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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended June 30, 2004

For the transition period from              to             

Commission File No. 0-27206

SPACEHAB, Incorporated

(Exact name of registrant as specified in this charter)

12130 Highway 3, Building 1

Webster, Texas 77598-1504

(713) 558-5000

Securities Registered pursuant to Section 12(b) of the Act: None

Securities Registered pursuant to Section 12(g) of the Act:

Number of shares of Common Stock (no par value) outstanding as of January 5, 2004, 12,435,827. Aggregate market value of Common Stock (no par value) held by non-affiliates of the registrant on January 5, 2004, based upon the closing price of the Common Stock on the NASDAQ National Market of $1.92 was approximately $23,876,788.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     YES  x    NO  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

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

DOCUMENTS INCORPORATED BY REFERENCE:

PART I

DEFINITIONS

As used in this Form 10-K, 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.

Item 1. Business.

THE COMPANY

Incorporated in 1984, SPACEHAB was the first company to commercially develop, own and operate pressurized space habitat modules. Serving the international community, SPACEHAB has experience supporting both manned and unmanned missions to space. We offer:

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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 June 30, 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).

On February 12, 1997, SPACEHAB acquired the operating assets and business of Astrotech Space Operations, Inc. (“Astrotech” or “ASO”) from Northrop Grumman Corporation. Offering customers an alternative to using government-owned facilities, our ASO subsidiary 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. Astrotech is a commercial provider of satellite processing services in the United States, supplying the facilities and services used in the launch preparation of these spacecraft. 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 200 satellites processed, ASO diversifies SPACEHAB’s customer base and broadens our core competencies.

We further expanded our capability to support human space flight activities by acquiring Johnson Engineering Corporation (“JE”) on July 1, 1998. In March 2003 we changed the business unit’s name to SPACEHAB Government Services (“SGS”). SGS includes specialized 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.

On April 11, 2000, SPACEHAB announced the formation of Space Media, Inc. (“SMI”), a majority-owned subsidiary intended to create proprietary space-themed content for education and commerce. SMI 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. In 2001, we acquired 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.

The current business of the Company is in three areas: (1) SFS services required to support the space shuttle’s return-to-flight, assembly and utilization of the ISS, and evolution of NASA’s exploration initiation; (2) Expansion of the ASO revenue base through new markets and new services, and (3) SGS support for the ISS Program Office under cost-type government contracts. We are continuing to identify new business and business opportunities within our core competencies.

Documents and Information Available on Website

The Internet address of the Company’s website is www.spacehab.com. We make available, free of charge through our website, all of our filings with the Securities and Exchange Commission (“SEC”), including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, as soon as reasonably practicable after they are electronically filed with or furnished to the SEC.

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On the Corporate Governance page of the Investor Info section of our company website, the documents listed below are also available or can be mailed in printed format to any stockholder upon request to the Vice President – Investor Relations, SPACEHAB, Inc. 12130 Highway 3, Building 1, Webster, Texas 77598.

SPACEHAB will make prompt disclosure of any amendment to or waiver of any provision of its business ethics guidelines that applies to any director or executive officer or to its chief executive officer, chief financial officer, chief accounting officer or controller, or persons performing similar functions. We will make any such disclosure that may be necessary by posting the disclosure on our website on the Corporate Governance page.

BUSINESS AND PROPERTY

SPACEHAB’s business segments provide a range of products and services to the aerospace market. Our four business units; SPACEHAB Flight Services, SPACEHAB Government Services, Astrotech Space Operations, and Space Media, provide a wide range of product and service support to the aerospace industry including research and logistics expertise and hardware; engineering and analysis services; payload processing and delivery; and space education and retail goods.

SPACEHAB Flight Services

NASA and other users of the space shuttle and ISS must follow a complex set of procedures to prepare payloads for launch, operate them in space, and process them upon return. The SFS Carrier Development and Operations Group offer these users turn-key, fixed-price payload services using Company-controlled assets. These services include payload scheduling, mission planning, safety analysis and certification, physical integration with a carrier (such as a SPACEHAB module or ICC), integration of carriers with the space shuttle, flight operations, data gathering and synthesis, and launch and landing site activities.

SFS is responsible for sustaining engineering, physical integration, and operation of the Company’s modules, ICCs, and supporting equipment, all which are housed at our SPACEHAB Payload Processing Facility in Cape Canaveral, Florida. A single module is an aluminum cylinder, measuring 10 feet in length by 13.5 feet in diameter, which incorporates a patented design that includes a truncated top and flat end caps. These fully-instrumented modules provide resources such as power, data management, thermal control, and vacuum venting. Single modules, which have a payload capacity of 5,400 pounds, are employed primarily for research and logistics missions. When doubled, the capacity increases to 10,000 pounds and optimizes the resupply capability for NASA by carrying vital supplies to cosmonauts and astronauts aboard the ISS.

In fiscal year 1997, the Company began full-scale development of the Research Double Module (“RDM”) (payload capacity 9,000 lb.), outfitted to serve as a microgravity laboratory. The RDM was completed in fiscal year 2001 and made its first flight on NASA shuttle mission STS-107. The RDM was destroyed in the STS-107 Columbia accident. The Company has no plans to replace the RDM at this time.

SPACEHAB developed the ICC system of unpressurized payload carriers to transport cargo that does not require a pressurized environment. Cargo suitable for transport on the ICC includes ISS assembly components and spares, astronaut tools, and unpressurized experiments. Based on a patented pallet technology, the ICC flies in what is ordinarily unused volume in the front or rear of the space shuttle’s cargo bay. It can be used alone or in combination with SPACEHAB single or double modules to provide the optimum mix of pressurized and unpressurized cargo capacity on a single mission to the ISS. By expanding the capabilities of the space shuttle and offering flexibility in the mix of pressurized and unpressurized cargo carried on each mission, the ICC is a cost-effective option for ISS logistics.

SPACEHAB completed construction of its fleet of three ICCs in fiscal year 1999. Our ICCs initially flew on NASA’s first supply mission to the ISS, space shuttle flight STS-96 in May 1999, and have flown on four subsequent missions with more flights scheduled on the NASA manifest. In fiscal year 2001, we sold our ICCs to EADS Space Transportation and entered into an agreement with them to lease back these assets for a period of four

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years with two additional four-year options. To meet particular NASA requirements for unpressurized cargo transport, SPACEHAB developed a Vertical Cargo Carrier (“VCC”), designed and built for us by RSC Energia. In fiscal year 2002, we completed construction of the VCC and also sold this asset to EADS for inclusion in the lease back arrangements cited above. The ICC system, including the VCC and other derivatives, is a highly-capable, flexible, and adaptable payload transport option.

The Space Shuttle Program is currently implementing modifications recommended in the Columbia Accident Investigation Board report issued after the Columbia accident and is scheduled for a return to flight no earlier than March 2005. Pending the return to flight, the SFS business unit is continuing operations, supporting four of the next six planned space shuttle missions. In April 2004, we successfully completed the transition of the Company’s module systems integration and operations from our subcontractor The Boeing Company (“Boeing”) to an in-house capability. Our personnel now perform mission integration, hardware development, and sustaining engineering required to support the flight of our modules. EADS provides ICC mission integration services under subcontract to SPACEHAB. 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. All module and ICC mission integration services as well as all cargo shipping services are currently provided to NASA under contract to Lockheed Martin Corporation (“Lockheed Martin”) who leads NASA’s Cargo Mission Contract (“CMC”) efforts.

We are also providing research access to space and on the ISS to the Japan Aerospace Exploration Agency (“JAXA”) through RSC Energia, the 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.

Subsequent to year end, 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 just 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 approaches that could be extensible to Mars and beyond. In addition to this six-month contract effort, the Company may be awarded a contract option that includes an additional six-month effort also valued at nearly $1.0 million.

Astrotech Space Operations

SPACEHAB’s Astrotech subsidiary provides satellite processing facilities and support services for satellite manufacturing and launch services industries, including commercial, NASA, and Department of Defense customers. Astrotech maintains company-owned facilities for the processing of payloads and payload elements launched from Florida’s NASA Kennedy Space Center/Cape Canaveral Air Force Station, and Vandenberg Air Force Base (“VAFB”) in California. Astrotech also provides payload processing and facilities maintenance support to the Sea Launch program at the Home Port facilities in Long Beach, California under contract to Sea Launch Company LLC. The ASO facilities are specifically sized and outfitted to accommodate a wide range of customer payloads as well as the payload fairings and payload adapter assemblies of the launch service providers. This approach allows for maximum flexibility in the processing of parallel missions and accommodating schedule changes. Astrotech’s goal is to make its facilities and operations a seamless extension of the customer’s factory environment.

Specific ASO satellite processing services include support for spacecraft final mechanical assembly, electrical checkout, liquid propellant loading, solid rocket motor/ordnance installation, payload fairing encapsulation, and remote payload command and control during the launch countdown. Satellite payload processing requires specialized facilities located near the launch site, with such features as advanced environmental control, clean high bay work areas, hazard-proof electrical systems, and overhead bridge cranes.

In support of the new Lockheed Martin and Boeing five-meter class launch vehicles, Astrotech began design and construction of a major facility expansion at its Florida site in August 1998 at a cost of approximately $31 million, building a new Spacecraft Processing Facility (“SPF”) and associated infrastructure upgrades to support projected higher launch rates and larger-sized payloads associated with these new launch vehicle systems. Dedicated in October 2001, the SPF supports all planned configurations of the Boeing Delta IV and Lockheed Martin Atlas V launch vehicle systems.

On October 1, 2003, Astrotech was notified by Boeing that it was exercising its termination rights with regards to its financial guarantees under the contractual 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

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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 for future contract payments guaranteed under the contract.

Although Boeing recently terminated its financial guarantees, they continue to use Astrotech’s processing support services. Subsequent to the termination announcement, Boeing funded three new task orders to Astrotech for payload processing support at their Florida facilities for work performed during fiscal year 2004 and 2005.

During fiscal 2004, Astrotech began direct contract support to NASA for satellite support services in Florida. Astrotech has two NASA missions under contract, MESSENGER which successfully launched after the fiscal year, and Deep Impact scheduled for launch in fiscal 2005. Astrotech is also working with NASA on an Indefinite Delivery/Indefinite Quantity (IDIQ) contract format for future mission support.

SPACEHAB Government Services

Our SGS business unit expands SPACEHAB’s core business of supporting people living and working in space. SGS supports the Government in the areas of large-scale configuration and data management programs such as the ISS; specialized design, development, and fabrication of space hardware; low- to high-fidelity mockup design and construction; and safety and quality support services. This SPACEHAB business unit offers a wide array of products and services in these varied fields and brings advanced ideas and solid execution of these innovations to our customers. SGS is currently under contract to provide configuration management services within the Program Integration & Control (“PI&C”) contract of which ARES Corporation is the prime contractor. Prior to this time, from May 1993 to April 2003, SGS primarily operated under the Flight Crew Systems Development contract, a $399.1 million multi-task cost-plus award and incentive-fee contract, which concluded in April 2003.

Space Media

On April 11, 2000, we announced the formation of SMI, a majority-owned subsidiary intended to create proprietary space-themed content for education and commerce. Through a highly-developed networking system and expertise in the space industry, Space Media is able to provide the space enthusiast with a variety of services and products. We have teamed with some of the nation’s leading space and media experts including space memorabilia appraisers, Hollywood prop and effects specialists, and publicity and astronaut appearance professionals. SMI’s services range from outfitting a comprehensive space exhibit, to providing astronaut product endorsements.

In fiscal year 2000, SMI acquired The Space Store, an online retail operation, anticipating that e-commerce could become an integral part of its Internet business. The Space Store currently offers space-related products through its website, www.thespacestore.com, and has a retail facility in Houston, Texas, near NASA’s Johnson Space Center. SMI also directs the STARS Program, a commercial educational initiative designed to stimulate students’ imagination and encourage interest in science topics related to space research. STARS has flown three successful missions involving thousands of students from around the world.

Other Operations

Our strategic programs business initiative is intended to build on our core expertise, expand existing markets, and develop new innovative, affordable “no-box” solutions to complex problems developed within the space exploration industry. In fiscal year 2000, SPACEHAB began design and construction of a commercial space station habitat module in partnership with RSC Energia of Korolev, Russia. Named Enterprise^™, this multipurpose module is intended to be attached to the ISS and could provide space station users habitation space, stowage space, communications, power and other utilities, and laboratory facilities for long-duration research. The module would provide NASA with the ability to support a full six-person crew on board the ISS. The Company also provided NASA with an alternate proposal, utilizing the core Enterprise asset base/technology in constructing a cargo module. In evaluating our investment in Enterprise in June 2003, the Company identified significant uncertainties in new human space flight programs. While we believe the service offered is a valuable service and we are actively marketing this service to NASA, we ceased funding development and were unable to determine if or when this investment would be recovered. Therefore, the Company wrote down its full investment of $8.2 million in Enterprise as of June 30, 2003.

SPACEHAB initiated development of the Docking Double Module (“DDM”) during the second half of fiscal year 1999. The DDM was conceived for the purpose of enabling Columbia, the oldest and heaviest orbiter in NASA’s shuttle fleet, to support ISS resupply operations. The DDM eliminates the need for the orbiter docking module and ancillary attachment hardware by allowing orbiters to dock directly to the roof of the SPACEHAB module. The

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DDM could increase orbiter payload capacity and the orbiters’ capability to “reboost” or restore the desired orbit of the ISS. The DDM utilizes the design of the existing SPACEHAB modules, but provides for a reinforced “roof” to allow direct docking to the ISS. In June 2003, we wrote down a portion of its investment in the DDM due to uncertainties in human space flight programs and the Columbia accident. The remaining costs, consisting of module materials, were reclassified to flight assets and will be depreciated over their remaining useful lives.

The Company decided to discontinue marketing and funding the development of the SPACEHAB Universal Communications System (“SHUCS”) and wrote down its investment in SHUCS in June 2003.

In 1998 we entered into a joint venture agreement with Guignè Technologies Ltd. of Canada to build Space-DRUMS – Dynamically Responding Ultrasonic Matrix Systems – a space-based facility using acoustic energy to position samples for containerless processing. Our interest in the joint venture was converted to an equity interest in Guignè Inc., the parent Company of Guignè Technologies Ltd., effective January 1, 2000. The Space-DRUMS facility is complete and scheduled for launch to the ISS on space shuttle mission STS-114 which has been delayed pending the return to flight of the space shuttle. SPACEHAB has less than 20% ownership of Guignè and has no significant influence over the activities of the investment. During the three months ended December 31, 2003, Guignè experienced an adverse financial event that, in the opinion of management, impairs the value of SPACEHAB’s investment. An impairment of $1.8 million was recognized in that period.

Industry Overview

SPACEHAB’s business is in the aerospace industry and focuses primarily on two aspects: the international human and robotic space exploration market and the commercial spacecraft processing industry. One general measure of the overall industry in which we operate, has seen a decline in total sales over the past three years from a high of $153 billion in 2001, to $148 billion in 2002, and $138 billion in 2003. This trend is more reflective of the glut of commercial aircraft in the world, complicated by the severe financial pressure on the commercial airline industry, than on the segments in which we operate. Comparable statistics for the global space industry reflect strong government spending and consumer demand for satellite services, producing growing revenues of $73.7 billion for 2000, $78.6 billion for 2001, and $86.8 billion for 2002.

NASA and the International Space Exploration Market: NASA is responsible for the United States’ civilian space program. The agency’s space shuttle system and the ISS are the core components of the U. S. Space Program. Human space flight programs accounted for almost half of the space agency’s fiscal year 2002 budget, the last full year of space shuttle operations. SPACEHAB plays a key role in the space shuttle and ISS programs, providing its fleet of modules and carriers along with expertise in payload integration, facility operations, and space station configuration management to NASA, other U. S. and foreign government space agencies, universities, and businesses.

NASA is operating under a fiscal year 2004 budget of $15.4 billion, a budget that has seen only inflationary adjustment annually over the past several fiscal years. Currently, the space shuttle fleet is temporarily grounded pending completion of the return-to-flight initiatives identified in the Columbia Accident Investigation Board (“CAIB”) analysis of the Columbia disaster. In January of 2004, President Bush announced a new vision for the U.S. space exploration program that proposed an immediate budget increase for NASA of $1.0 billion and an emphasis on the return to flight of the space shuttle and completion of the ISS program. The U.S. space program is focused on space exploration, advancing scientific research, establishing a permanent human presence in space, developing new technologies that contribute to economic growth and security, and fostering improved international relations through peaceful cooperation in space.

SPACEHAB is focused on two markets within the NASA space program: 1) space support services including space station logistics and re-supply, microgravity and space life sciences research, and exploration requirements and infrastructure definition, and 2) ground operations and payload processing. The microgravity environment of space provides a unique opportunity to study physical, chemical, and biological processes without the influence of gravity. Demand for access to a microgravity environment can be divided into two broad categories: scientific research and commercial applications. SPACEHAB customers for space-based research and development support aboard the space shuttle and the ISS include NASA, other government agencies, academic institutions, and private companies.

The ISS is the largest international engineering project ever undertaken. More than a dozen nations, including the United States, Canada, Japan, Russia, and members of the European Union are committed to building and operating this orbiting research platform. Technical constraints, the Columbia disaster, and NASA funding limitations have delayed completion of the ISS and the Agency and its international partners have not yet achieved the final configuration of the space station. Currently a station crew of only two is sustaining the ISS awaiting the shuttle’s

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return to flight and there is precious little crew time for research. Members of Congress, the science community, and other constituencies are encouraging NASA to commit to a “core complete” configuration accommodating a crew of six, within the constraints of the CAIB recommendations and to safely return the shuttle to flight to provide the means to achieve this goal. NASA is reviewing ISS planning and spending in order to determine how to proceed toward completion of the project while at the same time looking ahead to the post-shuttle era of ISS utilization and exploration.

Pending the return to flight of the space shuttle, NASA and the international space community are relying on the Russian space program’s Soyuz and Progress space vehicles to ferry astronauts and supplies to and from the ISS. We provide cargo transport and logistics services to NASA and foreign space agencies, scheduling and arranging payloads to the ISS on these Russian flights. Although these vehicles offer limited capacity when compared to the space shuttle, and interface between the United States and Russian space authorities sometimes encounters conflicting priorities, it is apparent that cargo access to the ISS by sources other than the U.S. space shuttle will be necessary even when it does return to flight.

We maintain cooperative relationships with both EADS Space Sciences Corporation (a consortium of Germany, France, Spain and Italy) and RSC Energia of Russia who offer large-scale aerospace technology and manufacturing capability. The ICC operated by SPACEHAB was designed with the technology support of EADS and manufactured by Energia. SPACEHAB and Energia are also working to co-design an expendable cargo carrier vehicle that offers a low-cost alternative to re-supply to the ISS.

The Commercial Satellite Industry: Global space industry revenues have continued to increase, growing at a rate of 15% annually over the six years from 1996 to 2002, even though some markets, such as the commercial satellite sector that SPACEHAB serves through our Astrotech business unit, have experienced a significant decline in recent years. Satellite services and ground equipment manufacturing have shown the greatest growth, while satellite manufacturing and the launch industry have shown the greatest declines. Government spending and strong consumer demands for satellite video services were responsible for almost all of this growth. Although industry revenues have been positive, other indicators – such as prices, profit margins, stock prices, and new orders – have experienced negative trends and reflect significant financial stress in the industry.

Future growth of Astrotech’s business base is linked to the prospects for new commercial satellite manufacturing orders and an increased market share in the government satellite processing sector. Activity in the commercial market fell sharply in 2000 as telecom and Internet-related investment plunged, reflecting the overbuilt market resulting from the technology boom of the late 1990’s. The world’s existing commercial satellites continue to age, however, as the market continues to expand for satellite-based broadband services pointing to a near-term recovery of this market. Experts identify nearly 100 of today’s satellites that are expected to reach the ends of their service lives in the next five years. Additionally, the Department of Defense is spending nearly $18 billion annually to develop, acquire, and operate satellites and other space-related systems. Space assets are ubiquitous and diversified in military operations. With each major conflict over the last two decades, the visibility, criticality, and importance of the space sector has increased.

The National Vision for the Future of Space Exploration: On January 14, 2004, President Bush made a major policy statement outlining a new focus and direction for the nation’s space exploration program. SPACEHAB views the President’s commitment to space exploration, the human space flight 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 new vision provides NASA with a clear focus, stabilizes the NASA Program, and proposed increased funding for the new pursuits.

The impacts of this vision will materialize over time, and we will continue to align our business direction to remain a constructive force in the human space flight program. In the long term, we believe that our core competencies offer opportunities to continue to provide high-value services as well as 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, our primary objective is to continue providing unique services to NASA and the space community in support of the space shuttle and ISS programs. Even with the renewed vision, the space shuttle and ISS will remain an integral part of the human space flight program through at least 2010. We are currently supporting four of the next six space shuttle flights and we are pursuing additional missions that will be important for completing the final assembly and on-going operation of the ISS.

In addition to providing services and flight assets that enhance working and living in space, SPACEHAB has continued to develop innovative concepts and initiatives that support the nation’s new space vision, some of them

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leveraging our unique international partnerships. These activities include the development of an affordable cargo delivery service that could augment ISS logistics requirements as the space shuttle is phased out; the expansion of our satellite payload processing services and facilities to support the ground processing of the new crew exploration vehicle; and the provision of flight hardware alternatives that allow the ISS to be completed more expediently and in a less costly manner. We believe that these innovative concepts will be valuable to NASA in fulfilling their new space vision.

In June 2004, the President’s Commission on Implementation of United States Space Exploration Policy issued its final report of conclusions and recommendations gathered from public testimony of 96 individuals and over 6,000 written inputs. The Commission’s objective was to “examine and make recommendations on implementing” the new national vision. The Commission found overwhelming support (public comments supporting the vision compared to those against the program by 7 to 1) for this new National Vision for Space Exploration.

Throughout the report, the Commission found and emphasized the need for a greater role of commercial enterprise in the space exploration program. As a pioneer in providing commercial assets and services to the space program, SPACEHAB is strongly encouraged with the opportunities ahead as the new national vision becomes reality and, subsequent to year end, secured its first study contract in support of this vision.

Competition

SPACEHAB’s competition varies amongst our business units. Generally, barriers to entry for new competitors remain high. The modules, facilities, and other assets that we own represent a capital investment that rivals would have difficulty matching. For SFS, we estimate that it would take another organization three to five years to get a similar module service established to the point where NASA could consider it for the space shuttle or ISS, and we are not aware of any company that is currently making such an effort. For our logistics modules and carriers there are similar assets currently owned and periodically used by NASA (i.e. the Italian Space Agency-built Multi Purpose Logistics Module, the Multi Purpose Experiment Support Structure carrier, and the Spacelab pallet). However, SPACEHAB’s assets provide more utility in supporting powered experiments and are able to carry more weight and volume. In April 1998, NASA terminated the government-owned and operated Spacelab program, which provided laboratory modules for shuttle missions.

Over the past twenty years, we have cultivated a global customer base and aligned ourselves with leading international partners within the space industry. Our primary strategic alliances include experienced and distinguished companies such as German-based EADS, Russia’s RSC Energia, and Mitsubishi Corporation of Japan. These partnerships have afforded us the opportunity to define and grow new capabilities that have benefited the space program across global boundaries. Additionally, SPACEHAB routinely collaborates with Boeing, Lockheed Martin, and United Space Alliance (“USA”) on shuttle and ISS support activities.

Our Astrotech company-owned satellite and payload processing facilities are located in Florida and California. At present, Astrotech’s U.S. competition is limited to the California launch site at VAFB where Spaceport Systems International (“SSI”) is located. SSI acquired surplus United States Air Force (“USAF”) facilities through a lease agreement with USAF at VAFB before Astrotech established its facilities there. SSI does not have payload processing facilities in Florida, where the majority of U.S. commercial satellite launches occur. Astrotech completed the expansion of its $31 million, 62-acre Florida space technology campus in 2002 with the SPF dedicated to spacecraft processing and payload storage. The SPF was designed and built specifically to accommodate EELV payloads, both 4-meter- and 5-meter-class satellites, with weights in excess of 25,000 pounds and payload fairings up to 75 feet long. The SPF is the only satellite processing facility at Florida’s Kennedy Space Center/Cape Canaveral Air Force Station launch complex with the capability to accommodate satellites and 5 meter payload fairings for Lockheed Martin Atlas V and Boeing Delta IV EELV missions.

SGS competes with companies that provide operations support, configuration management, and engineering and fabrication services to NASA. These competitors include aerospace contractors such as Boeing, Lockheed Martin, USA, Barrios Technologies Inc., Hernandez Engineering Inc., Cimarron, and Oceaneering Space Systems. However, for its primary source of revenue, SGS is currently operating under a subcontract to ARES Corporation through at least 2008.

SMI competes with various suppliers of space education and retail goods. This includes internet sites and retailers with space-related toys, food, games, clothing, and patches; builders of space museum exhibits, mockups, and displays; and some providers of space-based education curriculum.

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Dependence on a Single Customer

Approximately $41.9 million or 54% of SPACEHAB’s revenue in fiscal year 2004 was generated by seven NASA contracts or subcontracts – SFS’s Research and Logistics Mission Support (“ReALMS”) contract, CMC subcontract, and NASA Russian shipments contracts; Astrotech’s MESSENGER and AURA payload processing contracts; and SGS’s ISS Configuration Management contract, PI&C subcontract, and Stowage Engineering and Decal contract.

While the SFS, Astrotech, and SGS contracts with commercial customers provide revenue from varying sources, we anticipate that contracts with NASA will continue to account for a significant amount of the Company’s revenue in the near future. Although there are no assurances that NASA will require our services in the future, we are under firm contracts with NASA to support a variety of activities for the Agency for several years. We continue to work on diversifying our customer base to include foreign space agencies, aerospace partners, and private companies.

Similar to contracts with other agencies of the U.S. Government, our contracts with NASA contain provisions pursuant to which NASA may terminate the contract “for convenience.” Our contracts with NASA depend upon the Agency’s receipt of adequate annual appropriations from the U.S. Congress, and failure to receive adequate funds could prompt NASA to terminate its contracts with SPACEHAB “for convenience.” NASA’s fiscal year 2004 operating plan totals $15.4 billion, including $1.5 billion for the ISS. There is no assurance that future funding will be adequate for NASA to complete all of its initiatives including those relating to contracts with SPACEHAB. In calendar year 2002, issues facing NASA included 1) an ISS funding shortfall that prompted the agency to defer commitment for completion of the ISS beyond a “core complete” state, and 2) delays in space shuttle flights due to the discovery of flaws in engine parts. In February 2003, the loss of the Columbia orbiter and the subsequent investigation of the accident have temporarily delayed launches of the entire NASA shuttle fleet. We anticipate that a portion of future revenue will be derived from contracts with entities other than agencies of the U.S. Government that will not be subject to federal contract regulations such as termination “for convenience” or government funding restrictions.

We believe that NASA, as well as future space shuttle and ISS programs, will continue to be funded and supported by the U.S. Government. Furthermore, we believe that it is highly unlikely that any decision to discontinue these programs would be made during the next twelve months.

Astrotech serves the satellite launch industry, which is dominated domestically by Lockheed Martin and Boeing. The Company has a long-term contract in place with Lockheed Martin to support payload processing for the Atlas launch vehicle program which guarantees a minimum of four launches annually through December 2006. Astrotech has other current contracts in place with NASA, Boeing, and Orbital for support of spacecraft processing activities in both Florida and California. Astrotech manages the Sea Launch facility under a long-term contract with Sea Launch which extends through 2011.

Backlog

As of June 30, 2004, and June 30, 2003, the Company’s contract backlog was approximately $100.8 million and $169.6 million, respectively, of which $86.5 million and $100.3 million, respectively, represented U.S. Government backlog and $14.3 million and $69.3 million, respectively, represented non-U.S. Government contracts.

Contract History

SPACEHAB’s initial business strategy focused on anticipating customer requirements, investing capital to develop space flight assets, contracting with established aerospace companies for engineering and asset production, and retaining ownership of these assets. This approach still holds true today.

For SFS, we have obtained four significant space flight services contracts with NASA to date that utilize our fleet of research and logistics modules and carriers. This includes the original $184.2 million Commercial Middeck Augmentation Module contract for four space shuttle research missions; a $91.5 million contract for four logistics missions and three option missions (all of which were exercised) to the Russian space station Mir; a $241.5 million ReALMS contract initially for four missions with pricing for six mission configurations in support of the ISS and microgravity science requirements; and the CMC subcontract in support of NASA’s ISS logistics requirements served through Lockheed Martin. The final value of the ReALMS contract is $214.3 million.

For the first half of fiscal 2004, the ReALMS contract was the vehicle used by NASA to obtain the use of our modules and carriers. Upon the restructuring of NASA’s various ISS contracts, Lockheed Martin became the CMC prime contractor, and SFS now provides our logistics services and assets as a subcontractor. The new contract also requires SPACEHAB to provide single and double modules as well as ICCs to support research payloads and outfitting of the ISS. We are currently supporting three missions under this contract, STS-121, STS-116, and STS-118.

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Additionally, SPACEHAB has a $19.9 million contract with Boeing for ICC services on the STS-114 mission. Currently, STS-114 is the return-to-flight mission scheduled to be flown no earlier than March 2005. SPACEHAB is paid an equitable adjustment for delays in launching this mission, and other missions under contract, due to the Columbia accident. The equitable adjustment is a cost-based contract price adjustment to cover the period until the space shuttle returns to flight.

Revenue recognized under the ReALMS, CMC, Boeing, and other various shipping and processing contracts for fiscal year 2004, 2003 and 2002 was $38.4 million, $46.8 million and $51.4 million, respectively.

Astrotech has successfully supported the processing of over 200 satellites since beginning operations in 1985 for commercial spacecraft processing. For fiscal years 2004, 2003, and 2002, Astrotech recognized revenues of $28.3 million, $12.4 million and $9.9 million, respectively.

In fiscal year 2000, our Astrotech subsidiary completed negotiations of long-term extensions to payload processing contracts with its two largest customers, Boeing and Lockheed Martin. The total revenue under these contracts was approximately $85 million. Additionally, Astrotech also has payload processing contracts in place with NASA, Sea Launch Company, LLC, and Orbital.

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 for future contract payments guaranteed under the contract.

In fiscal year 2004, SGS operated primarily under two contracts. For the first half of the year SGS was the prime contractor for ISS Configuration Management (“CM”), a contract that was completed. SGS is now supporting the ISS PI&C contract as a subcontractor to the ARES Corporation team, a NASA contract awarded at the completion of the original ISS CM contract.

Prior to fiscal year 2004, SGS led the Flight Crew Systems Development contract, a multi-task cost-plus award and incentive-fee contract. NASA exercised a series of extensions on the contract to extend the performance period of the contract to December 2002. The revised total value of the contract as of April 30, 2003 was $399.1 million. NASA opened elements of this contract for recompete for calendar year 2003. SGS competed to continue performing this work, but was notified in February 2003 that their recompete bid was not accepted. Contract work was transitioned to the successful bidder in April 2003. For fiscal years 2004, 2003 and 2002, SGS recognized revenue of $10.2 million, $34.7 million and $40.8 million, respectively.

Research and Development

SPACEHAB incurred $0.2 million, $0.1 million, and $0.4 million in research and development expenditures during fiscal years 2004, 2003, and 2002, respectively. We spent $0.2 million in 2004 and $0.1 million in 2003 on miscellaneous research and development projects, including the design of a new commercial payload service (“CPS”). Research and development in fiscal year 2004 has been directed towards development of commercial responses to the National Vision for Space Exploration.

Approximately $0.2 million of our research and development expenditures for fiscal year 2002 was spent on the development of the Enterprise module which is no longer under development, but much of the technological and structural design is being used to develop the new CPS system. The remainder of $0.2 million was spent on miscellaneous research and development projects in 2002.

Certain Regulatory Matters

The Company is subject to federal, state, and local laws and regulations designed to protect the environment and to regulate the discharge of materials into the environment. We believe that our policies, practices, and procedures are properly designed to prevent unreasonable risk of environmental damage and consequential financial liability to the Company. Compliance with environmental laws and regulations and technology export requirements has not had in the past, and, we believe, will not have in the future, material effects on the capital expenditures, earnings or competitive position of the Company.

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The operations of SPACEHAB are subject to various regulations under federal laws relative to the international transfer of technology as well as to various federal and state laws relative to business operations. In addition, the Company is subject to federal contracting procedures, audit, and oversight under Federal Acquisition Regulations.

Significant federal regulations impacting the Company’s operations encompass the following:

Federal Regulation of International Business: The Company is subject to various federal regulations relative to the export of certain goods, services, and technology. These regulations, which include the Export Administration Act of 1979 administered by the Commerce Department and the Arms Export Control Act administered by the State Department, impose substantial restrictions on the sharing or transfer of technology to foreign entities. Our activities in the development of space technology and in the processing of commercial satellites deal with technology of the type subject to these regulations. Operations of the Company are conducted pursuant to a comprehensive Export Compliance Policy that provides close review and documentation of activities subject to these laws and regulations.

Foreign Corrupt Practices Act: The Foreign Corrupt Practices Act establishes rules for U.S. companies doing business internationally. Compliance with these rules is achieved through established and enforced corporate policies and documented procedures in the Company’s internal procedures and financial controls.

Iran Nonproliferation Act of 2000: This act includes specific prohibitions on commercial activities with certain specified Russian entities engaged in providing goods or services to the ISS. Our activities with RSC Energia of Russia are not subject to this act.

Federal Acquisition Regulations: Goods and services provided by the Company to NASA and other U. S. Government agencies are subject to Federal Acquisition Regulations. These regulations provide rules and procedures for invoicing, documenting, and conducting business under contract with such entities. The Federal Acquisition Regulations also subject the Company to audit by federal auditors to confirm such compliance.

Truth in Negotiations Act (“TINA”): A public law enacted for the purpose of providing for full and fair disclosure by contractors in the conduct of negotiations with the Government. The most significant provision included in TINA is the requirement that contractors submit certified cost and pricing data for negotiated procurements above a defined threshold.

Regulatory Compliance and Risk Management

The Company maintains compliance with regulatory requirements and manages its risks through a proactive program of compliance, awareness, and insurance which includes the following:

Safety: SPACEHAB places a continual emphasis on safety throughout the organization. At the corporate level, safety programs and training are monitored by a corporate safety manager. A staff of senior safety professionals within the SFS business unit provide safety as a component of its space flight operations and augment the safety awareness and oversight available at the corporate level.

Export Control Compliance: We have a designated senior officer responsible for export control issues and the procedures detailed in our Export Control Policy. This officer and the designated Export Compliance Administrator monitor training and compliance with regulations relative to foreign business activities. Employees are provided comprehensive training in compliance with regulations relative to export and foreign activities through the Company’s interactive training program and are certified as proficient in such regulations as are relative to their job responsibilities.

Insurance: The Company’s operations are subject to the hazards associated with operating assets in the severe environment of space. These hazards include the risk of loss or damage to the assets during storage, preparation for launch, in transit to the launch site, and during the space mission itself. We maintain insurance coverage against these hazards with reputable insurance underwriters. By policy, we insure our flight assets at replacement value for risk of loss during space flight missions.

Employees

As of June 30, 2004, SPACEHAB and its wholly-owned subsidiaries employed 192 regular full-time employees. The breakdown by area is as follows: SPACEHAB corporate and executive management is 35; 64 are employed by SFS; SGS personnel total 60; 29 are employed by Astrotech; and SMI, specifically The Space Store, employs 4. Of these employees, approximately 16% hold advanced degrees. Additionally, a significant number of our employees have experience in both the space industry and/or governmental space agencies, with a special expertise in commercial space and human space flight. None of our employees are covered by collective bargaining agreements. Underlying all of SPACEHAB’s efforts has been the dedication and skill of its personnel. People are the source of our success.

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Item 1A. Executive Officers and Key Employees

Set forth below are the names and positions of our executive officers and key employees as of September 2, 2004, together with their ages and years of service with us.

The executive officers and key employees named above will serve in such capacities until the next annual meeting of our Board of Directors, or until their respective successors have been duly elected and have been qualified, or until their earlier death, resignation, disqualification, or removal from office.

Michael E. Kearney

Mr. Kearney, a member of the Board of Directors since 2001, was appointed SPACEHAB’s Chief Executive Officer in April 2003 and has served as the Company’s President since January 2001. Joining SPACEHAB in 1994, Mr. Kearney has served as Senior Vice President for Marketing and Sales and as Vice President of Business Development. Prior to joining the Company, Mr. Kearney held leadership positions at McDonnell Douglas. He served for 26 years as a U.S. Navy Aeronautical Engineering Officer, as a Weapon Systems Acquisition Specialist and Program Manager, and flew Navy fighter aircraft both in combat and in a production acceptance role.

Brian K. Harrington

Mr. Harrington joined SPACEHAB in January 2004 and serves at the Company’s Senior Vice President, Finance and Chief Financial Officer. Prior to joining the Company, he held similar positions at the publicly-traded Kirby Corporation and as a financial consultant and manager. His corporate and consulting experience includes acquisitions, bank financings, public and private placement debt, public equity transactions, divestures, and recapitalizations. A Certified Public Accountant, Mr. Harrington began his career in the U.S Army, First Armored Division, where he served as Deputy Division Finance Officer during the Viet Nam conflict.

Daniel A. Bland

Mr. Bland has served as Senior Vice President of the SPACEHAB Flight Services business unit since March 2000. In this capacity, he manages the Company’s flight services contract efforts with NASA and other commercial customers which utilize SPACEHAB’s modules and carriers. He also manages a variety of commercial space access and transportation initiatives involving U.S. and international launch vehicles in support of NASA’s Space Exploration vision. Beginning his career with NASA in 1966, Mr. Bland worked for 28 years at both the Kennedy and Johnson Space Centers. He held key positions in NASA’s astronaut training program supporting the Apollo and Apollo-Soyuz projects from 1966 to 1975. From 1975 to 1994, he managed projects with the Space Shuttle, International Space Station, and SPACEHAB programs.

John B. Satrom

Since April 2000, Mr. Satrom has served as the Senior Vice President and General Manager of Astrotech Space Operations, Inc., a subsidiary of SPACEHAB. He has been managing the payload processing operations for the Company since joining in April 1998. Prior to his employment at Astrotech, he was Manager of the Launch Integration and Operations Department for Space Systems/Loral in Palo Alto, California and worked on the Atlas program at Cape Canaveral for General Dynamics Space System Division. From 1983 to 1990, Mr. Satrom served as an Air Force officer both at Vandenberg Air Force Base in California and Cape Canaveral Air Force Station in Florida, working on the Peacekeeper missile flight test program and the Space Shuttle program.

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H. Jay Sauerwein

Mr. Sauerwein serves as Vice President of SPACEHAB’s Government Services business unit. He holds the position of Program Manager over the Configuration Management and Data Integration segments of NASA’s Program Integration and Control contract, manages much of SPACEHAB’s corporate office infrastructure team, and leads flight/ground hardware development initiatives for the NASA Space Shuttle and International Space Station program offices. Prior to SPACEHAB, Mr. Sauerwein worked as a McDonnell Douglas senior manager at the Kennedy Space Center. His experience also includes work with Lockheed Space Operations, beginning in 1982, on a shuttle processing contract, as well as a 25-year career in the U.S. Navy.

Nicholas G. Morgan

Mr. Morgan holds the title of Vice President, Accounting and was appointed Controller of SPACEHAB in March 2004. A Certified Public Accountant, he has served as Assistant Controller of the Company since April 2001 and as Assistant Controller of Johnson Engineering, Inc. from February 1996 until the acquisition by SPACEHAB in July 1998. Mr. Morgan began his career with Loral Aerospace Corporation in San Jose, California; he held several positions in the accounting and finance area from 1990 to 1992. He transferred to Loral Space Information Systems, Houston, Texas in 1992 as a Job Cost Analyst until he joined Johnson Engineering in 1996.

Item 2. Properties.

The Company and its four business units, SFS, Astrotech, SGS, and SMI, currently occupy five locations. The corporate headquarters which had been located at 300 D Street SW, Suite 814, Washington, D.C. 20024 was re-designated to 12130 State Highway 3, Webster, Texas 77598 in fiscal year 2002. The term of the present lease for the D Street space expires on December 16, 2007. As of June 30, 2002, we sublet the entire D Street space through the end of the term of the Company’s lease. Our other Washington, D.C. office location was closed as of December 31, 2003 and all executive and administrative functions were consolidated at our Webster, Texas office. The former office space at 601 13th Street N.W., Suite 900 South, Washington, D.C. 20005, consisting of 5,920 square feet, is under a lease which expires May 2006, has been sublet through the end of the term of the Company’s lease.

SPACEHAB executive management, marketing and communications, human resources, finance, and operations support personnel, along with approximately half of the SFS and a few SGS employees, are located at 12130 Highway 3, Building 1, Webster, Texas 77598. The facility consists of 90,867 square feet of office, warehouse, and fabrication space located near the Johnson Space Center. The lease expires on March 15, 2006.

Our SFS payload processing facility, housing an 18-person operations team, is located near the Kennedy Space Center in Cape Canaveral, Florida. The facility is contained in an approximately 58,000 square foot plant. We own the building that houses the payload processing facility but lease the land upon which it is constructed. The payload processing facility has a clean room work area of approximately 24,000 square feet. This work area is designed to accommodate the SPACEHAB single and double modules, as well as the ICCs and VCC. This area includes 11 secure experiment/payload integration and work areas ranging in size from 300 square feet to 1,000 square feet each. In addition, the facility provides office space, stock rooms, storage areas, a machine shop, an electrical shop, conference rooms, and other miscellaneous accommodations. We negotiated an agreement with the Canaveral Port Authority for the lease of the land for a forty-three year period which commenced on August 28, 1997. Upon expiration of the land lease, all improvements on the property revert at no cost to the lessor.

SFS previously occupied 23,000 square feet of office space located at 6000 Technology Drive in Huntsville, Alabama housing the Company’s subcontractor personnel. The subcontractor requirements were terminated in April 2004. The lease expires on September 30, 2004 and has been partially sublet through the end of the lease term.

Astrotech occupies two company-owned locations. Astrotech’s headquarters and Florida operations team, consisting of 20 personnel, are located in a nine-building complex located on a 62-acre space technology campus at 1515 Chaffee Drive, Titusville, Florida 32780. This campus encompasses 140,000 square feet of facility space supporting non-hazardous and hazardous flight hardware processing, payload storage, and customer offices. The construction of the new 50,000 square foot SPF was completed in March 2002. These buildings presently occupy one-third of the 62-acre property owned by Astrotech, with one-third available for expansion and the remaining one-third reserved for hazardous facility safety clearances.

Astrotech has a two-person technical staff located on VAFB in Santa Barbara County, California. Astrotech presently leases a 60-acre site on the base and owns four buildings comprising 18,800 square feet, dedicated to the same functions provided at the Florida facility. The term of the present land lease expires on July 13, 2013, with provisions to extend the lease at the request of the lessee and the concurrence of the lessor. Upon final expiration of the land lease, all improvements on the property revert, at the lessor’s option, to the lessor at no cost.

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Additionally, Astrotech has seven employees who are housed at the Sea Launch Home Port facility in Long Beach, California provided per the provisions of the Astrotech contract with Sea Launch Company, LLC.

During part of fiscal year 2004, SGS occupied two additional locations. One was located at 555 Forge River Road, Suite 150, Webster, Texas 77058. The office space housed 17 employees within a 31,114 square foot facility. This office lease expired on June 28, 2003 and was extended on a monthly basis through August 31, 2003 when the operations were consolidated into the facility at 12130 State Highway 3, Webster, Texas. SGS also occupied approximately 9,826 square feet of space at 18100 Upper Bay Road, Houston, Texas 77058 that housed a 26-person engineering and laboratory team. The lease expired on December 31, 2003.

SGS has 44 employees who are housed in two government facilities within the Houston area.

SMI, primarily The Space Store, has 4 employees and occupies approximately 2,450 square feet of space located at 1400 NASA Road One, Suite D, Houston, Texas 77058. The lease expires in March 2008.

The Company believes that its current facilities and equipment are generally well maintained and in good condition and are adequate for its present and foreseeable needs.

Item 3. Legal Proceedings.

SPACEHAB’s operations are subject to the operating hazards normally incidental to business activities as well as the special risks of operating assets in the environment of space. From time to time, we are involved in various legal proceedings and litigation arising in the ordinary course of business. There is no pending litigation and, to the knowledge of the Company, there is no threatened litigation, the unfavorable resolution of which would have a material adverse effect on our financial condition or results of operations except as detailed below. SPACEHAB maintains insurance policies with insurers in such amounts and with such coverage and deductibles as we believe are reasonable and prudent.

Claim for Indemnification of Loss on Space Shuttle Columbia Accident: The Company has submitted a formal claim for indemnification of losses totaling $87.7 million dollars resulting from the Space Shuttle Columbia accident in February 2003. The claim has been submitted to NASA and we are currently in negotiations with NASA with the goal of expedient resolution. Our contract with NASA providing for use of the Company’s space assets on the Space Shuttle Columbia provided for indemnification of $8.0 million by NASA. The negotiations underway relate to indemnification beyond this amount based upon our total loss of $87.7 million and NASA’s reconciliation of the losses allowable under the Federal Acquisition Regulations of approximately $47.4 million. In the event that an acceptable resolution cannot be reached, SPACEHAB has the right to file for administrative and/or judicial review of its claim for indemnification.

Proceeding Filed by Certain Underwriters at Lloyd’s of London in Washington State Court: Our insurer, Certain Underwriters at Lloyd’s of London (“Lloyd’s”), on the Space Shuttle Columbia accident paid the full proceeds of $17.7 million to the Company shortly after the accident. Subsequently, Lloyd’s has filed suit against SPACEHAB seeking recovery of the $17.7 million alleging that: (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 our 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. We believe that the Lloyd’s complaint is without merit and while cooperating with Lloyd’s in protecting their interests, have responded accordingly.

Item 4. Submission of Matters to a Vote of Security Holders.

No matters were submitted to a vote of stockholders during the fourth quarter of the year ended June 30, 2004.

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

The Company’s common stock (the “Common Stock”) trades on the NASDAQ National Market System under the symbol “SPAB”. The Common Stock has been publicly traded since December 22, 1995, the date of the closing of our initial public offering. The quarterly high and low intra-day bid prices for fiscal years 2004 and 2003 are as follows:

SPACEHAB has never paid cash dividends. It is the present policy of the Company to retain earnings to finance the growth and development of its business and, therefore, we do not anticipate paying cash dividends on our Common Stock in the foreseeable future.

The Company has authorized 30,000,000 shares of Common Stock. At June 30, 2004, 12,571,962 shares of Common Stock were outstanding. The Company had approximately 3,724 shareholders of record and beneficial holders of its Common Stock on June 30, 2004.

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Issuer Purchases of Equity Securities

On March 25, 2003 the Board of Directors authorized SPACEHAB to repurchase up to $1.0 million of the Company’s outstanding stock at market prices. As of June 30, 2004, SPACEHAB had repurchased 116,100 shares at a cost of $117,320. A summary of shares purchased under this plan follows:

In February 2004, the Company’s Board of Directors authorized the filing of an Amended and Restated Rights Agreement which amended the existing Agreement to provide for exercisability of the Rights granted thereunder upon an Acquiring Person (as defined therein) acquiring beneficial ownership of 20% or more of the outstanding Common Shares, replacing the previous threshold of 15% or more of the outstanding Common Shares.

Sales of Unregistered Securities

During fiscal year 2004, SPACEHAB did not issue any unregistered securities.

Item 6. Selected Financial Data.

The selected financial data presented below are derived from the audited consolidated financial statements of SPACEHAB. This selected financial information should be read in conjunction with the Consolidated Financial Statements of the Company and the notes thereto included elsewhere in this report.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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

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OVERVIEW

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.

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. This “Overview” section concludes with a summary of our current liquidity position and items that could impact our liquidity position in fiscal year 2005 and beyond. Please note that this “Overview” section is merely a summary and should be read together with the remainder of Item 7, 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 this report.

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.

On a space-available basis for each mission, additional revenue can be generated by SFS 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 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:

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.

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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:

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 PI&C contract of which ARES Corporation is the prime contractor. Prior to this time, from May 1993 to April 2003, SGS primarily operated under the Flight Crew Systems Development (“FCSD”) contract which was a $399.1 million multi-task cost-plus award and incentive-fee contract.

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:

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:

Liquidity. As of June 30, 2004, we had cash on hand and in short-term investments of $7.6 million. Our $5.0 million revolving credit facility, which includes a potential restriction on $5.6 million of our short-term investments if fully utilized, had a balance drawn of $1.4 million as of June 30, 2004, of which approximately $2.0 million of restricted cash and investments is pledged against. Our ability to maintain sufficient liquidity in the future will depend on a number of factors including the amount and timing of the ultimate settlement of our claim for indemnification for losses we suffered on the Space Shuttle Columbia accident, the return to flight of the space shuttle and the continued activity in the commercial and governmental satellite launch industry.

For the next 12 months, we expect that our operating cash flows will be sufficient to satisfy our capital expenditures, debt maturities, interest expenses, and operating commitments. In order to increase our liquidity and to provide capacity in the event of a further delay in the ultimate settlement of our claim for indemnification from NASA; to fund capital expenditures for stand-by spare parts for our modules; and for costs of developing and submitting proposals for new government contracts, we will seek to replace or amend our $5.0 million revolving credit facility to remove its restriction on our short-term investments and to increase the amount available under the facility.

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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, and that we will reach an amicable settlement with NASA on our claim for indemnification of losses on the Space Shuttle Columbia. If these events happen, they would increase our liquidity significantly and provide resources and financial capacity for the redemption of our subordinated convertible notes when due in October 2007. The notes are convertible into our Common Stock at a rate of $13.625 per share. 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 reach an acceptable resolution of our claim for indemnification from NASA. Failure of either 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.

Critical Accounting Policies

Revenue Recognition. SPACEHAB’s business units’ revenue is derived primarily from long-term contracts with the U.S. Government 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 ReALMS contract which was added to the contract as a pricing amendment due to the delay in the return to flight. Costs to complete include, when appropriate, material, labor, subcontracting costs, lease costs, commissions, insurance and depreciation. Our business segment personnel perform periodic contract status and performance reviews. In the event of a change in total estimated contract cost or profit, the cumulative effect of such change is recorded in the period that the change in estimate occurs.

A Summary of Revenue Recognition Methods Follows:

Goodwill. In assessing the recoverability of goodwill and other intangibles, we must make assumptions regarding the estimated future cash flows and other factors to determine the fair value of the respective assets. If and when these circumstances or their related assumptions change in the future, the Company may be required to record impairment charges for these assets. We adopted SFAS No. 142, “Goodwill and Other Intangible Assets”, on July 1, 2002, under which the Company ceased to amortize goodwill and instead analyze goodwill at least annually for impairment issues. Goodwill on the balance sheet as of December 2003 was tested for impairment and was written off in fiscal year 2004.

Long-Lived Assets. In assessing the recoverability of long-lived assets, fixed assets, assets under construction and intangible assets, we evaluate the recoverability of those assets in accordance with the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” This Statement requires that certain long-lived

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fixed assets of the Company be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

RESULTS OF OPERATIONS

Overview. In this section we discuss our results of operations, both on a consolidated basis and, where appropriate, by segment for our fiscal years ended June 30, 2004, 2003, and 2002. Where we report earnings or loss on a per share basis, we have done so on a “diluted earnings per share” basis. The weighted average number of common shares applicable to diluted earnings for 2004, 2003, and 2002 were 14,141,949, 12,285,467, and 11,884,309 respectively. At the end of this section we have included our outlook for fiscal year 2005 for each business unit.

We had net earnings (loss) of $2,075,000 or $0.15 per diluted share on revenues of $77,606,000 for our 2004 fiscal year compared to ($81,775,000) or ($6.66) per share on revenues of $94,963,000 for 2003 and ($2,367,000) or ($0.20) per share on revenues of $102,773,000 for 2002. For our 2002 fiscal year, net earnings and earnings per share included $0.09 per share of goodwill amortization expense. Amortization of goodwill ceased January 1, 2002 as a result of adoption of Statement of Financial Accounting Standards (“SFAS”) No. 142.

Non-GAAP Financial Measures. Management uses income from operations before charges as one measure of financial performance. Income from operations before charges is a non-GAAP financial measure and consists of operating income before unusual and infrequent events such as: goodwill impairments, asset impairments, investment impairments and our loss of the RDM on the Columbia accident. Income from operations before charges does not include interest expense or income taxes, each of which is evaluated on a consolidated basis. Because we do not allocate interest expense and income taxes by segment, management believes that income from operations is a useful measure of our segment’s operating performance for investors. Income from operations before charges should not be considered an alternative to, or more meaningful than, net income or cash flows from operations as determined in accordance with GAAP. The Other column in the presentation below is our corporate selling, general and administrative expenses that are incurred for the overall operations of the Company.

The following tables provide summary financial data regarding our consolidated and segmented results of operations for our 2004, 2003, and 2002 fiscal years, respectively (in millions):

Fiscal Year Ended June 30, 2004

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Fiscal Year Ended June 30, 2003

Fiscal Year Ended June 30, 2002

Operating Income (Loss). Operating income (loss) was $10.7 million in fiscal year 2004, compared to ($75.4) million and $1.1 million for fiscal years 2003 and 2002 respectively. The following summarizes the activity in each of our operating segments:

SPACEHAB Flight Services. Operating income (loss) for our SFS segment was $8.9 million for fiscal year 2004, compared to ($51.4) million and $12.9 million for fiscal years 2003 and 2002, respectively. Operating income for 2004 included general and administrative expense of $0.7 million and depreciation and amortization expense of $2.8 million as compared to general and administrative expenses of $0.1 million and $0.1 million and depreciation and amortization expense of $5.0 million and $8.6 million for fiscal years 2003 and 2002, respectively. Please see “—Other” beginning on page 27 for a consolidated discussion of general and administrative expense and depreciation and amortization expense.

Fiscal year ended June 30, 2004 as Compared to the Fiscal Year Ended June 30, 2003

SFS’ operating income before charges increased by $2.1 million from fiscal year 2003 to fiscal year 2004. The following summarizes significant items:

Revenue decrease of $8.4 million

Cost of Revenue decrease of $10.5 million

All space shuttle missions have been suspended since the February 1, 2003 Space Shuttle Columbia accident affecting revenues and operating income of our SFS business unit for fiscal year 2004. Pending the return to flight of the space shuttle program, we have operated under “equitable adjustments” and subsequently in preparation for the return to flight under the contractual arrangements in place prior to the accident. The equitable adjustment provides compensation for space flight assets committed for future contracted missions and for personnel and services in place to maintain those assets and support the return-to-flight activities.

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Our SFS business unit is currently supporting NASA’s return-to-flight activities and is continuing its operations in preparation for shuttle missions 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 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, we are scheduled to provide our non-deployable ICC 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. We have completed negotiations with Boeing and NASA for the respective contract equitable adjustments required to continue uninterrupted support to ongoing 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. We are currently providing these services under letter agreement and we are in contract negotiations with Lockheed Martin for this new contract. Additionally, after 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 will now be performed by our SFS personnel and selected NASA cargo integration tasks on SPACEHAB module missions will now be performed by Lockheed Martin as a part of the CMC with NASA. This action enables SFS to continue providing services to NASA and is consistent with the direction of the ISS Program Office.

In January 2004, SPACEHAB initiated activity under the Japanese Experiment Thermal Incubator Service (“JETIS”) contract with the Mitsubishi Corporation, representing JAXA, that was entered into in 2000 and originally scheduled to fly aboard our RDM. Subsequent to the suspension of the space shuttle flights and destruction of our RDM, we contracted for construction of certain space research equipment and for research space aboard the ISS and up to three (3) Russian Progress cargo missions with V.J.F. Russian Consulting, representing RSC Energia, a major Russian aerospace manufacturer and mission operator.

Fiscal year ended June 30, 2003 as Compared to the Fiscal Year Ended June 30, 2002

SFS’ operating income before charges decreased by $6.1 million from fiscal year 2002 to fiscal year 2003. The following summarizes significant items:

Revenue decrease of $4.7 million

Cost of Revenue increase of $2.8 million

Our fiscal year 2003 operating income included a charge of approximately $50.3 million, net of insurance proceeds of $17.7 million on our loss of the RDM in the Space Shuttle Columbia tragedy. Also, due to the uncertainties in the human space flight programs following the Columbia accident, we decided to no longer fund certain work in process in development of future flight assets and recorded an impairment charge of $7.9 million. During fiscal year 2003, we contracted for the RDM on shuttle mission STS-107, the ICC on STS-114, and the logistics single module and ICC on STS-116 and 118.

We participated in one space shuttle mission in fiscal year 2002 which included the ICC. In fiscal year 2003 we participated in one space shuttle mission which included our RDM. There were no space shuttle missions in our fiscal year 2004.

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Astrotech Space Operations. Operating income for our ASO segment was $17.5 million for fiscal year 2004, compared to $4.5 million and $3.8 million for fiscal years 2003 and 2002, respectively. Operating income for 2004 included selling, general and administrative expense of $0.4 million and depreciation and amortization expense of $2.0 million as compared to selling, general and administrative expense of $0.5 million and $0.9 million and depreciation and amortization expense of $1.9 million and $1.3 million for fiscal years 2003 and 2002, respectively. Please see “—Other” beginning on page 27 for a consolidated discussion of selling, general and administrative expense and depreciation and amortization expense.

Fiscal year ended June 30, 2004 as Compared to the Fiscal Year Ended June 30, 2003

ASO’s operating income before charges increased by $15.5 million from fiscal year 2003 to fiscal year 2004. The following summarizes significant items:

Revenue increase of $15.8 million

Cost of Revenue increase of $0.3 million

Fiscal 2004 operating income for our ASO business unit included a contract early termination payment of $17.5 million with regards to its financial guarantees under the contract agreement with Boeing 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. Astrotech recognized the early termination payment as revenue in the quarter ended December 31, 2003. The termination of the Boeing contract guarantees had a significant impact on Astrotech’s future guaranteed revenue stream. As the result of this event, the Company performed a goodwill impairment test at Astrotech in accordance with SFAS No. 142, “Goodwill and Intangible Assets.” The impairment test indicated an impairment of Astrotech’s remaining goodwill of approximately $2.5 million which was recorded in the period ended December 31, 2003. The Company utilized market valuation techniques to calculate the fair value of Astrotech.

Fiscal year ended June 30, 2003 as Compared to the Fiscal Year Ended June 30, 2002

ASO’s operating income before charges increased by $0.7 million from fiscal year 2002 to fiscal year 2003. The following summarizes significant items:

Revenue increased by $2.5 million from fiscal year 2002 to fiscal year 2003

Cost of Revenue increased by $1.8 million

Astrotech’s operating expenses decreased $0.4 million due to no longer recording amortization of goodwill of $0.2 and reduction of $0.2 million in financing fees that occurred in fiscal year 2002.

SPACEHAB Government Services. Operating income (loss) for our SGS business unit was ($5.4) million for fiscal year 2004, compared to ($10.0) million and $2.0 million for fiscal years 2003 and 2002, respectively. Operating loss for 2004 included selling, general and administrative expense of $1.3 million and depreciation and amortization expense of $0.1 million as compared to selling, general and administrative expense of $1.9 and $2.0 and depreciation and amortization expense of $0.7 million and $1.6 million for fiscal years 2003 and 2002, respectively. Please see “—Other” beginning on page 27 for a consolidated discussion of selling, general and administrative expense and depreciation and amortization expense.

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Fiscal year ended June 30, 2004 as Compared to the Fiscal Year Ended June 30, 2003

SGS’s operating income before charges decreased by $1.6 million from fiscal year 2003 to fiscal year 2004. The following summarizes significant items:

Revenue decreased by $24.5 million

Cost of revenue decreased by $22.9 million

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 CMC with NASA, of which SGS was a subcontractor, was not selected for contract award. As a result of these events, we performed a goodwill impairment test at SGS in accordance with SFAS No. 142, “Goodwill and Intangible Assets.” The impairment test indicated an impairment of SGS’s remaining goodwill of approximately $5.7 million which was recorded in the period ended December 31, 2003. The Company utilized market valuation techniques to calculate fair value of SGS.

Fiscal year ended June 30, 2003 as Compared to the Fiscal Year Ended June 30, 2002

SGS’s operating income before charges decreased by $0.2 million from fiscal year 2002 to fiscal year 2003. The following summarizes significant items:

Revenue decreased by $6.0 million from fiscal year 2002 to fiscal year 2003

Cost of revenue decreased by $6.2 million

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As a result of the loss of the recompete of the Flight Crew Systems Development contract at SGS in fiscal year 2003, a goodwill impairment test was performed. The impairment test indicated that the goodwill at SGS was impaired and a $11.9 million impairment charge of goodwill was recorded.

Space Media, Inc. Operating loss before charges for our SMI business unit was ($0.1) million for fiscal year 2004, compared to ($0.3) million and ($1.6) million for fiscal years 2003 and 2002, respectively. Operating loss for 2004 included selling, general and administrative expense of $0.3 million and no depreciation and amortization expense as compared to selling, general and administrative expense of $0.8 million and $1.7 million and depreciation and amortization expense of $0.3 million and $0.3 million for fiscal years 2003 and 2002, respectively. Please see “—Other” below for a consolidated discussion of selling, general and administrative expense and depreciation and amortization expense.

Other. Other operating loss was ($10.2) million for fiscal year 2004, compared to ($18.2) million and ($16.0) million for fiscal years 2003 and 2002 respectively. The $10.2 million loss for fiscal year 2004 relates primarily to selling, general and administrative expenses and depreciation and amortization expenses which were incurred at the corporate level and an impairment change of $1.8 million of our investment in Guignè. The ($18.2) million loss for fiscal year 2003 includes a $8.2 million charge for asset impairments.

Consolidated selling, general and administrative expenses and research and development were $11.1 million in fiscal year 2004, compared to $13.2 million and $19.9 million in 2003 and 2002, respectively. The $2.1 million decrease for fiscal year 2004 to 2003 is principally the result of our ongoing cost reduction efforts and staffing reductions. In addition, for the year ended June 30, 2004, we recorded a charge of approximately $0.3 million related to the closing of the Washington, D.C. office.

The $6.7 million decrease for fiscal year 2002 to 2003 was primarily due to our Company-wide cost reduction actions. SMI’s expenses decreased by $1.0 million associated with the downsizing of the SMI operations during the year ended June 2002. SPACEHAB selling, general and administrative expenses were reduced by $0.6 million in facilities, and $0.5 million in depreciation and other expense. Astrotech’s selling, general and administrative expense decreased $0.4 million due to no longer recording amortization of goodwill of $0.2 million and reduction of $0.2 million in financing for that occurred in fiscal year 2002. SPACEHAB’s selling, general and administrative expenses decreased due to the closing of the Huntsville operations partially offset by increased bid and proposal efforts.

Consolidated depreciation and amortization expenses were $5.4 million in fiscal year 2004 compared to $8.9 million and $12.7 million in 2003 and 2002, respectively. The $3.5 million decrease in fiscal year 2004 compared to 2003 is primarily due to the write-off of the RDM lost in the Space Shuttle Columbia accident, offset by the increased depreciation on the completion of the new SPF at the Astrotech Titusville, Florida campus. The decrease in depreciation of $3.8 million for fiscal year 2003 as compared to 2002 resulted from the RDM having 12 months of depreciation in fiscal year 2002 as compared to seven months of depreciation in fiscal year 2003.

Interest Expense. Interest expense totaled $8.2 million for fiscal year 2004, compared with $7.2 million and $8.0 million for 2003 and 2002, respectively. The $1.0 million increase for 2004 as compared to 2003 resulted primarily from the termination of the interest rate swap upon restructuring our mortgage financing of our Astrotech SPF, partially offset by the lower interest payments on the lower mortgage amount after the restructuring.

The decrease of interest expense from 2002 to 2003 was primarily due to the fact that no interest expense was capitalized in 2003 as compared to $1.3 million of capitalized interest in 2002. In addition, fiscal year 2003 includes a full year of interest on the mortgage loan payable. Interest was capitalized on the in-progress construction of our modules and payload processing facilities in 2002.

Income Tax Provision (Benefit). For fiscal year 2004 we recorded an income tax provision of $0.5 million, applying our net operating loss carry-forwards to the extent allowable. The income tax provision is a result of the alternative minimum tax limiting our ability to use all of our net operating loss carry forwards. We recorded an income tax benefit for fiscal years 2003 and 2002 of ($0.9) million and ($2.1) million, respectively. As of June 30, 2004, the Company had approximately $22.0 million of available net operating loss carry-forwards expiring between 2008 and 2023 to offset future regular taxable income.

Inflation. The effects of inflation and changing prices have not significantly impacted the Company’s revenue or income from continuing operations during the years ended June 30, 2004 and 2003.

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FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY

Balance Sheet. Our total assets at June 30, 2004 were $99.9 million compared to total assets of $121.4 million at the end of fiscal year 2003. The following table sets forth the significant components of the balance sheet as of June 30, 2004, compared with 2003 (in thousands):

Fiscal Year 2004 Compared to 2003. Current assets as of June 30, 2004 decreased by $6.5 million as compared to June 30, 2003, primarily due to a reduction in short-term investments of $7.4 million, partially offset by an increase in accounts receivable of $1.1 million. Short-term investments as of June 30, 2004 and June 30, 2003 included proceeds of the insurance settlement from loss of the RDM on the Space Shuttle Columbia. The increase in accounts receivable was primarily attributable to:

The decrease in property and equipment from June 30, 2003 to June 30, 2004 resulted primarily from the write-off of furniture, fixtures, equipment, and leasehold improvements from the closing of our Washington D.C. and Huntsville, AL offices and the relocation of those activities to our Houston facility. Net property and equipment decreased by $4.1 million from 2003 to 2004 due to fixed asset additions during the year offset by depreciation expense for fiscal year 2004. Fiscal year 2004 included $1.2 million for assets removed from the books upon closing of certain offices.

The decrease in other assets of $10.8 million from June 30, 2003 to June 30, 2004 resulted primarily from the impairment of goodwill of $8.3 million, impairment of an investment of $1.8 million, and the reduction in deferred financing costs of $1.3 million resulting from refinancing our Astrotech SPF mortgage and amortization of financing costs in the current fiscal year. These reductions were partially offset by an increase in other assets of $0.6 million, primarily due to deferred mission costs for the Company’s project with JAXA.

Our current liabilities declined by $5.0 million from June 30, 2003 to June 30, 2004. The following summarizes significant items:

Our long-term debt as of June 30, 2004 decreased by $13.1 million from the end of the prior fiscal year due primarily to the restructuring of our Astrotech facility mortgage. The restructuring included the repayment of $9.5 million of principal and the termination of an interest rate swap of $1.3 million held to effectively convert the floating rate interest on the mortgage into a fixed commitment. Our scheduled mortgage principal payments reduced the outstanding balance of this facility by $2.3 million.

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Other long-term liabilities declined by $7.7 million at year end 2004 compared to 2003 due to a decrease in long-term deferred revenue, primarily from a contract with JAXA that was previously scheduled for a space shuttle mission, but due to the suspension of shuttle operations, we restructured the contract and placed the payload on a Russian Progress mission scheduled to fly early in our fiscal year 2005 with on-going flight operations support to 2006.

Cash Flows From Operating Activities. Cash provided by operations for the years ended June 30, 2004, 2003, and 2002 was $5.3 million, $19.8 million, and $8.6 million, respectively. The significant items affecting the differences in cash flows from operating activities in fiscal year 2004 compared to fiscal year 2003, and fiscal year 2003 compared to fiscal year 2002 are discussed below:

Fiscal Year 2004 Compared to 2003. For the fiscal year 2004 compared to fiscal year 2003, the significant items affecting cash provided by operating activities were:

Fiscal Year 2003 Compared to 2002. For the fiscal year 2003 compared to fiscal year 2002, the significant items affecting cash provided by operating activities were primarily the net loss of $81.8 million in fiscal year 2003 which included $78.3 million of non-cash charges for the loss of the RDM, asset impairment, and goodwill impairment. In addition the Company received $17.7 million of commercial insurance proceeds in fiscal year 2003 related to the loss of the RDM. Other items that affected cash provided by operating activities in fiscal year 2003 as compared to fiscal year 2002 included the following:

Cash Flows From Investing Activities. For the years ended June 30, 2004, 2003, and 2002, cash flows provided by (used in) investing activities were $5.0 million, $(14.6) million, and $(13.2) million. The significant items affecting the differences in cash flows from investing activities in fiscal year 2004 compared to fiscal year 2003 and fiscal year 2003 compared to fiscal year 2002 are discussed below:

Fiscal Year 2004 Compared to 2003. For the fiscal year 2004 compared to fiscal year 2003, the significant item affecting cash flows used in investing activities was the sale of $7.4 million of short term investments compared to the purchase of short term investments of $14.0 million in fiscal year 2003, partially offset by the use of $2.1 million cash flow for purchases of property and equipment, payments for buildings under construction and payments for flight assets under construction in fiscal year 2004 compared to the use of $1.5 million for such purchases and payments in fiscal year 2003.

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Fiscal Year 2003 Compared to 2002. For the fiscal year 2003 compared to fiscal year 2002, the significant items affecting cash flow used in investing activities were as follows:

Cash Flows From Financing Activities. For the years ended June 30, 2004, 2003, and 2002, cash flows (used in) provided by financing activities were ($11.1) million, ($6.5) million, and $7.2 million, respectively. In January 2004 we restructured our mortgage financing of our Astrotech Titusville SPF as a three-year fixed-rate loan by reducing the outstanding balance by $9.5 million, and terminating the interest rate swap in place at a cost of $1.3 million. Also during fiscal year 2004, the Company paid the outstanding balance on the loan from Alenia of $2.0 million. During fiscal year 2003, we repaid approximately $6.3 million of debt including the New Credit Facility which expired and was repaid in July 2002, $2.0 million on the mortgage loan, and $1.9 million on the loan from Alenia. During fiscal year 2002, we received $20.0 million related to the financing of the Astrotech SPF in Titusville, Florida and repaid approximately $0.9 million of the loan. We repaid $4.0 million of the loan payable, $4.0 million of the note payable to shareholder, and repaid in full $0.3 million of the note payable to insurers. In addition, we repaid $4.6 million of the New Credit Facility during fiscal year 2002.

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

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

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

On March 25, 2003, the Board of Directors authorized the Company to repurchase up to $1.0 million of the Company’s outstanding Common Stock at market prices. Any purchases under the Company’s stock repurchase program may be made from time-to-time, in the open market, through block trades or otherwise in accordance with applicable regulations of the SEC. Through June 30, 2004, the Company had repurchased 116,100 shares at a cost of $117,320. We will continue to evaluate the stock repurchase program and the funds authorized for the program.

The Company was under contract with NASA to support the STS-107 mission on its Columbia orbiter. The mission utilized our RDM flight asset. On February 1, 2003, the RDM was lost in the tragic STS-107 accident. The RDM was partially covered by commercial insurance. During the three months ended March 31, 2003, the Company received $17.7 million from commercial insurers. We do not plan on replacing the RDM. SPACEHAB has two additional modules available to support the Company’s current NASA contracts. In January 2004, we submitted a detailed claim to NASA for recovery of our RDM investment in the amount of $87.7 million. We believe we have a basis for recovery of some or all of the loss from NASA but there can be no assurance as to the timing or the amount, if any, to be received from the claim. Upon resolution of the claim, any proceeds from NASA would be recorded in the period in which the claim is resolved.

We continue to focus our efforts on improving the overall liquidity of the Company through identifying new business opportunities within the areas of our core competencies, reducing operating expenses, limiting cash commitments for future capital investments and new asset development. Please read the discussion of liquidity in the overview section (page 17) in conjunction with this section.

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The Company’s cash and short-term investments are approximately $7.6 million as of June 30, 2004. We believe that the Company has sufficient liquidity to fund ongoing operations for at least the next fiscal year and expect to utilize existing cash and any potential payment from NASA to support strategies for new business initiatives and reduce debt service requirements. However, under certain scenarios the Company could be facing liquidity concerns after that point in time.

Contractual Obligations. The Company’s contractual obligations as of June 30, 2004 are as follows (in thousands):

UNCERTAINTY OF FORWARD-LOOKING STATEMENTS AND INFORMATION

This Form 10-K includes statements reflecting assumptions, expectations, projections, intentions, or beliefs about future events that are intended as “forward-looking statements.” All statements included or incorporated by reference in this annual report, other than statements of historical fact, that address activities, events, or developments that we or our management expect, believe, or anticipate will or may occur in the future are forward-looking statements. These statements represent our reasonable judgment on the future based on various factors and using numerous assumptions and are subject to known and unknown risks, uncertainties, and other factors that could cause our actual results and financial position to differ materially from those contemplated by the statements. These statements can be identified by the fact that they do not relate strictly to historical or current facts. They use words such as “anticipate,” “estimate,” “project,” “forecast,” “plan,” “may,” “will,” “should,” “expect,” and other words of similar meaning. In particular, these include but are not limited to, statements relating to the following:

Any or all of our forward-looking statements may turn out to be wrong. They can be affected by inaccurate assumptions or by known or unknown risks, uncertainties, and other factors including, among others:

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In addition, there may be other factors that could cause our actual results to be materially different from the results referenced in the forward-looking statements, some of which are included elsewhere in this Form 10-K. Many of these factors will be important in determining our actual future results. Consequently, no forward-looking statement can be guaranteed. Our actual future results may vary materially from those expressed or implied in any forward-looking statements.

All forward-looking statements contained in this Form 10-K are qualified in their entirely by this cautionary statement. Forward-looking statements speak only as of the date they are made, and we disclaim any obligation to update any forward-looking statements to reflect events or circumstances after the date of this Form 10-K, except as otherwise required by applicable law.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

SPACEHAB’s primary exposure to market risk relates to interest rates. Our financial instrument that is subject to interest rate risk is the revolving loan payable that has interest at prime plus one percent. SPACEHAB does not currently use any interest rate swaps or derivative financial instruments to manage its exposure to fluctuations in interest rates. A one percent change in variable interest rates will not have a material impact on our financial condition.

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Item 8. Financial Statements and Supplementary Data.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

SPACEHAB, Incorporated and Subsidiaries:

We have audited the accompanying consolidated balance sheet of SPACEHAB, Incorporated and subsidiaries (the “Company”) as of June 30, 2004, and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss) and cash flows for the year then ended June 30, 2004. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of June 30, 2004, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

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Report of Independent Registered Public Accounting Firm

The Stockholders and Board of Directors

SPACEHAB, Incorporated and Subsidiaries:

We have audited the accompanying consolidated balance sheet of SPACEHAB, Incorporated and subsidiaries (the Company) as of June 30, 2003, and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss), and cash flows for each of the two years in the period ended June 30, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of SPACEHAB, Incorporated and subsidiaries as of June 30, 2003 and the consolidated results of their operations and their cash flows for each of the two years in the period ended June 30, 2003, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 2 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” effective July 1, 2002.

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SPACEHAB, INCORPORATED AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands, except share data)