and statements of income, retained earnings, and cash flow, in each case setting forth in comparative form the figures for the corresponding period of the preceding fiscal year, all in reasonable detail certified by an acceptable officer of the Borrower to have been prepared in accordance with GAAP and to fairly and accurately present (subject to year-end audit adjustments and the absence of footnotes) the financial condition and results of operations of the Borrower and the Subsidiaries, on a consolidated and consolidating basis, at the date and for the periods indicated therein;

(c) Certificate of No Default. Concurrently with the delivery of each of the financial statements referred to in subsections 7.1(a) and 7.1(b), a certificate of an acceptable officer of the Borrower (i) stating that to the best of such officer’s knowledge, no Default has occurred and is continuing, or if a Default has occurred and is continuing, a statement as to the nature thereof and the action which is proposed to be taken with respect thereto, and (ii) showing in reasonable detail the calculations demonstrating compliance with Article IX;

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(d) Management Letters. Promptly upon receipt thereof, a copy of any management letter or written report submitted to the Borrower or any Subsidiary by independent certified public accountants with respect to the business, condition (financial or otherwise), operations, prospects, or properties of the Borrower or any Subsidiary;

(e) Notice of Litigation. Promptly after the commencement thereof, notice of all actions, suits, and proceedings before any Governmental Authority or arbitrator affecting the Borrower or any Subsidiary which, if determined adversely to the Borrower or such Subsidiary, could reasonably be expected to have a Material Adverse Effect;

(f) Notice of Default. As soon as possible and in any event within five (5) days after the occurrence of each Default, a written notice setting forth the details of such Default and the action that the Borrower has taken and proposes to take with respect thereto;

(g) ERISA Reports. Promptly after the filing or receipt thereof, copies of all reports, including annual reports, and notices which the Borrower or any Subsidiary files with or receives from the PBGC or the U.S. Department of Labor under ERISA; and as soon as possible and in any event within five (5) days after the Borrower or any Subsidiary knows or has reason to know that any Reportable Event or Prohibited Transaction has occurred with respect to any Plan or that the PBGC or the Borrower or any Subsidiary has instituted or will institute proceedings under Title IV of ERISA to terminate any Plan, a certificate of an acceptable officer of the Borrower setting forth the details as to such Reportable Event or Prohibited Transaction or Plan termination and the action that the Borrower proposes to take with respect thereto;

(h) Reports to Other Creditors. Promptly after the furnishing thereof, copies of any statement or report furnished to any other party pursuant to the terms of any indenture, loan, or credit or similar agreement and not otherwise required to be furnished to the Lender pursuant to any other clause of this Section;

(i) Notice of Material Adverse Change. As soon as possible and in any event within five (5) days after the occurrence thereof, written notice of any matter that could reasonably be expected to have a Material Adverse Effect;

(j) Borrowing Base Report. As soon as available, and in any event within fifteen (15) days after the end of each calendar month in which amounts were outstanding under the Revolving Credit Note, a Borrowing Base Report, in a form acceptable to the Lender, certified by an acceptable officer of the Borrower;

(k) Proxy Statements, Etc. As soon as available, one copy of each financial statement, report, notice or proxy statement sent by the Borrower or any Subsidiary to its stockholders generally and one copy of each regular, periodic or special report, registration statement, or prospectus filed by the Borrower or any Subsidiary with any securities exchange or the Securities and Exchange Commission or any successor agency;

(l) Tax Returns. The Borrower shall provide to the Lender a copy of its annual income tax return within thirty (30) days of the date filed with the Internal

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Revenue Service but in no event later than one hundred twenty (120) days after the end of each fiscal year (provided, however, if Borrower shall have duly filed for an extension of the filing deadline for such tax return, and promptly furnished evidence thereof to Lender, then such tax return shall be delivered to Lender on or before two hundred fifty-five (255) days after the end of such fiscal year); and

(m) General Information. Promptly, such other information concerning the Borrower or any Subsidiary as the Lender may from time to time reasonably request.

7.2 Maintenance of Existence; Conduct of Business. The Borrower will preserve and maintain, and will cause each Subsidiary to preserve and maintain, its existence and all of its leases, privileges, licenses, permits, franchises, qualifications, and rights that are necessary or desirable in the ordinary conduct of its business. The Borrower will conduct, and will cause each Subsidiary to conduct, its business in an orderly and efficient manner in accordance with good business practices.

7.3 Maintenance of Properties. The Borrower will maintain, keep, and preserve, and cause each Subsidiary to maintain, keep, and preserve, all of its material properties (tangible and intangible) necessary or useful in the proper conduct of its business in good working order and condition, ordinary wear and tear excepted.

7.4 Taxes and Claims. The Borrower will pay or discharge, and will cause each Subsidiary to pay or discharge, at or before maturity or before becoming delinquent, except when failure to do so is not reasonably likely to have a Material Adverse Effect, (a) all taxes, levies, assessments, and governmental charges imposed on it or its income or profits or any of its property, and (b) all lawful claims for labor, material, and supplies, which, if unpaid, might become a Lien upon any of its property; provided, however, that neither the Borrower nor any Subsidiary shall be required to pay or discharge any tax, levy, assessment, or governmental charge which is being contested in good faith by appropriate proceedings diligently pursued, and for which adequate reserves have been established.

7.5 Insurance. The Borrower will maintain, and will cause each of the Subsidiaries to maintain, insurance with financially sound and reputable insurance companies in such amounts and covering such risks as is usually carried by businesses engaged in similar businesses and owning similar properties in the same general areas in which the Borrower and the Subsidiaries operate, provided that in any event the Borrower will maintain and cause each Subsidiary to maintain workmen’s compensation insurance, property insurance, comprehensive general liability insurance, products liability insurance, and business interruption insurance reasonably satisfactory to the Lender.

7.6 Audit and Inspection Rights. At any reasonable time and from time to time, the Borrower will permit the Lender to conduct an audit of the Collateral and any other matters affecting the credit facility provided for in this Agreement, and will permit, and will cause each Subsidiary to permit, representatives of the Lender to examine, copy, and make extracts from its books and records, to visit and inspect its properties, and to discuss its business, operations, and financial condition with its officers, employees, and independent certified public accountants.

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7.7 Keeping Books and Records. The Borrower will maintain, and will cause each Subsidiary to maintain, proper books of record and account in which full, true, and correct entries in conformity with GAAP shall be made of all dealings and transactions in relation to its business and activities.

7.8 Compliance with Laws. The Borrower will comply, and will cause each Subsidiary to comply, in all material respects with all applicable laws, rules, regulations, orders, and decrees of any Governmental Authority or arbitrator.

7.9 Compliance with Agreements. The Borrower will comply, and will cause each Subsidiary to comply, in all material respects with all agreements, contracts, and instruments binding on it or affecting its properties or business.

7.10 Further Assurances. The Borrower will, and will cause each Subsidiary to, execute and deliver such further agreements and instruments and take such further action as may be reasonably requested by the Lender to carry out the provisions and purposes of this Agreement and the other Loan Documents and to create, preserve, and perfect the Liens of the Lender in the Collateral.

7.11 ERISA. The Borrower will comply, and will cause each Subsidiary to comply, with all minimum funding requirements, and all other material requirements, of ERISA, if applicable, so as not to give rise to any liability thereunder.

7.12 Subordinated Indenture. The Borrower has provided the Lender with a true and correct copy of its outstanding subordinated debenture, that certain Indenture dated as of October 15, 1997, to First Union National Bank, Trustee. The Borrower has also provided to the Lender a sample copy of the form of each Security issued thereunder. The Borrower will not voluntarily redeem any of the Securities issued under the Indenture without the prior written approval of the Lender.

7.13 UCC-3 Termination Statements. Within 45 days of the date hereof, the Borrower shall cause to be terminated, and to be delivered to the Lender and its counsel evidence of termination of, the following financing statements: those in favor of Alenia Spazo Spa filed of record in Washington and Florida against the Borrower, and those filed of record in favor of Bank of America in Washington, Bank of America in Colorado against the Borrower, and that of Bank of America filed in Colorado against Johnson Engineering Corp.

VIII

Negative Covenants

The Borrower covenants and agrees that, as long as the Obligations or any part thereof are outstanding or the Lender has any Commitment hereunder, the Borrower will perform and observe the following negative covenants, unless the Lender shall otherwise consent in writing:

8.1 Debt. The Borrower will not incur, create, assume, or permit to exist, and will not permit any Subsidiary to incur, create, assume, or permit to exist, any Debt, except:

(a) Debt to the Lender;

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(b) Existing Debt described on Schedule 6.9 hereto (or any refinance thereof);

(c) Existing or Future Debt arising in connection with the Borrower’s acquisition of vehicles, inventory, or equipment acquired in the ordinary course of the Borrower’s business; and

(d) Debt incurred in connection with the Borrower’s ongoing operations, so long as, after giving effect to the existence of such Debt, no Default results.

8.2 Limitation on Liens. The Borrower will not incur, create, assume, or permit to exist, and will not permit any Subsidiary to incur, create, assume, or permit to exist, any Lien upon any of its property, assets, or revenues, whether now owned or hereafter acquired, except:

(a) Liens disclosed on Schedule 8.2 hereto;

(b) Liens in favor of the Lender;

(c) Encumbrances consisting of minor easements, zoning restrictions, or other restrictions on the use of real property that do not (individually or in the aggregate) materially affect the value of the assets encumbered thereby or materially impair the ability of the Borrower or the Subsidiaries to use such assets in their respective businesses, and none of which is violated in any material respect by existing or proposed structures or land use;

(d) Liens for taxes, assessments, or other governmental charges which are not delinquent or which are being contested in good faith and for which adequate reserves have been established;

(e) Liens of mechanics, materialmen, warehousemen, carriers, or other similar statutory Liens securing obligations that are not overdue for a period of more than thirty (30) days and for which adequate reserves have been established and which are incurred in the ordinary course of business;

(f) Liens resulting from good faith deposits to secure payments of workmen’s compensation or other social security programs or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, or contracts (other than for payment of Debt), or leases made in the ordinary course of business; and

(g) Liens securing Debt arising pursuant to Section 8.1(c).

8.3 Mergers, Etc. The Borrower will not, and will not permit any Subsidiary to, become a party to a merger or consolidation, or purchase or otherwise acquire all or any part of the assets of any Person or any shares or other evidence of beneficial ownership of any Person, or wind-up, dissolve, or liquidate.

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8.4 Restricted Payments. The Borrower will not declare or pay any dividends or make any other payment or distribution (in cash, property, or obligations) on account of its capital stock, or redeem, purchase, retire, or otherwise acquire any of its capital stock, or permit any of its Subsidiaries to purchase or otherwise acquire any capital stock of the Borrower or another Subsidiary, or set apart any money for a sinking or other analogous fund for any dividend or other distribution on its capital stock or for any redemption, purchase, retirement, or other acquisition of any of its capital stock.

8.5 Loans and Investments. The Borrower will not make, and will not permit any Subsidiary to make, any advance, loan, extension of credit, or capital contribution to or investment in, or purchase, or permit any Subsidiary to purchase, any stock, bonds, notes, debentures, or other securities of, any Person, except:

(a) readily marketable direct obligations of the United States of America or any agency thereof with maturities of one year or less from the date of acquisition;

(b) fully insured certificates of deposit with maturities of one year or less from the date of acquisition issued by any commercial bank operating in the United States of America having capital and surplus in excess of $50,000,000.00;

(c) commercial paper of a domestic issuer if at the time of purchase such paper is rated in one of the two highest rating categories of Standard and Poor’s Corporation or Moody’s Investors Service;

(d) money market accounts or mutual funds investing primarily in items described in clauses (a) through (c) above;

(e) loans, investments, and advances in or to the Borrower or any Subsidiary;

(f) promissory notes or other investments received as a result of the authorized compromise or extension of payment on any accounts receivable; and

(g) investments each fiscal year of up to 20% of the Consolidated Tangible Net Worth of the Borrower as of June 30, 2004.

8.6 Intentionally Deleted.

8.7 Transactions With Affiliates. The Borrower will not enter into, and will not permit any Subsidiary to enter into, any transaction, including, without limitation, the purchase, sale, or exchange of property or the rendering of any service, with any Affiliate of the Borrower or such Subsidiary, except in the ordinary course of and pursuant to the reasonable requirements of the Borrower’s or such Subsidiary’s business and upon fair and reasonable terms no less favorable to the Borrower or such Subsidiary than would be obtained in a comparable arm’s-length transaction with a Person not an Affiliate of the Borrower or such Subsidiary.

8.8 Disposition of Assets. The Borrower will not sell, lease, assign, transfer, or otherwise dispose of any of its assets, or permit any Subsidiary to do so with any of its assets,

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except (a) dispositions of inventory in the ordinary course of business, (b) dispositions of used and worn-out equipment and other assets, and (c) dispositions permitted by Section 8.9.

8.9 Sale and Leaseback. Except as listed on Schedule 8.9 hereto, the Borrower will not enter into, and will not permit any Subsidiary to enter into, any arrangement with any Person pursuant to which it leases from such Person real or personal property that has been or is to be sold or transferred, directly or indirectly, by it to such Person.

8.10 Prepayment of Debt. Other than prepayment of Debt with the proceeds of a refinancing of such Debt, the Borrower will not prepay, and will not permit any Subsidiary to prepay, any Debt, except the Obligations.

8.11 Nature of Business. The Borrower will not, and will not permit any Subsidiary to, engage in any business other than the businesses in which they are engaged as of the date hereof and business that is directly related to the outer space industry.

8.12 Environmental Protection. Except in the ordinary course, and in material compliance with applicable Environmental Laws, the Borrower will not, and will not permit any of its Subsidiaries to, (a) use (or permit any tenant to use) any of their respective properties or assets for the handling, processing, storage, transportation, or disposal of any Hazardous Material, (b) generate any Hazardous Material, (c) conduct any activity that is likely to cause a Release or threatened Release of any Hazardous Material, or (d) otherwise conduct any activity or use any of their respective properties or assets in any manner that is likely to violate any Environmental Law or create any Environmental Liabilities for which the Borrower or any of its Subsidiaries would be responsible.

8.13 Accounting. The Borrower will not, and will not permit any of its Subsidiaries to, change its fiscal year or make any change (a) in accounting treatment or reporting practices, except as required by GAAP and disclosed to the Lender, or (b) in tax reporting treatment, except as required by law and disclosed to the Lender.

IX

Financial Covenants

The Borrower covenants and agrees that, as long as the Obligations or any part thereof are outstanding or the Lender has any Commitment hereunder, the Borrower will observe and perform the financial covenants contained in Annex II attached hereto, unless the Lender shall otherwise consent in writing.

X

Default

10.1 Events of Default. Each of the following shall be deemed an “Event of Default”:

(a) The Borrower shall fail to pay when due the Obligations or any part thereof.

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(b) Any representation or warranty made or deemed made by the Borrower or any Obligated Party (or any of their respective officers) in any Loan Document or in any certificate, report, notice, or financial statement furnished at any time in connection with this Agreement shall be false, misleading, or erroneous in any material respect when made or deemed to have been made.

(c) The Borrower or any Obligated Party shall fail to perform, observe, or comply with any covenant, agreement, or term contained in this Agreement or any other Loan Document, and such failure shall continue for thirty (30) days after notice from the Lender.

(d) The Borrower, any Subsidiary, or any Obligated Party shall commence a voluntary proceeding seeking liquidation, reorganization, or other relief with respect to itself or its debts under any bankruptcy, insolvency, or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian, or other similar official of it or a substantial part of its property or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it or shall make a general assignment for the benefit of creditors or shall generally fail to pay its debts as they become due or shall take any corporate action to authorize any of the foregoing.

(e) An involuntary proceeding shall be commenced against the Borrower, any Subsidiary, or any Obligated Party seeking liquidation, reorganization, or other relief with respect to it or its debts under any bankruptcy, insolvency, or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian, or other similar official for it or a substantial part of its property, and such involuntary proceeding shall remain undismissed and unstayed for a period of sixty (60) days.

(f) The Borrower, any Subsidiary or any Obligated Party shall fail to discharge within a period of thirty (30) days after the commencement thereof any attachment, sequestration, or similar proceeding or proceedings involving an aggregate amount in excess of TWENTY-FIVE THOUSAND AND NO/100 DOLLARS ($25,000.00) against any of its assets or properties.

(g) A final judgment or judgments for the payment of money in excess of TWENTY-FIVE THOUSAND AND NO/100 DOLLARS ($25,000.00) in the aggregate shall be rendered by a court or courts against the Borrower, any of its Subsidiaries, or any Obligated Party and the same shall not be discharged (or provision shall not be made for such discharge), or a stay of execution thereof shall not be procured, within thirty (30) days from the date of entry thereof and the Borrower or the relevant Subsidiary or Obligated Party shall not, within said period of thirty (30) days, or such longer period during which execution of the same shall have been stayed, appeal therefrom and cause the execution thereof to be stayed during such appeal.

(h) The Borrower, any Subsidiary, or any Obligated Party shall fail to pay when due principal of or interest on, in an amount in excess of $25,000, any Debt (other

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than the Obligations), or the maturity of any such Debt shall have been accelerated, or any such Debt shall have been required to be prepaid prior to the stated maturity thereof, or any event shall have occurred that permits (or, with the giving of notice or lapse of time or both, would permit) any holder or holders of such Debt or any Person acting on behalf of such holder or holders to accelerate the maturity thereof or require any such prepayment.

(i) This Agreement or any other Loan Document shall cease to be in full force and effect or shall be declared null and void or the validity or enforceability thereof shall be contested or challenged by the Borrower, any Subsidiary, any Obligated Party or any of their respective shareholders, or the Borrower or any Obligated Party shall deny that it has any further liability or obligation under any of the Loan Documents, or any lien or security interest created by the Loan Documents shall for any reason cease to be a valid, first priority perfected security interest in and lien upon any of the Collateral purported to be covered thereby.

(j) Any of the following events shall occur or exist with respect to the Borrower or any ERISA Affiliate: (i) any Prohibited Transaction involving any Plan; (ii) any Reportable Event with respect to any Plan; (iii) the filing under Section 4041 of ERISA of a notice of intent to terminate any Plan or the termination of any Plan; (iv) any event or circumstance that might constitute grounds entitling the PBGC to institute proceedings under Section 4042 of ERISA for the termination of, or for the appointment of a trustee to administer, any Plan, or the institution by the PBGC of any such proceedings; or (v) complete or partial withdrawal under Section 4201 or 4204 of ERISA from a Multiemployer Plan or the reorganization, insolvency, or termination of any Multiemployer Plan; and in each case above, such event or condition, together with all other events or conditions, if any, have subjected or could in the reasonable opinion of the Lender subject the Borrower to any tax, penalty, or other liability to a Plan, a Multiemployer Plan, the PBGC, or otherwise (or any combination thereof) which in the aggregate exceed or could reasonably be expected to exceed TWENTY-FIVE THOUSAND AND NO/100 DOLLARS ($25,000.00).

(k) Any Change in Control occurs.

(l) The Borrower, any of its Subsidiaries, or any Obligated Party, or any of their properties, revenues, or assets, shall become subject to an order of forfeiture, seizure, or divestiture (whether under RICO or otherwise) and the same shall not have been discharged within thirty (30) days from the date of entry thereof.

10.2 Remedies Upon Default. If any Event of Default shall occur and be continuing, the Lender may without notice terminate the Commitment and declare the Obligations or any part thereof to be immediately due and payable, and the same shall thereupon become immediately due and payable, without notice, demand, presentment, notice of dishonor, notice of acceleration, notice of intent to accelerate, notice of intent to demand, protest, or other formalities of any kind, all of which are hereby expressly waived by the Borrower; provided, however, that upon the occurrence of an Event of Default under Section 10.1(d) or Section 10.1(e), the Commitment shall automatically terminate, and the Obligations shall

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become immediately due and payable without notice, demand, presentment, notice of dishonor, notice of acceleration, notice of intent to accelerate, notice of intent to demand, protest, or other formalities of any kind, all of which are hereby expressly waived by the Borrower. If any Event of Default shall occur and be continuing, the Lender may exercise all rights and remedies available to it in law or in equity, under the Loan Documents, or otherwise.

10.3 Performance by the Lender. If the Borrower shall fail to perform any covenant or agreement contained in any of the Loan Documents, the Lender may perform or attempt to perform such covenant or agreement on behalf of the Borrower. In such event, the Borrower shall, at the request of the Lender, promptly pay any amount expended by the Lender in connection with such performance or attempted performance to the Lender, together with interest thereon at the Default Rate from and including the date of such expenditure to but excluding the date such expenditure is paid in full. Notwithstanding the foregoing, it is expressly agreed that the Lender shall not have any liability or responsibility for the performance of any obligation of the Borrower under this Agreement or any other Loan Document.

XI

Miscellaneous

11.1 Expenses. The Borrower hereby agrees to pay on demand: (a) all costs and expenses of the Lender in connection with the preparation, negotiation, execution, and delivery of this Agreement and the other Loan Documents and any and all amendments, modifications, renewals, extensions, and supplements thereof and thereto, including, without limitation, the fees and expenses of legal counsel for the Lender, (b) all costs and expenses of the Lender in connection with any Default and the enforcement of this Agreement or any other Loan Document, including, without limitation, the fees and expenses of legal counsel for the Lender, (c) all transfer, stamp, documentary, or other similar taxes, assessments, or charges levied by any Governmental Authority in respect of this Agreement or any of the other Loan Documents, (d) all costs, expenses, assessments, and other charges incurred in connection with any filing, registration, recording, or perfection of any security interest or Lien contemplated by this Agreement or any other Loan Document, and (e) all other costs and expenses incurred by the Lender in connection with this Agreement or any other Loan Document, including, without limitation, all costs, expenses, and other charges incurred in connection with obtaining any mortgagee title insurance policy, survey, audit, or appraisal in respect of the Collateral.

11.2 INDEMNIFICATION. THE BORROWER SHALL INDEMNIFY THE LENDER AND EACH AFFILIATE THEREOF AND THEIR RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES, ATTORNEYS, AND AGENTS FROM, AND HOLD EACH OF THEM HARMLESS AGAINST, ANY AND ALL LOSSES, LIABILITIES, CLAIMS, DAMAGES, PENALTIES, JUDGMENTS, DISBURSEMENTS, COSTS, AND EXPENSES (INCLUDING ATTORNEYS’ FEES) TO WHICH ANY OF THEM MAY BECOME SUBJECT WHICH DIRECTLY OR INDIRECTLY ARISE FROM OR RELATE TO (A) THE NEGOTIATION, EXECUTION, DELIVERY, PERFORMANCE, ADMINISTRATION, OR ENFORCEMENT OF ANY OF THE LOAN DOCUMENTS, (B) ANY OF THE TRANSACTIONS CONTEMPLATED BY THE LOAN DOCUMENTS, (C) ANY BREACH BY THE BORROWER OF ANY REPRESENTATION, WARRANTY,

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COVENANT, OR OTHER AGREEMENT CONTAINED IN ANY OF THE LOAN DOCUMENTS, (D) THE PRESENCE, RELEASE, THREATENED RELEASE, DISPOSAL, REMOVAL, OR CLEANUP OF ANY HAZARDOUS MATERIAL LOCATED ON, ABOUT, WITHIN, OR AFFECTING ANY OF THE PROPERTIES OR ASSETS OF THE BORROWER OR ANY SUBSIDIARY, OR (E) ANY INVESTIGATION, LITIGATION, OR OTHER PROCEEDING, INCLUDING, WITHOUT LIMITATION, ANY THREATENED INVESTIGATION, LITIGATION, OR OTHER PROCEEDING, RELATING TO ANY OF THE FOREGOING. WITHOUT LIMITING ANY PROVISION OF THIS AGREEMENT OR OF ANY OTHER LOAN DOCUMENT, IT IS THE EXPRESS INTENTION OF THE PARTIES HERETO THAT EACH PERSON TO BE INDEMNIFIED UNDER THIS SECTION SHALL BE INDEMNIFIED FROM AND HELD HARMLESS AGAINST ANY AND ALL LOSSES, LIABILITIES, CLAIMS, DAMAGES, PENALTIES, JUDGMENTS, DISBURSEMENTS, COSTS, AND EXPENSES (INCLUDING ATTORNEYS’ FEES) ARISING OUT OF OR RESULTING FROM THE SOLE OR CONTRIBUTORY NEGLIGENCE OF SUCH PERSON (BUT NOT SUCH PERSON’S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT).

11.3 Limitation of Liability. Neither the Lender nor any Affiliate, officer, director, employee, attorney, or agent of the Lender shall have any liability with respect to, and the Borrower hereby waives, releases, and agrees not to sue any of them upon, any claim for any special, indirect, incidental, or consequential damages suffered or incurred by the Borrower in connection with, arising out of, or in any way related to, this Agreement or any of the other Loan Documents, or any of the transactions contemplated by this Agreement or any of the other Loan Documents. The Borrower hereby waives, releases, and agrees not to sue the Lender or any of the Lender’s Affiliates, officers, directors, employees, attorneys, or agents for punitive damages in respect of any claim in connection with, arising out of, or in any way related to, this Agreement or any of the other Loan Documents, or any of the transactions contemplated by this Agreement or any of the other Loan Documents.

11.4 No Duty. All attorneys, accountants, appraisers, and other professional Persons and consultants retained by the Lender shall have the right to act exclusively in the interest of the Lender and shall have no duty of disclosure, duty of loyalty, duty of care, or other duty or obligation of any type or nature whatsoever to the Borrower or any of the Borrower’s shareholders or any other Person.

11.5 Lender Not Fiduciary. The relationship between the Borrower and the Lender is solely that of debtor and creditor, and the Lender has no fiduciary or other special relationship with the Borrower, and no term or condition of any of the Loan Documents shall be construed so as to deem the relationship between the Borrower and the Lender to be other than that of debtor and creditor.

11.6 Equitable Relief. The Borrower recognizes that in the event the Borrower fails to pay, perform, observe, or discharge any or all of the Obligations, any remedy at law may prove to be inadequate relief to the Lender. The Borrower therefore agrees that the Lender, if the Lender so requests, shall be entitled to temporary and permanent injunctive relief in any such case without the necessity of proving actual damages.

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11.7 No Waiver; Cumulative Remedies. No failure on the part of the Lender to exercise and no delay in exercising, and no course of dealing with respect to, any right, power, or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power, or privilege under this Agreement preclude any other or further exercise thereof or the exercise of any other right, power, or privilege. The rights and remedies provided for in this Agreement and the other Loan Documents are cumulative and not exclusive of any rights and remedies provided by law.

11.8 Successors and Assigns. This Agreement is binding upon and shall inure to the benefit of the Lender and the Borrower and their respective successors and assigns, except that the Borrower may not assign or transfer any of its rights or obligations under this Agreement without the prior written consent of the Lender.

11.9 Survival. All representations and warranties made in this Agreement or any other Loan Document or in any document, statement, or certificate furnished in connection with this Agreement shall survive the execution and delivery of this Agreement and the other Loan Documents and repayment of the Obligation, and no investigation by the Lender or any closing shall affect the representations and warranties or the right of the Lender to rely upon them.

11.10 ENTIRE AGREEMENT; AMENDMENT; WAIVERS. THIS AGREEMENT, THE NOTE, AND THE OTHER LOAN DOCUMENTS REFERRED TO HEREIN EMBODY THE FINAL, ENTIRE AGREEMENT AMONG THE PARTIES HERETO AND SUPERSEDE ANY AND ALL PRIOR COMMITMENTS, AGREEMENTS, REPRESENTATIONS, AND UNDERSTANDINGS, WHETHER WRITTEN OR ORAL, RELATING TO THE SUBJECT MATTER HEREOF AND MAY NOT BE CONTRADICTED OR VARIED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS OF THE PARTIES HERETO. THERE ARE NO ORAL AGREEMENTS AMONG THE PARTIES HERETO. The provisions of this Agreement and the other Loan Documents to which the Borrower is a party may be amended or waived only by an instrument in writing signed by the parties hereto.

11.11 Maximum Interest Rate. No provision of this Agreement or any other Loan Document shall require the payment or the collection of interest in excess of the maximum amount permitted by applicable law. If any excess of interest in such respect is hereby provided for, or shall be adjudicated to be so provided, in any Loan Document or otherwise in connection with this loan transaction, the provisions of this Section shall govern and prevail and neither the Borrower nor the sureties, guarantors, successors, or assigns of the Borrower shall be obligated to pay the excess amount of such interest or any other excess sum paid for the use, forbearance, or detention of sums loaned pursuant hereto. In the event the Lender ever receives, collects, or applies as interest any such sum, such amount which would be in excess of the maximum amount permitted by applicable law shall be applied as a payment and reduction of the principal of the indebtedness evidenced by the Note; and, if the principal of the Note has been paid in full, any remaining excess shall forthwith be paid to the Borrower. In determining whether or not the interest paid or payable exceeds the Maximum Rate, the Borrower and the Lender shall, to the extent permitted by applicable law, (a) characterize any non-principal payment as an expense, fee, or premium rather than as interest, (b) exclude voluntary prepayments and the effects

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thereof, and (c) amortize, prorate, allocate, and spread in equal or unequal parts the total amount of interest throughout the entire contemplated term of the indebtedness evidenced by the Note so that interest for the entire term does not exceed the Maximum Rate.

11.12 Notices. All notices and other communications provided for in this Agreement and the other Loan Documents to which the Borrower is a party shall be given in writing and made by telecopy or mailed by certified mail return receipt requested, or delivered to the intended recipient at the “Address for Notices” specified below its name on the signature pages hereof; or, as to any party at such other address as shall be designated by such party in a notice to the other party given in accordance with this Section. Except as otherwise provided in this Agreement, all such communications shall be deemed to have been duly given when transmitted by telecopy, subject to mechanical confirmation of receipt, or when personally delivered or, in the case of a mailed notice, when duly deposited in the mails, in each case given or addressed as aforesaid.

11.13 Governing Law; Venue; Service of Process. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas and the applicable laws of the United States of America. This Agreement has been entered into in Harris County, Texas, and it shall be performable for all purposes in Harris County, Texas. Any action or proceeding against the Borrower under or in connection with any of the Loan Documents may be brought in any state or federal court in Harris County, Texas. The Borrower hereby irrevocably (a) submits to the nonexclusive jurisdiction of such courts, and (b) waives any objection it may now or hereafter have as to the venue of any such action or proceeding brought in any such court or that any such court is an inconvenient forum. The Borrower agrees that service of process upon it may be made by certified or registered mail, return receipt requested, at its address specified or determined in accordance with the provisions of Section 11.12. Nothing herein or in any of the other Loan Documents shall affect the right of the Lender to serve process in any other manner permitted by law or shall limit the right of the Lender to bring any action or proceeding against the Borrower or with respect to any of its property in courts in other jurisdictions. Any action or proceeding by the Borrower against the Lender shall be brought only in a court located in Harris County, Texas.

11.14 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

11.15 Severability. Any provision of this Agreement held by a court of competent jurisdiction to be invalid or unenforceable shall not impair or invalidate the remainder of this Agreement and the effect thereof shall be confined to the provision held to be invalid or illegal.

11.16 Headings. The headings, captions, and arrangements used in this Agreement are for convenience only and shall not affect the interpretation of this Agreement.

11.17 Non-Application of Chapter 346 of Texas Finance Code. The provisions of Chapter 346 of the Texas Finance Code (or any other statutory equivalent) are specifically declared by the parties hereto not to be applicable to this Agreement or any of the other Loan Documents or to the transactions contemplated hereby.

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11.18 Participations. Upon receipt of the Borrower’s approval, which approval shall not be unreasonably withheld or delayed, the Lender shall have the right at any time and from time to time to grant participations in the Note and any other Loan Documents. Each actual or proposed participant shall be entitled to receive all information received by the Lender regarding the Borrower and its Subsidiaries, including, without limitation, information required to be disclosed to a participant pursuant to Banking Circular 181 (Rev., August 2, 1984), issued by the Comptroller of the Currency (whether the actual or proposed participant is subject to the circular or not).

11.19 Construction. The Borrower and the Lender acknowledge that each of them has had the benefit of legal counsel of its own choice and has been afforded an opportunity to review this Agreement and the other Loan Documents with its legal counsel and that this Agreement and the other Loan Documents shall be construed as if jointly drafted by the Borrower and the Lender.

11.20 Independence of Covenants. All covenants hereunder shall be given independent effect so that if a particular action or condition is not permitted by any of such covenants, the fact that it would be permitted by an exception to, or be otherwise within the limitations of, another covenant shall not avoid the occurrence of a Default if such action is taken or such condition exists.

11.21 WAIVER OF JURY TRIAL. TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, BORROWER HEREBY IRREVOCABLY AND EXPRESSLY WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM (WHETHER BASED UPON CONTRACT, TORT, OR OTHERWISE) ARISING OUT OF OR RELATING TO ANY OF THE LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREBY OR THE ACTIONS OF LENDER IN THE NEGOTIATION, ADMINISTRATION, OR ENFORCEMENT THEREOF.

[Remainder of Page Intentionally Left Blank]

[Signature Page to Follow]

24

IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written.

BORROWER:
SPACEHAB, INCORPORATED
By:	/s/ Brian Harrington
	Brian Harrington
	Senior Vice President and Chief Financial Officer
Address for Notices:
12130 Highway 3, Building 1
Webster, Texas 77598
Fax No.: 713/558-5956
Telephone No.: 713/558-5126
Attention: Brian Harrington

Signature Page to Loan Agreement

LENDER:
FIRST AMERICAN BANK
By:	/s/ Vernon G. Facundo
	Vernon G. Facundo
	Assistant Vice President
Address for Notices:
First American Bank, SSB
2000 West Sam Houston Parkway South
Suite 600
Houston, Texas 77042
Fax No.: 713/954-2053
Telephone No.: 713/954-9562 ext. 102
Attention: Dave Martin

Signature Page to Loan Agreement

INDEX TO EXHIBITS

Exhibit	Description of Exhibit	Section
A	Revolving Credit Note	Definitions
B	Security Agreement	Definitions

INDEX TO SCHEDULES

Schedule	Description of Schedule	Section
6.5	Existing Litigation	6.5
6.9	Existing Debt	6.9 & 8.1
6.14	List of Subsidiaries	6.14
6.20	Environmental Matters	6.20
8.2	Existing Liens	8.2
8.9	Sale and Leaseback Transactions	8.8 and 8.9

INDEX TO ANNEXES

Annex	Description of Annex	Section
I	Definitions	1.1
II	Financial Covenants	Article IX

Indexes to Exhibits, Schedules and Annexes

SCHEDULE 6.5

EXISTING LITIGATION

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

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

3. Tort Claim. On November 8, 2004, Borrower filed a second claim with NASA seeking damages of $79.7 million under the Federal Tort Claims Act for the loss of the RDM resulting from NASA’s alleged negligence leading to the destruction of the Space Shuttle Columbia and the loss of the RDM. Borrower’s claim represents its loss of $87.7 million less the $8.0 million recovered from NASA. Under federal tort claim procedures, NASA has statutory deadlines for responding to such claims. In the event that Borrower’s administrative claim is denied, Borrower would have the right to pursue the claim in Federal District Court.

Schedule 6.5

SCHEDULE 6.9

EXISTING DEBT

1. Indebtedness outstanding pursuant to the Indenture referred to in Section 7.12 totaling $63,250,000.

2. Indebtedness of Astrotech Florida Holdings, Inc. pursuant to that certain Credit Agreement dated as of August 30, 2001 with SouthTrust Bank, as lender (the “SouthTrust Indebtedness”).

3. Guaranty obligations of Borrower and Astrotech Space Operations, Inc., in connection with the SouthTrust Indebtedness

Schedule 6.9

SCHEDULE 6.14

LIST OF SUBSIDIARIES

Percentage of Voting Stock

Name of Subsidiary	Jurisdiction of Incorporation	Owned by the Borrower
SPACEHAB Government Services, Incorporated	Colorado	100%
Space Media, Inc.	Delaware	82%
Space Store, LLC	Delaware	100% by Space Media, Inc.
SPACEHAB Acquisition Corporation	Delaware	100%
Space Station Enterprise, LLC	Delaware	100%
Enermedia, LLC	Delaware	100%
Johnson Engineering	Colorado	100%
Technologies Corporation Space Portal, Inc.	Delaware	100%
Astrotech Florida Holdings, Inc.	Florida	100%
Astrotech Space Operations, Inc.	Delaware	100%

Schedule 6.14

SCHEDULE 6.20

ENVIRONMENTAL MATTERS

None.

Schedule 6.20

SCHEDULE 8.2

EXISTING LIENS

Real and personal property Liens securing the indebtedness under that certain Credit Agreement dated as of August 30, 2001, between Astrotech Florida Holdings, Inc., as borrower, and SouthTrust Bank, as lender, as amended

Schedule 8.2

SCHEDULE 8.9

SALE AND LEASEBACK TRANSACTIONS

1. Sale and leaseback of SPACEHAB Headquarters, consisting of a 90,987 square foot facility on 4.848 acres and approximately 3 acres of vacant land, located at 12130 Highway 3, Webster, Texas 77598 (the “Ellington Property”). Borrower does not currently own the Ellington Property, but may exercise an option to purchase. In the event of a sale and leaseback of the Ellington Property, Borrower estimates that it will sell the Ellington Property for $3,000,000 to $3,500,000, and lease the Ellington Property back for a 6 to 15 year term at a cost averaging $4.00 to $4.50 per square foot.

2. Sale and leaseback of SPACEHAB Payload Processing Facility, consisting of an approximately 58,000 square foot building located at 620 Magellan Road, Cape Canaveral, Florida 32920 (the “Florida Facility”). In the event of a sale and leaseback of the Florida Facility, Borrower estimates that it will sell the Florida Facility for $4,700,000 to $4,900,000, and lease the Florida Facility back for a 6 to 10 year term at a cost averaging $7.50 to $8.00 per square foot.

Schedule 8.9

ANNEX I

DEFINITIONS

“Advance” means an advance of funds by the Lender to the Borrower pursuant to Article II.

“Advance Request Form” means a certificate, in a form approved by the Lender, properly completed and signed by the Borrower requesting an Advance.

“Affiliate” means, as to any Person, any other Person (a) that directly or indirectly, through one or more intermediaries, controls or is controlled by, or is under common control with, such Person; (b) that directly or indirectly beneficially owns or holds five percent (5%) or more of any class of voting stock of such Person; or (c) that directly or indirectly beneficially owns or holds five percent (5%) or more of the voting stock of which is directly or indirectly beneficially owned or held by the Person in question. The term “control” means the possession, directly or indirectly, of the power to direct or cause direction of the management and policies of a Person, whether through the ownership of voting securities, by contract, or otherwise; provided, however, in no event shall the Lender be deemed an Affiliate of the Borrower or any of its Subsidiaries.

“Applicable Rate” shall mean the sum of the Prime Rate in effect from day to day plus one percent (1.0%).

“Applicable Subsidiaries” shall mean SPACEHAB Government Services, Incorporated and Astrotech Space Operations, Inc.

“Borrowing Base” means, at any time, an amount equal to eighty percent (80%) of Eligible Accounts.

“Business Day” means any day on which commercial banks are authorized to conduct business or are not required to close in the State of Texas.

“Capital Lease Obligations” means, as to any Person, the obligations of such Person to pay rent or other amounts under a lease of (or other agreement conveying the right to use) real and/or personal property, which obligations are required to be classified and accounted for as a capital lease on a balance sheet of such Person under GAAP. For purposes of this Agreement, the amount of such Capital Lease Obligations shall be the capitalized amount thereof, determined in accordance with GAAP.

“Change in Control” means:

(a) any “person” or “group” (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, but excluding any employee benefit plan of such person or its subsidiaries, and any person or entity acting in its capacity as trustee, agent, or other fiduciary or administrator of any such plan) becomes the “beneficial owner” (as defined in Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934), directly or indirectly, of 35% or more of the equity securities of Borrower entitled to vote

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for members of the board of directors or equivalent governing body of Borrower on a fully-diluted basis.

(b) a majority of the members of the board of directors or other equivalent governing body of Borrower cease to be composed of individuals (i) who were members of that board or equivalent governing body on the first day of such period, (ii) whose election or nomination to that board or equivalent governing body was approved by individuals referred to in clause (i) above constituting at the time of such election or nomination at least a majority of that board or equivalent governing body was approved by individuals referred to in clauses (i) and (ii) above constituting at the time of such election or nomination at least a majority of that board or equivalent governing body (excluding, in the case of both clause (ii) and clause (iii), any individual whose initial nomination for, or assumption of office as, a member of that board or equivalent governing body occurs as a result of an actual or threatened solicitation of proxies or consents for the election or removal of one or more directors by any person or group other than a solicitation for the election of one or more directors by or on behalf of the board of directors); or

(c) any Person or two or more Persons acting in concert shall have acquired, by contract or otherwise, control over the equity securities of Borrower entitled to vote for members of the board of directors or equivalent governing body of Borrower on a fully-diluted basis (and taking into account all such securities that such Person or group has the right to acquire pursuant to any option right) representing 35% or more of the combined voting power of such securities.

“Code” means the Internal Revenue Code of 1986, as amended, and the regulations promulgated and rulings issued thereunder.

“Collateral” has the meaning specified in Section 4.1.

“Commitment” means the obligation of the Lender to make revolving credit Advances pursuant to Section 2.1 in an aggregate principal amount at any time outstanding up to but not exceeding Five Million and No/100 Dollars ($5,000,000.00), subject, however, to termination pursuant to Section 10.2.

“Consolidated Current Assets” means, at any particular time, all amounts which, in conformity with GAAP, would be included as current assets on a consolidated balance sheet of the Borrower and the Subsidiaries.

“Consolidated Current Liabilities” means, at any particular time, all amounts which, in conformity with GAAP, would be included as current liabilities on a consolidated balance sheet of the Borrower and the Subsidiaries.

“Consolidated Tangible Net Worth” means, at any particular time, all amounts which, in conformity with GAAP, would be included as shareholders’ equity on a consolidated balance sheet of the Borrower and the Subsidiaries; provided, however, goodwill shall be excluded therefrom.

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“Debt” means as to any Person at any time (without duplication): (a) all obligations of such Person for borrowed money, (b) all obligations of such Person evidenced by bonds, notes, debentures, or other similar instruments, (c) all obligations of such Person to pay the deferred purchase price of property or services, except trade accounts payable of such Person arising in the ordinary course of business that are not past due by more than ninety (90) days, (d) all Capital Lease Obligations of such Person, (e) all Debt or other obligations of others guaranteed by such Person, (f) all obligations secured by a Lien existing on property owned by such Person, whether or not the obligations secured thereby have been assumed by such Person or are non-recourse to the credit of such Person, (g) all reimbursement obligations of such Person (whether contingent or otherwise) in respect of letters of credit, bankers’ acceptances, surety or other bonds and similar instruments, and (h) all liabilities of such Person in respect of unfunded vested benefits under any Plan.

“Default” means an Event of Default or the occurrence of an event or condition which with notice or lapse of time or both would become an Event of Default.

“Default Rate” means the Maximum Rate or, if no Maximum Rate exists, the sum of the Prime Rate in effect from day to day plus ten percent (10%).

“Dollars” and “$” mean lawful money of the United States of America.

“EBITDA” means, with respect to any period of its determination, the consolidated net income (excluding any extraordinary gains or losses) for such period, plus the interest expense and income taxes for such period, plus the depreciation and amortization for such period.

“Eligible Accounts” means, at any time, all accounts receivable of the Borrower, SPACEHAB Government Services, Incorporated, and Astrotech Space Operations, Inc. created in the ordinary course of business that are acceptable to the Lender in its sole discretion and satisfy the following conditions:

(a) The account complies with all applicable laws, rules, and regulations, including, without limitation, usury laws, the Federal Truth in Lending Act, and Regulation Z of the Board of Governors of the Federal Reserve System;

(b) The account has not been outstanding for more than sixty-one (61) days past the original due date of invoice;

(c) The account was created in connection with (i) the sale of goods by the Borrower in the ordinary course of business and such sale has been consummated and such goods have been shipped and delivered and received by the account debtor, or (ii) the performance of services by the Borrower in the ordinary course of business and such services have been completed and accepted by the account debtor;

(d) The account arises from an enforceable contract, the performance of which has been completed by the Borrower;

Annex I - 3

(e) The account does not arise from the sale of any good that is on a bill-and-hold, guaranteed sale, sale-or-return, sale on approval, consignment, or any other repurchase or return basis;

(f) The Borrower has good and indefeasible title to the account and the account is not subject to any Lien except Liens in favor of the Lender;

(g) The account does not arise out of a contract with or order from, an account debtor that, by its terms, prohibits or makes void or unenforceable the grant of a security interest by the Borrower to the Lender in and to such account;

(h) Except as permitted by Section 3.4 of the Security Agreement, the account is not subject to any setoff, counterclaim, defense, dispute, recoupment, or adjustment other than normal discounts for prompt payment; PROVIDED, HOWEVER, (i) to the extent that the Lender has been informed of the nature of any setoff and counterclaim, (ii) such setoff and counterclaim is noted in the Borrowing Base Report and (iii) the Lender has agreed to allow the same to be retained in the Borrowing Base, the account will constitute an Eligible Account;

(i) The account debtor is not insolvent or the subject of any bankruptcy or insolvency proceeding and has not made an assignment for the benefit of creditors, suspended normal business operations, dissolved, liquidated, terminated its existence, ceased to pay its debts as they become due, or suffered a receiver or trustee to be appointed for any of its assets or affairs;

(j) The account is not evidenced by chattel paper or an instrument;

(k) No default exists under the account by any party thereto;

(l) The account debtor has not returned or refused to retain, or otherwise notified the Borrower of any dispute concerning, or claimed nonconformity of, any of the goods from the sale of which the account arose;

(m) The account is not owed by an Affiliate of the Borrower;

(n) The account is payable in Dollars by the account debtor;

(o) The account shall be ineligible if the account debtor is domiciled in any country other than the United States of America;

(p) The account shall be ineligible if more than twenty-five percent (25%) of the aggregate balances then outstanding on accounts owed by such account debtor and its Affiliates to the Borrower are more than ninety (90) days past due from the dates of their original invoices;

(q) The account shall be ineligible if the account debtor is the United States of America or any department, agency, or instrumentality thereof, and the Assignment of Claims Act of 1940, as amended, shall not have been complied with; and

Annex I - 4

The amount of the Eligible Accounts owed by an account debtor to the Borrower shall be reduced by the amount of all “contra accounts” and other obligations owed by the Borrower to such account debtor.

“Environmental Laws” means any and all federal, state, and local laws, regulations, and requirements pertaining to health, safety, or the environment, including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. § 9601 et seq., the Resource Conservation and Recovery Act of 1976, 42 U.S.C. § 6901 et seq., the Occupational Safety and Health Act, 29 U.S.C. § 651 et seq., the Clean Air Act, 42 U.S.C. § 7401 et seq., the Clean Water Act, 33 U.S.C. § 1251 et seq., and the Toxic Substances Control Act, 15 U.S.C. § 2601 et seq., as such laws, regulations, and requirements may be amended or supplemented from time to time.

“Environmental Liabilities” means, as to any Person, all liabilities, obligations, responsibilities, Remedial Actions, losses, damages, punitive damages, consequential damages, treble damages, costs, and expenses (including, without limitation, all reasonable fees, disbursements and expenses of counsel, expert and consulting fees and costs of investigation and feasibility studies), fines, penalties, sanctions, and interest incurred as a result of any claim or demand, by any Person, whether based in contract, tort, implied or express warranty, strict liability, criminal or civil statute, including any Environmental Law, permit, order or agreement with any Governmental Authority or other Person, arising from environmental, health or safety conditions or the Release or threatened Release of a Hazardous Material into the environment, resulting from the past, present, or future operations of such Person or its Affiliates.

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations and published interpretations thereunder.

“ERISA Affiliate” means any corporation or trade or business which is a member of the same controlled group of corporations (within the meaning of Section 414(b) of the Code) as the Borrower or is under common control (within the meaning of Section 414(c) of the Code) with the Borrower.

“Event of Default” has the meaning specified in Section 10.1.

“Fixed Charge Coverage Ratio” means (a) the result of (i) EBITDA minus (ii) income taxes paid in cash divided by (b) the sum of (i) current maturities of long term Debt, plus (ii) current interest expense, plus (iii) capital expenditures to the extent not financed with any debt.

“GAAP” means generally accepted accounting principles, applied on a consistent basis, as set forth in Opinions of the Accounting Principles Board of the American Institute of Certified Public Accountants and/or in statements of the Financial Accounting Standards Board and/or their respective successors and which are applicable in the circumstances as of the date in question. Accounting principles are applied on a “consistent basis” when the accounting principles applied in a current period are

Annex I - 5

comparable in all material respects to those accounting principles applied in a preceding period.

“Governmental Authority” means any nation or government, any state or political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory, or administrative functions of or pertaining to government.

“Hazardous Material” means any substance, product, waste, pollutant, material, chemical, contaminant, constituent, or other material which is or becomes listed, regulated, or addressed under any Environmental Law, including, without limitation, asbestos, petroleum, and polychlorinated biphenyls.

“Lien” means any lien, mortgage, security interest, tax lien, financing statement, pledge, charge, hypothecation, assignment, preference, priority, or other encumbrance of any kind or nature whatsoever (including, without limitation, any conditional sale or title retention agreement), whether arising by contract, operation of law, or otherwise.

“Loan Documents” means this Agreement and all promissory notes, security agreements, deeds of trust, assignments, letters of credit, guaranties, and other instruments, documents, and agreements executed and delivered pursuant to or in connection with this Agreement, as such instruments, documents, and agreements may be amended, modified, renewed, extended, or supplemented from time to time.

“Lock Box Agreement” means any of the Lock Box Agreements between Borrower, SPACHAB Government Services, Incorporated, or Astrotech Space Operations, Inc., and Lender establishing arrangements with Lender for collection of accounts receivable payments.

“Material Adverse Effect” means any act, event, condition or circumstance which could materially and adversely effect (i) the business, operations, condition (financial or otherwise), prospects, liabilities, assets, results of operations, capitalization, liquidity or properties of Borrower, Subsidiaries or any Obligated Party, taken as a whole; (ii) the value of the Collateral; or (iii) the ability of Borrower to pay and perform the Note or the other Obligations.

“Maximum Rate” means, at any time, the maximum rate of interest under applicable law that the Lender may charge the Borrower. The Maximum Rate shall be calculated in a manner that takes into account any and all fees, payments, and other charges in respect of the Loan Documents that constitute interest under applicable law. Each change in any interest rate provided for herein based upon the Maximum Rate resulting from a change in the Maximum Rate shall take effect without notice to the Borrower at the time of such change in the Maximum Rate. For purposes of determining the Maximum Rate under Texas law, the applicable rate ceiling shall be the indicated rate ceiling described in, and computed in accordance with, Chapter 303 of the Texas Finance Code.

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“Multiemployer Plan” means a multiemployer plan defined as such in Section 3(37) of ERISA to which contributions have been made by the Borrower or any ERISA Affiliate and which is covered by Title IV of ERISA.

“Note” means, collectively, all promissory notes executed at any time by the Borrower and payable to the order of the Lender; as renewed, extended, modified and/or increased from time to time.

“Obligated Party” means any guarantor or any other Person who is or becomes party to any agreement that guarantees or secures payment and performance of the Obligations or any part thereof.

“Obligations” means all obligations, indebtedness, and liabilities of the Borrower to the Lender, now existing or hereafter arising, whether direct, indirect, related, unrelated, fixed, contingent, liquidated, unliquidated, joint, several, or joint and several, including, without limitation, the obligations, indebtedness, and liabilities of the Borrower under this Agreement, the Note, and the other Loan Documents, and all interest accruing thereon and all attorneys’ fees and other expenses incurred in the enforcement or collection thereof.

“Payment Date” means the 11th day of each month of each year, the first of which shall be the first such day after the date of this Agreement.

“PBGC” means the Pension Benefit Guaranty Corporation or any entity succeeding to all or any of its functions under ERISA.

“Person” means any individual, corporation, business trust, association, company, partnership, joint venture, Governmental Authority, or other entity.

“Plan” means any employee benefit or other plan established or maintained by the Borrower or any ERISA Affiliate and which is covered by Title IV of ERISA.

“Prime Rate” means the prime rate quoted from time to time in the Money Rates section of The Wall Street Journal, Southwest Edition and if two (2) or more rates are quoted the highest rate quoted. Effective the day a published Wall Street Journal reflects a change in that prime rate, and without notice to the Borrower or any other party, the Applicable Rate on the Note shall likewise change. In the event The Wall Street Journal dissolves, liquidates or otherwise ceases to publish or announce a prime rate, the then holder of the Note shall designate a bank having its principal banking location in New York City, New York, whose base or prime rate, from and after the effective date of such designation, shall be the Prime Rate for purposes hereof.

“Principal Office” means the principal office of the Lender, presently located at 2000 West Sam Houston Parkway South, Suite 600, Houston, Texas 77042.

“Prohibited Transaction” means any transaction set forth in Section 406 of ERISA or Section 4975 of the Code.

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“Quarterly Payment Date” means May 11, 2005 and the same day of each August, November and February thereafter that the Commitment is outstanding.

“Release” means, as to any Person, any release, spill, emission, leaking, pumping, injection, deposit, disposal, disbursement, leaching, or migration of Hazardous Materials into the indoor or outdoor environment or into or out of property owned by such Person, including, without limitation, the movement of Hazardous Materials through or in the air, soil, surface water, ground water, or property.

“Remedial Action” means all actions required to (a) clean up, remove, treat, or otherwise address Hazardous Materials in the indoor or outdoor environment, (b) prevent the Release or threat of Release or minimize the further Release of Hazardous Materials so that they do not migrate or endanger or threaten to endanger public health or welfare or the indoor or outdoor environment, or (c) perform pre-remedial studies and investigations and post-remedial monitoring and care.

“Reportable Event” means any of the events set forth in Section 4043 of ERISA.

“Revolving Credit Note” means the promissory note of the Borrower payable to the order of the Lender, in substantially the form of Exhibit A hereto, and all extensions, renewals, and modifications thereof.

“RICO” means the Racketeer Influenced and Corrupt Organizations Act of 1970, as amended from time to time.

“Secured Debt Leverage Ratio” means, at any particular time, the ratio of Debt secured by liens to Consolidated Tangible Net Worth.

“Security Agreement” means any of the Security Agreements of the Borrower, Astrotech Space Operations, Inc. and SPACEHAB Government Services, Incorporated in favor of the Lender in substantially the form of Exhibit B hereto, as the same may be amended, supplemented, or modified.

“Subordinated Debt” means obligations of the Borrower subject to the Indenture described in Section 7.12 hereof.

“Subsidiary” means any corporation of which at least a majority of the outstanding shares of stock having by the terms thereof ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether or not at the time stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned or controlled by the Borrower or one or more of the Subsidiaries or by the Borrower and one or more of the Subsidiaries.

“Termination Date” means 11:00 A.M. Houston, Texas time one (1) year from the date hereof, or such earlier date on which the Commitment terminates as provided in this Agreement.

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“UCC” means the Uniform Commercial Code as in effect in the State of Texas.

Other Definitional Provisions. All definitions contained in this Agreement are equally applicable to the singular and plural forms of the terms defined. The words “hereof”, “herein”, and “hereunder” and words of similar import referring to this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement. Unless otherwise specified, all Article and Section references pertain to this Agreement. All accounting terms not specifically defined herein shall be construed in accordance with GAAP. Terms used herein that are defined in the UCC, unless otherwise defined herein, shall have the meanings specified in the UCC.

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ANNEX II

FINANCIAL COVENANTS

1. Consolidated Tangible Net Worth.

(a) Subject to paragraph (b) hereunder, the Borrower shall at all times maintain Consolidated Tangible Net Worth in an amount not less than Fifteen Million and No/100 Dollars ($15,000,000.00) (the “Required Amount”).

(b) If on either the date of determination or the date any Advance is to be made hereunder the Consolidated Tangible Net Worth shall be less than the Required Amount, then: (i) the Borrower shall, pursuant to documentation in form and substance reasonably satisfactory to the Lender, within three (3) business days pledge to the Lender cash or deposit accounts (the “Cash Collateral”) in an amount equal to the lesser of (A) the revolving credit Advances at such time outstanding and (B) the difference, as most recently calculated, between Consolidated Tangible Net Worth and the Required Amount; and (ii) the Lender shall not be required to make additional revolving credit Advances to the Borrower unless after giving effect to such additional Advances the Borrower shall be in compliance with the requirements of clause (b)(i) above.

The amount of Cash Collateral required to be pledged shall be adjusted from time to time to reflect changes in the amount of revolving credit Advances outstanding and in the amount of Consolidated Tangible Net Worth. If on any date of determination the amount of Cash Collateral pledged as of such date is greater than the amount required to be so pledged pursuant to the above calculations, the Lender shall release such excess amount from the pledge.

2. Secured Debt Leverage Ratio. The Borrower will at all times maintain a Secured Debt Leverage Ratio of not greater than .75 to 1.0.

3. Fixed Charge Coverage Ratio. The Borrower will at all times maintain a Fixed Charge Coverage Ratio of not less than 1.2 to 1.0, calculated on a trailing four (4) quarterly basis.

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EX-31.1

EXHIBIT 31.1

CERTIFICATIONS

I, Michael E. Kearney, certify that:

1. I have reviewed this quarterly 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 officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 11, 2005

/s/ Michael E. Kearney

Michael E. Kearney

President and Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATIONS

I, Brian K. Harrington, certify that:

1. I have reviewed this quarterly 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 officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 11, 2005

/s/ Brian K. Harrington

Brian K. Harrington

Senior Vice President and

Chief Financial Officer

EX-32

EXHIBIT 32

CERTIFICATIONS

Each of the undersigned hereby certifies, pursuant to 18 U.S.C. Section 1350, in his capacity as an officer of SPACEHAB, Incorporated (“SPACEHAB”), that, to the best of his knowledge, the Quarterly Report of SPACEHAB on Form 10-Q for the period ended December 31, 2004, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operation of SPACEHAB.

Date: February 11, 2005

/s/ Michael E. Kearney

Michael E. Kearney

President and Chief Executive Officer

/s/ Brian K. Harrington

Brian K. Harrington

Senior Vice President and

Chief Financial Officer

A signed original of this written statement required by Section 906 has been provided to SPACEHAB and will be retained by SPACEHAB and furnished to the Securities and Exchange Commission or its staff upon request.