** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-K/A**

**(Amendment No. 2)**

** **

**(Mark One)**

** **
| **x**      | **ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                      |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                                                                                                                                                                                                                                               |
| ** ** | **For the fiscal year ended  June 30, 2007**                                                                                                                                                                                                                                                                                        |
| ** ** | ** **                                                                                                                                                                                                                                                                                                                               |
| **o**      | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                  |
| ** ** | ** **                                                                                                                                                                                                                                                                                                                               |
| ** ** | **For the transition period from                            to                        ** |

 

**Commission File No. 0-27206**

 

**SPACEHAB,Incorporated**

(Exact name of registrant asspecified in this charter)

 

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

 

**12130 Highway 3, Building 1**

**Webster, Texas 77598-1504**(Address of principal executive offices)      (Zipcode)

** **

**(713) 558-5000**

(Registrant’s telephonenumber, including area code)

 

**Securities Registered pursuant to Section 12(b) ofthe Act:**

** **

| ** **                       |       | **Name of each exchange** |
|----------------------------------|------------|---------------------------|
| **Title of each class**          |       | **on which registered**   |
| **Common Stock**

(no par value) | ** ** | **NASDAQ Capital Market** |

** **

**Securitiesregistered pursuant to Section 12(g) of the Act:**None

** **

Indicate by check mark if theregistrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act. 

YES o  NO x

 

Indicate by check mark if theregistrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act. 

YES o  NO x

 

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

YES x  NO o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405of this chapter) is not contained herein, and will not be contained, to thebest of registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a small reporting company. See the definitions of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

 

| Large accelerated filer o                      |   | Accelerated filer o         |
|------------------------------------------------|--------|-----------------------------|
| Non-accelerated filer x                        |   | Smaller reporting company o |
| (Do not check if a smaller  reporting company) |   |                        |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

YES o  NO x

 

The aggregate market value ofthe registrants voting and non-voting common equity held by non-affiliates ofthe registrant, based upon the closing price of such stock on the NASDAQCapital Market on such date of $0.65 was approximately $8,429,242 as of December 29,2006.

 

As of September 19,2007, 13,027,196 shares of the registrant’s Common Stock, no par value, wereoutstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE:

 

Informationcalled for in Part III of this Form 10-K is incorporated by referenceto the registrant’s definitive Proxy Statement to be filed within 120 daysafter the end of the registrant’s fiscal year in connection with the registrant’sannual meeting of shareholders.

 

 

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**EXPLANATORY NOTE**

** **

SPACEHAB, Incorporated is amending their Fiscal Year2007 Form 10-K as a result of a reclassification of $6.3 million ofrestricted cash as a non current asset and the reclassification of $5.7 millionof advances on a construction contract as a non current liability in accordancewith ARB 43, Chapter 3, Section A, Paragraph 6 and 8. The reclassificationof the $6.3 million of restricted cash included classifying the net change inrestricted cash as a cash flow from operating activities in accordance with FAS95. Amendment to this document in accordance with these standards is outlinedin the subsequent pages below.

 

Note:  There areno other changes to the original Form 10-K filing other than thoseoutlined in this document. This Form 10-K/A does not reflect eventsoccurring after the filing of the original Form 10-K, or modify or updatethe disclosures therein in any way other than as required to reflect theamendment set forth below.

 

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** **

**PART II**

** **

# **Item 6.  Selected Financial Data.**

#  

The following table sets forth our selectedconsolidated financial data as of and for the years ended June 30, 2003,2004, 2005, 2006, and 2007 restated. Such data has been derived from ourconsolidated financial statements audited by Ernst & Young LLP for thefiscal year ended June 30, 2003, by Grant Thornton LLP for the fiscalyears ended June 30, 2004, 2005, and 2006, and by PMB Helin Donovan, LLPfor fiscal year ended June 30, 2007. The data set forth below should beread in conjunction with “Management’s Discussion and Analysis of FinancialCondition and Results of Operations,” “Risk Factors” and our ConsolidatedFinancial Statements and Notes thereto included in this annual report. Allamounts, except per share amounts, are in thousands.

 
| ** **                                                                  | ** ** | **Years Ended June 30,** | ** ** |
|-----------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                  | ** ** | **2003**                                | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** |
| ** **                                                                  | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Restated** | ** ** |
| **Statement of Operations Data:**                                           | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue from operations                                                     |       | $                                       | 94,963     |   | $ | 77,606 | (3) | $ | 59,401 |   | $ | 50,746 |   | $ | 52,762 |   |
| Costs of revenue                                                            |       | 78,791                                  |       | 45,678 |   | 47,158 |   | 46,855 | (7) | 51,029 | (9) |
| Gross profit                                                                |       | 16,172                                  |       | 31,928 |   | 12,243 |   | 3,891 |   | 1,733 |   |
| Selling, general and administrative expenses                                |       | 91,434                                  | (1)        | 20,982 | (4) | 1,639 | (5) | 10,672 |   | 13,762 | (9) |
| Research and development expenses                                           |       | 118                                     |       | 223 |   | 77 |   | 410 |   | 801 |   |
| Income (loss) from operations                                               |       | (75,380                                 | )          | 10,723 |   | 10,527 |   | (7,191 | ) | (12,830 | ) |
| Interest expense, net of capitalized amounts and interest and other  income |       | 7,252                                   |       | 8,142 |   | 5,424 |   | 5,174 | (8) | 3,531 |   |
|                                                                        |       |                                    |       |   |   |   |   |   |   |   |   |
| Net income (loss)                                                           |       | (81,775                                 | )          | 2,075 |   | 5,249 |   | (12,397 | ) | (16,292 | ) |
| Net income (loss) per common share –basic                              |       | $                                       | (6.66      | ) | $ | 0.17 |   | $ | 0.42 |   | $ | (0.97 | ) | $ | (1.26 | ) |
| Net income (loss) per common share – diluted                           |       | $                                       | (6.66      | ) | $ | 0.15 |   | $ | 0.37 |   | $ | (0.97 | ) | $ | (1.26 | ) |
| Shares used in computing net income (loss) per common share – basic    |       | 12,285                                  |       | 12,450 |   | 12,613 |   | 12,744 |   | 12,920 |   |
| Shares used in computing net income (loss) per common share – diluted  |       | 12,285                                  |       | 14,142 |   | 14,190 |   | 12,744 |   | 12,920 |   |
| Cash dividends declared per common share                                    |       | —                                  |       | — |   | — |   | — |   | — |   |
|                                                                        |       |                                    |       |   |   |   |   |   |   |   |   |
| **Other Data:**                                                             |       |                                    |       |   |   |   |   |   |   |   |   |
| Cash provided by (used in) operations                                       |       | $                                       | 2,114      |   | $ | 5,273 |   | $ | (7,153 | ) | $ | 3,984 | (8) | $ | 6,028 | (10) |
| Cash provided by (used in) investing activities                             |       | 3,037                                   | (2)        | 5,019 |   | 17,683 | (6) | (1,141 | ) | (1,077 | ) |
|                                                                        |       |                                    |       |   |   |   |   |   |   |   |   |
| **Balance Sheet Data (at period end):**                                     |       |                                    |       |   |   |   |   |   |   |   |   |
|                                                                        |       |                                    |       |   |   |   |   |   |   |   |   |
| Working capital (deficit) surplus                                           |       | $                                       | (4,750     | ) | $ | (6,351 | ) | $ | 5,435 |   | $ | 2,753 |   | $ | (6,105 | ) |
| Total assets                                                                |       | 121,356                                 |       | 99,925 |   | 101,951 |   | 85,450 |   | 72,475 |   |
| Long-term debt, excluding current  portion                                  |       | 80,056                                  |       | 66,942 |   | 64,885 |   | 63,250 |   | 52,944 |   |
| Stockholders’ equity (deficit)                                         |       | 5,090                                   |       | 9,410 |   | 14,797 |   | 2,809 |   | (13,131 | ) |

 

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(1)               Includesapproximately $78.3 million of non-cash write downs related to the loss of ourresearch double module, goodwill impairment at our Government Services businessunit, and asset impairment.

(2)               Includesapproximately $17.7 million of insurance proceeds related to the loss of ourresearch double module.

(3)               Includes approximately $17.5million due to Boeing’s termination of its spacecraft processing contract withus.

(4)               Includes approximately $0.3million of non-cash expenses related to subleasing of excess facilities, $8.3million of goodwill impairment at our Government Services and Astrotech SpaceOperations business units, and a $1.8 million non-cash write-down of aninvestment in Guignè.

(5)               Includes $7.7 million of netrecovery from non-recurring transactions related to the loss of our researchdouble module.

(6)               Includes approximately $8.2million from ReALMS contract indemnification clause related to the loss of ourresearch double module.

(7)               Includes approximately $6.3million of non-cash write downs related to our flight unit 3 and the shuttlebased flight assets.

(8)               Includes approximately $0.6million of non-cash charges related to the acceleration of debt placement feesrelated to the convertible subordinated notes.

(9)               Includes approximately $12.5million of non-cash write downs related to our flight unit 2 and the shuttlebased flight assets and a $0.1 million non-cash write down of an investment inApplied Astronautical Corporation.

(10)         Includes $3.1 millionadvance from customer for in-flight insurance for STS-118 that was paid in July 2007to the insurance carrier.

 

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#  

# **Item7.  Management’s Discussion and Analysisof Financial Condition and Results of Operations.**

#  

The following discussion should be read in conjunctionwith, and is qualified in its entirety by reference to, our auditedconsolidated financial statements and notes thereto included elsewhere in thisreport.

 

Historically, we have operated in three main areasgenerally related to space flight activities within the aerospace industry:space assets and mission support services for manned and unmanned spaceexploration and research missions; commercial and exploratory satellitepre-launch services; and engineering services in support of government andcommercial space operations. Because of the diversity among the operations ofour activities, we report the results of each business as a separate segment inour consolidated financial statements. Our consolidated financial results alsoreflect corporate-level expenses such as general and administrative, interest,and depreciation and amortization, but because of their nature, these items arenot reported as a separate segment.

 

**Overview**

 

We provide a range of products and services that focuson the needs of industry, governments and academia requiring access to, andutilization of the unique environment of space. We employ a staff of engineersand technicians who have supported approximately 250 manned and unmannedmissions to space from multiple locations worldwide, including 23 space shuttlemissions. We offer products and services in the following areas:

 

·                  Expertise inqualifying hardware for spaceflight and the habitability and occupationalchallenges of space;

·                  Facilities andsupport services necessary for the preparation of satellites and payloads forlaunch;

·                  Engineering,analysis, and payload operations services;

·                  Programintegration and control; and

·                  Product design, development, andfabrication.

 

# **Our Business Units**

#  

Our company is currently comprised of three primarybusiness segments which provide the following products and services to thegovernment and commercial markets. Our business units include:

 

*SPACEHAB Flight Services*. Theprimary goal of our Flight Services business unit is to enable government andcommercial enterprises to overcome the accessibility, habitability andoccupational challenges of space. To meet our clients’ specific missionrequirements, we offer a range of engineering, research, logistics,integration, operations, and ground support services. Through this businessunit, we have and will continue to offer a full range of ground-based pre- andpost-flight experiment, cargo, and payload processing services as well ason-orbit operations support. Additionally, we are supporting contracts forongoing flight hardware manufacturing projects in support of NASA andinternational customers. Our Flight Services Business Unit generates revenue byproviding turnkey services generally on a fixed price basis. We recognizerevenue for mission contracts that extend over multiple financial reportingperiods using the percentage of completion method which relies upon estimatesof costs and time to complete, as well as other estimates. During fiscal year2007, our Flight Services business unit accounted for 65% of our consolidatedrevenues.

 

The primary factors impacting our Flight Servicesbusiness unit earnings and cash flows are the number of space shuttle missionsflown, the requirements for use of our space shuttle hardware and theconfiguration of the cargo handling and research logistics required for eachmission. Other factors that have impacted, and are expected to continue toimpact earnings and cash flows for this business unit include:

 

·                  NASA’s use ofour space shuttle modules and related space assets that utilize ourcompetencies in configuration and cargo handling.

·                  Commercialdemand for access to space launch capability and need for research cargologistics

·                  Space shuttle mission requirementsfor the manufacture of specialized cargo handling equipment.

 

*Astrotech Space Operations*. Our Astrotechbusiness unit provides modern facilities and support for the preparation ofmulti-million dollar satellites and payloads for launch on expendable launchvehicles. Since 1985, our Astrotech business unit has been providing governmentand commercial customers with a commercial alternative to usinggovernment-owned facilities to prepare their satellites for launch in theUnited States. Astrotech currently has long-term contracts in place with NASA,United Launch Alliance, National Reconnaissance Office and Sea Launch, LLC.During fiscal year 2007, Astrotech accounted for 23% of our consolidatedrevenues.

 

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Revenue for our Astrotech business unit is generatedfrom various fixed-priced contracts with launch service providers in both thecommercial and government markets. The services and facilities we provide toour customers support the final assembly, checkout, and countdown functionsassociated with preparing a spacecraft for launch. The earnings and cash flowsgenerated from our Astrotech operations are related to the number of commercialspacecraft launches, which reflects the growth in the satellite-basedcommunications industries, and the requirement to replace aging satellites.Other factors that have impacted, and are expected to continue to impact,earnings and cash flows for this business include:

 

·                  Our ability tocontrol our capital expenditures, which primarily are limited to modificationsto accommodate payload processing for new launch vehicles, maintenance andsafety, environmental and reliability projects, and other costs, throughdisciplined management and safe, efficient operations

·                  The continuinglimited availability of competing facilities at the major domestic launch sitesthat can offer compatible services, leading to an increase in government use ofour services

·                  Our ability to complete customerspecified facility modifications within budgeted costs and time commitments

 

*SPACEHAB Government Services*. Fornearly 30 years, our Government Services business unit has provided large scaleprogram technical support and specialized engineering analysis, products, andservices to NASA and other customers. Our Government Services business unitderives most of its revenue under ARES’ contract to provide configuration anddata management services within NASA’s Program Integration & Control (“PI&C”)contract for the International Space Station. The base contract period extendsthrough September 2008 and can be extended for two additional one yearterms at the election of our NASA customer. Under this contract, we facilitatethe assurance that the tens of thousands of pieces of hardware and softwareparts and components meet approved design and configuration requirements forthe International Space Station. During the first nine months of fiscal year2007, our Government Services business unit accounted for 11% of ourconsolidated revenues.

 

Earnings from our Government Services business unitare dependent on our ability to continue to win contracts with NASA or othergovernment entities through the competitive bidding process and our performanceunder those contracts in achieving performance bonuses. Other factors that haveimpacted, and are expected to continue to impact earnings and cash flows forthis business include:

 

·                  Continuationthrough 2008 of our PI&C contract with the International Space Stationprogram and exercise of the contract options through 2010

·                  Our ability tomaintain small business qualification for our Government Services business unitunder NASA contracting rules

·                  Our ability to control costs withinour budget commitments

* *

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

 

·                  Interest expensewhich has decreased due to the repayment of our mortgage debt during fiscalyear 2006 and which will be further reduced if our Exchange Transaction (seeNote 28) is successful

·                  Income taxes, with respect to whichwe currently only pay alternative minimum tax and minimal state income taxes;income taxes will be impacted by limitations on our net operating loss carryforward upon consummation of our Exchange Transaction, if successful (see Note28)

 

# **New Business Vision**

#  

In anticipation of the planned 2010 space shuttleretirement, we began developing new products and services. We are now focusingour business on using our core capabilities for the commercial exploitation ofspace. These new business initiatives include the following:

 

·                  Processingproducts and services in microgravity;

·                  Commercializingproducts manufactured in microgravity;

·                  Commercializingproducts developed for use in the space industry;

·                  Acquiring otherU.S. space contractors; and

·                  Providing end-to-end services forcommercial and government satellite operations.

 

Although we are developing products and services insupport of the new business visions, we currently do not have contracts orother arrangements to provide these products and services. We cannot assure youthat we will be able to successfully develop these new products and services inthe future. We anticipate that we will require substantial

 

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additional capital to develop these new products andservices, and that this additional financing will likely substantially dilutecurrent holders of our common stock.

 

# **New BusinessInitiatives**

#  

Many of our identified new business initiatives arefocused on space-based life sciences and end-to-end space mission assuranceservices, which are natural extensions of our 23 years of space industryexperience and our core capabilities in these fields. These new businessinitiatives will require large investments of capital and technical expertise.

 

*Microgravity*. In the early daysof the space program, it was determined that the effects of microgravityprovide a unique environment that could potentially benefit humans. Since theinception of the Space Shuttle Program and extending through the InternationalSpace Station Program, NASA has spent billions of dollars on microgravityinfrastructure and research. We have been logistically responsible for severalhundred of these experiments on the space shuttle, the Russian Progress vehicleand the International Space Station.

 

Previous spaceflight research suggests that growingprotein crystals in the microgravity environment of space offers thepossibility of significantly increasing the x-ray diffraction quality ofprotein crystals. We believe that because of the high quality of these proteincrystal structures, they may be used to better define the protein structures ofdiseases such as diabetes, cystic fibrosis, sickle cell anemia, Alzheimer’s,Parkinson’s disease, Lou Gehrig’s disease and certain forms of cancer, which inturn may lead to the development of drugs capable of combating these diseases.If we are successful in developing protein crystals in microgravity, we expectto pre-sell these crystals to pharmaceutical companies.

 

On August 14, 2007, NASA announced that it was seekingprivate industry proposals for research and manufacturing concepts andopportunities onboard the International Space Station. This announcementindicates NASA’s desire to open the International Space Station to commercialprojects. Because of our experience with microgravity, we are responding to thesolicitation and believe that we are well positioned to transition proteincrystal growth, and other identified candidates, from a space research projectto a fully commercialized microgravity processing operation.

 

*Advanced Research and Conventional TechnologyUtilization Spacecraft (ARCTUS)*. We are assembling a team ofindustry partners with a common goal of developing a commercial transportationsystem providing lower cost, lower risk space transportation services thanconventional, government-developed transportation systems. ARCTUS is designedto provide cargo transportation services to the International Space Stationunder the unfunded Space Act Agreement signed with NASA in June 2007.

 

*End-to-End Space Mission Assurance*.We believe that Astrotech is a recognized leader in providing commercialspacecraft processing services. Astrotech intends to expand its market byoffering end-to-end assurance services to both commercial and governmentcustomers. These new end-to-end space mission assurance services would extendAstrotech’s current relationships with customers’ spacecraft from a condensedfew weeks of ground processing at an Astrotech facility to multiple years ofspace mission assurance services throughout the satellite’s lifecycle.

 

*SPACETECH*. In 2007, we formed a “technologyincubator” called SPACETECH. The purpose of SPACETECH is to cultivatetechnology developed for and from space into commercial applications. Thefollowing are two examples of new initiatives already underway withinSPACETECH:

 

·                  Under anunfunded Space Act Agreement with NASA, we began development of a mini-massspectrometer which we hope to turn into a small, portable, low power unitcapable of detecting chemical compounds such as explosives, weapons of massdestruction, and toxic gases. We are negotiating an agreement for thelicensing, sale and distribution of the mini mass spectrometer.

·                  The Federal Aviation Administrationand Department of Transportation have enacted new regulations for airtransportation of oxygen containers to enhance safety in the event of a fire.Applying decades of experience in the development of specialized containers, wehave been working with an industry partner to develop and certify a container tomeet these new requirements. If successful, this project will provide us anopportunity to enter a new market.

 

# **Our BusinessStrategy**

#  

Our strategic vision is to be a recognized marketleader in providing services to support space operations and utilization withconsistent growth while increasing shareholder value. Our business strategiesto achieve this are:

 

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·                  Deliverexcellence on current work, including providing technical support on spaceprograms and remaining space shuttle missions;

·                  Leverage decadesof experience facilitating bioscience space payloads and developing andoperating successful space hardware for expansion into microgravity processing;

·                  Bring maturespace technology and space-based processing to the commercial markets;

·                  Provide accessto space on alternative launch systems for proprietary space processing and forcommercial customers;

·                  Design solutionsthat encourage private commercial investment in space; and

·                  Continue to develop space-relatedhardware.

 

**FINANCIAL CONDITION, CAPITAL RESOURCES, AND LIQUIDITY**

** **

***Balance Sheet***. Our total assets at June 30,2007 were $72.5 million compared to total assets of $85.5 million at the end offiscal year 2006. The following table sets forth the significant components ofthe balance sheet as of June 30, 2007, compared with 2006 (in thousands):

 
| ** **                                 | ** ** | **2007  Restated** | ** ** | **2006** | ** ** | **Chg.** | ** ** |
|--------------------------------------------|------------|--------------------|------------|----------|------------|----------|------------|
| Assets:                                    |       |               |       |     |       |     |       |
| Current assets                             |       | $                  | 19,644     |     | $          | 20,675   |       | $ | (1,031 | ) |
| Property and equipment (net)               |       | 43,884             |       | 61,637   |       | (17,753  | )          |
| Other assets (net)                         |       | 8,947              |       | 3,138    |       | (5,809   | )          |
| Total                                      |       | $                  | 72,475     |     | $          | 85,450   |       |   |   |
| Liabilities and stockholders’ equity: |       |               |       |     |       |     |       |
| Current liabilities                        |       | $                  | 25,749     |     | $          | 17,922   |       | $ | 7,827 |   |
| Long-term debt-less current portion        |       | 52,944             |       | 63,250   |       | (10,306  | )          |
| Other long-term liabilities                |       | 6,913              |       | 1,469    |       | 5,444    |       |
| Stockholders’ equity                  |       | (13,131            | )          | 2,809    |       | (15,940  | )          |
| Total                                      |       | $                  | 72,475     |     | $          | 85,450   |       |   |   |

 

Fiscal Year2007 Restated Compared to Fiscal Year 2006. Currentassets as of June 30, 2007 increased by $5.3 million as compared to June 30,2006. This increase is primarily due to:

 

·                  Decrease incurrent assets of $1.0 million. These differences are attributed to:

·                  Increase in cashof $3.4 million partially due to us receiving $3.1 million from our customerbefore year-end for the in-flight insurance on STS-118. The payment to theinsurance carrier was made subsequent to year-end.

·                  Decrease inaccounts receivable of $3.1 million is primarily attributable to the decreasedvolume of sales in Flight Services due to our contracted missions for ourshuttle assets ending their contracted period of performance.

·                  Decrease inother assets of $1.5 million is primarily a result of us valuing our inventoryto market prices. This resulted in a non-cash write-down of the inventory by$1.7 million and the recording of a $1.0 million note receivable.

·                  Increase inprepaid expenses of $0.3 million.

 

The decrease in net property and equipment of $17.8million from June 30, 2007 to June 30, 2006 resulted primarily fromthe write-down of our flight unit 2 module due to our analysis of the remainingshuttle flights and the potential need for our flight unit 2 module on theseflights and depreciation.

 

The increase in other assets of $5.8 million from June 30,2007 restated to June 30, 2006 resulted primarily from an increase inrestricted cash attributable to a new contract to expand our payload processingfacility in our Astrotech subsidiary which generated $6.3 million in restrictedcash during fiscal year 2007, and a decrease in net deferred financing costs ofapproximately $0.5 million as a result of amortization of the deferredfinancing costs. Additionally, we had a non-cash valuation allowance of $0.1million for our investment in Applied Astronautical Corporation offset by anincrease in other assets of $0.1 million.

 

Our current liabilities increased by $7.8 million fromJune 30, 2006 to June 30, 2007. The following summarizes significantitems:

 

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·                  Our accountspayable and accrued expenses decreased from $14.7 million to $11.0 million duea reduction in mission activities in our Flight Services business unit and thetiming of payments.

·                  Our short-termdebt decreased by $1.6 million from June 30, 2006 to June 30, 2007 aswe paid the remaining payments on our mortgage loan at our Astrotech facility.Additionally, our short-term debt increased from June 30, 2006 to June 30,2007 by $10.3 million due to our 8% convertible subordinated notes maturing in October 2007.

·                  Our short-termdeposit account increased by $3.1 million during the current fiscal year. Thisis a result of us receiving $3.1 million from our customer prior to year endfor the in-flight insurance on our flight assets for STS-118 that flew in August 2007.The payment to the insurance carrier was made subsequent to year end.

·                  Our current portion of deferredrevenue decreased by $0.2 million for June 30, 2006 to June 30, 2007due to timing of receiving payments and recognizing revenue for shuttle relatedand satellite related programs.

 

Our long-termdebt as of June 30, 2007 decreased by $10.3 million due to the maturity of$10.3 million of our 8% convertible subordinated notes in October 2007.

 

Otherlong-term liabilities increased by $5.4 million at year end 2007 restatedcompared to year end 2006 primarily due to recognition of the long-term gain ofthe $1.6 million that was recorded in the fourth quarter of fiscal year 2005due to the sale of our Cape Canaveral and Houston Headquarters facilities that willbe recognized over the term of the leases offsetting advances on constructioncontract increased by $5.7 million from June 30, 2006 to June 30,2007. The increase in advances on the construction contract was primarily dueto receiving the initial milestone payments on our contract with a governmentalagency to design and build a new processing facility and corresponding paymentsto subcontractors for work performed during the period.

 

# **Liquidity andCapital Resources**

#  

As of June 30, 2007 we had cash and restrictedcash on hand of $16.0 million and our working capital was approximately ($5.5)million. Restricted cash, which consists of advance payments on a governmentcontract to modify certain spacecraft processing facilities, totaled $6.3million at June 30, 2007. For fiscal year 2007 restated we generated $6.0million from operating activities. Our $5.0 million revolving credit facilityexpired as of February 11, 2007 and we elected not to renew the facility.

 

Our $10.3 million of outstanding 8.0% convertiblenotes are due on October 15, 2007 and our $52.9 million of 5.5% seniorconvertible notes are due in October 2010. A covenant in our 5.5% noteindenture restricts us from using the proceeds from the sale or mortgage of ourAstrotech Florida assets for purposes other than reducing outstanding balanceson our credit facility, repaying our now extinguished mortgage loan, orredeeming outstanding 5.5% senior convertible notes. We do not have sufficientliquidity to repay the principal and interest on our 8.0% convertible notes andthe interest on our 5.5% senior convertible notes when due on October 15,2007 unless our Exchange Offer (see Item 7. Management’s Discussion andAnalysis of Financial Condition and Results of Operations–Liquidity and CapitalResources) is successfully consummated.

 

***Cash Flows From OperatingActivities.*** Cash provided by (used in) operations for theyears ended June 30, 2007 restated, 2006, and 2005 was $12.3 million, $4.0million, and ($7.2) million, respectively. The significant items affecting thedifferences in cash flows from operating activities in fiscal year 2007 ascompared to fiscal year 2006, and fiscal year 2006 compared to fiscal year 2005are discussed below:

 

Fiscal Year2007 Restated Compared to Fiscal Year 2006. For thefiscal year 2007 compared to fiscal year 2006, the significant items affectingcash provided by operating activities were:

 

·                  Net loss forfiscal year 2007 was $16.3 million as compared to net loss for fiscal year 2006of $12.4 million. Included in the net loss for fiscal year 2007 is a $12.5million non-cash charge for the write-down of our flight unit 2 module andother shuttle related assets. Additionally, the net loss for fiscal year 2007included a non-cash charge of $0.1 million for the valuation of our investmentin Applied Astronautics Corporation. Included in the net loss for fiscal year2006 is a $6.3 million non-cash charge for the write-down of our flight unit 3module.

·                  Fiscal year 2006included a non-cash charge of $0.6 million related to the acceleration of debtplacement costs related to the original issuance costs of our $63.3 million 8%convertible subordinated costs to the exchange of $52.9 million of the notesfor $52.9 million of 5.5% senior convertible subordinated notes.

·                  Fiscal year 2007Restated cash flows from operations included an increase in restricted cash of$6.3 million due to advances received for the design and construction of apayload processing facility at our Vandenberg Air Force Base location.

 

8

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·                  Depreciation andamortization for fiscal year 2007 was $0.3 million more compared to fiscal year2006, primarily due to increased depreciation expense for our flight assetsresulting from the change of the depreciable lives from 2016 to 2010. Thischange in depreciable lives is based on the most current information availablefrom NASA on the retirement of the space shuttle fleet at the end of 2010.

·                  Changes inassets for fiscal year 2007 provided cash from operations of $4.3 million. Thischange is primarily due to:

·                  Decrease inaccounts receivable of $4.6 million which is primarily due to a decrease inshuttle-related project work and the timing of payments.

·                  Increase inprepaid expenses and other assets of $0.3 million which is mainly due toincreased mission activities in our Astrotech business unit for futuresatellite processing missions.

·                  Changes inassets for fiscal year 2006 provided cash from operations of $5.6 million. Thischange is primarily due to:

·                  Decrease inaccounts receivable of $5.5 million which is primarily due to a decrease inshuttle-related project work and the timing of payments.

·                  Decrease inprepaid expenses and other assets of $0.1 million which is primarily due to adecrease in deferred mission costs for the Japanese Experiment ThermalIncubator Service contract due to the completion of the contract in fiscal year2006.

·                  Changes inliabilities for fiscal year 2007 provided cash from operations of$5.3 million. This change is primarily due to:

·                  Decreases inaccounts payable, accrued expenses, and accrued subcontracting costs of $3.3million which is due to decreased mission activity for shuttle relatedprojects.

·                  Decrease indeferred revenue of $0.2 million. The decrease in deferred revenue is primarilydue to the timing of mission activities and payments in Astrotech businessunit.

·                  Increase inadvances on construction contract of $5.7 million. The increase for ouradvances on the construction contract increased by $5.7 million due toreceiving the initial milestone payments on our contract with a governmentalagency to design and build a new processing facility and corresponding paymentsto subcontractors for work performed during the period.

·                  Increase of $3.1million in customer deposits. Our short-term deposit account increased by $3.1million during the current fiscal year. This is a result of us receiving $3.1million from our customer prior to year end for the in-flight insurance on ourflight assets for STS-118 that flew in August 2007. The payment to theinsurance carrier was made subsequent to year end.

 

Changes in liabilities for fiscal year 2006 used cashfrom operations of $2.2 million. This change was due primarily to thedecreases in accounts payable, accrued expenses, and accrued subcontractingcosts of $1.8 million and the decrease in deferred revenue of $0.4 million. Thedecreases in accounts payable, accrued expenses, and accrued subcontractingcosts is due to decreased mission activity for shuttle related projects. Thedecrease in deferred revenue is primarily due to the completion of the JapaneseExperiment Thermal Incubator Service contract during fiscal year 2006.

 

Fiscal Year2006 Compared to Fiscal Year 2005. For the fiscal year2006 compared to fiscal year 2005, the significant items affecting cashprovided by operating activities were:

 

·                  Net loss forfiscal year 2006 was $12.4 million as compared to net income for fiscal year2005 of $5.2 million. Included in the net loss for fiscal year 2006 is a $6.3million non-cash charge for the write-down of our flight unit 3 module.Included in net income for fiscal year 2005 is $7.7 million recognized as a netrecovery of a previously reported non-recurring loss of our research doublemodule destroyed during the Space Shuttle *Columbia*mission.

·                  Fiscal year 2006non-cash charge of $0.6 million related to the acceleration of debt placementcosts related to the original issuance costs of our $63.3 million 8%convertible subordinated costs to the exchange of $52.9 million of the notesfor $52.9 million of 5.5% senior convertible subordinated notes.

·                  Depreciation andamortization for fiscal year 2006 was $0.5 million more compared to fiscal year2005, primarily due to increased depreciation expense for our flight assetsresulting from the change of the depreciable lives from 2016 to 2010. Thischange in depreciable lives is based on the most current information availablefrom NASA on the retirement of the space shuttle fleet at the end of 2010. Thisincrease is partially offset by a portion of assets reaching the end of theiruseful lives and decreased depreciation expense due to the sale of our facilityin Cape Canaveral, Florida during fiscal year 2005.

 

9

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·                  Changes in assets for fiscal year2006 provided cash from operations of $5.6 million. This change is primarilydue to a decrease in accounts receivable of $5.5 million and a decrease inprepaid expenses and other assets of $0.1 million. The decrease in accountsreceivable is primarily due to a decrease in shuttle-related project work andthe timing of payments. The decrease in other assets is primarily due to adecrease in deferred mission costs for the Japanese Experiment ThermalIncubator Service contract due to the completion of the contract in fiscal year2006. For fiscal year 2005 change in assets used cash from operations of $7.9million primarily from an increase in accounts receivable of $9.0 million andan increase in prepaid expenses of $0.2 million, which was partially offset bya decrease in other assets of $1.3 million.

·                  Changes in liabilities for fiscalyear 2006 used cash from operations of $2.2 million. This change is dueprimarily to the decreases in accounts payable, accrued expenses, and accruedsubcontracting costs of $1.8 million and the decrease in deferred revenue of$0.4 million. The decreases in accounts payable, accrued expenses, and accruedsubcontracting costs is due to decreased mission activity for shuttle relatedprojects. The decrease in deferred revenue is primarily due to the completionof the Japanese Experiment Thermal Incubator Service contract during fiscalyear 2006. For fiscal year 2005 changes in liabilities used cash in operationsof $1.8 million. This change is due primarily to the decreases in accountspayable and accrued expenses of $1.5 million which includes an increase due tothe recording of $0.5 million related to the Lloyd’s settlement and thedecrease in deferred revenue of $5.4 million.

 

***Cash Flows From InvestingActivities***. For the years ended June 30, 2007Restated, 2006, and 2005, cash flows provided by (used in) investing activitieswere ($1.1) million, ($1.1) million, and $17.7 million, respectively. Thesignificant items affecting the differences in cash flows from investingactivities in fiscal year 2007 compared to fiscal year 2006 and fiscal year2006 compared to fiscal year 2005 are as follows:

 

Fiscal Year2007 Compared to Fiscal Year 2006. For the fiscal year2007 compared to fiscal year 2006, the significant items affecting cashprovided by (used in) investing activities were:

 

·                  Property andequipment purchases of $0.6 million for fiscal 2007 as compared to $2.1 millionfor fiscal year 2006. This reduction is a continuation of our efforts to reducecapital expenditures.

·                  Fiscal year 2007cash flows from investing activities included a $0.5 million payment to Lloyd’sof London as a result of our claim dismissal against NASA for the loss of ourRDM.

·                  Fiscal year 2006 cash flows frominvesting activities included a decrease in cash securing credit facilities of$0.1 million for fiscal year 2006.

 

Fiscal Year2006 Compared to Fiscal Year 2005. For the fiscal year2006 compared to fiscal year 2005, the significant items affecting cashprovided by (used in) investing activities were:

 

·                  Property andequipment purchases of $2.1 million for fiscal 2006 as compared to $3.4 millionfor fiscal year 2005. For fiscal year 2005 cash flows from investing activitiesincluded the purchase of the Houston Headquarters facility that wassubsequently sold and leased back from the new landlord.

·                  Fiscal year 2005cash flows from investing activities were generated from the sale of short-terminvestments of $6.6 million as compared to no sales of such short-terminvestments for the fiscal year 2006.

·                  Fiscal year 2005cash flows from investing activities included $8.2 million received from NASAunder the Research and Logistics Mission Support contract indemnificationclause for the loss of our RDM.

·                  Fiscal year 2005cash flows from investing activities included $6.8 million from the sale of ourCape Canaveral and Headquarters facilities.

·                  Fiscal year 2006 cash flows frominvesting activities included a decrease of $1.0 million in cash securingcredit facilities as compared to an increase in restricted cash of $0.5 millionfor fiscal year 2005.

 

***Cash Flows From FinancingActivities***. For the years ended June 30, 2007, 2006,and 2005, cash flows used in financing activities were $1.5 million, $3.9million, and $3.7 million, respectively. The significant items affecting thedifferences in cash flows from financing activities in fiscal year 2007compared to fiscal year 2006 and fiscal year 2006 compared to fiscal year 2005are as follows:

 

Fiscal Year2007 Compared to Fiscal Year 2006. For the fiscal year2007 compared to fiscal year 2006, the significant items affecting cash used infinancing activities were:

 

·                  Fiscal year 2007had a payment of $1.6 million for our mortgage loan as compared to payments of$2.1 million for fiscal year 2006. This decrease is due to the maturity of theterm note in January 2007 and complete payment in December 2006.

 

10

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·                  Fiscal year 2006had an increase of $1.9 million from the refinancing of our subordinatedconvertible notes as compared to fiscal year 2007.

 

Fiscal Year2006 Compared to Fiscal Year 2005. For the fiscal year2006 compared to fiscal year 2005, the significant items affecting cash used infinancing activities were:

 

·                  Fiscal year 2005had net repayments of $1.4 million in principal under our revolving credit facilityas compared to no borrowings for fiscal year 2006.

·                  Fiscal year 2006had a payment of $2.1 million for our mortgage loan as compared to payments of$1.9 million for fiscal year 2005. This increase is due to the term of themortgage loan approaching its maturity date of January 2007.

·                  Fiscal year 2006had an increase of $1.5 million from the refinancing of our subordinatedconvertible notes as compared to fiscal year 2005.

 

***Liquidity***. We continue to focus ourefforts on improving overall liquidity through identifying new businessopportunities within the areas of our core competencies, reducing operatingexpenses, and limiting cash commitments for future capital investments and newasset development. We have continued to restrict new capital investment and newasset development, limiting projects to those required to support currentcontracts and facility maintenance. Additionally, we continue to evaluateoperating expenses in an effort to reduce or eliminate costs not required forus to operate effectively.

 

On April 28, 2005 we consummated the sale andsimultaneous lease back of our Cape Canaveral, Florida payload processingfacility. The sale resulted in net cash of approximately $3.8 million. Weleased back the facility for an initial period of five years, with an optionperiod of an additional five years. The annual rental for the first five yearsof this lease is approximately $0.45 million. On May 26, 2005 weconsummated the sale and lease back of our corporate offices in Webster(Houston), Texas. The sale resulted in net cash of approximately $0.9 million.We leased back 100% of the facility for an initial period of ten years, withtwo five-year options. We also retained the adjacent 3.0 acre parcel for futuredevelopment or sale. The annual rental for the first year of this lease isapproximately $0.3 million and gradually increases through the tenth year ofthe lease to approximately $0.4 million.

 

Our cash and restricted cash on hand was approximately$16.0 million as of June 30, 2007. Included in the $16.0 million is $3.1million for in-flight insurance on STS-118 that was paid in July 2007.Additionally, $6.3 million is restricted cash for a construction contract toexpand one of our processing facilities. Our capital requirements for continuingoperations consist of our general working capital needs, scheduled principaland interest payments on our debt obligations, certain contractual commitments,and capital expenditures. This includes short-term capital to financecontinuing operations at the end of 2007, and long-term capital to finance ourgrowth. Our capital resources which are solely comprised of cash reserves andcash generated from operations may not be sufficient to meet these capitalrequirements. While we believe that the exchange offer would help address ourforeseeable refinancing risk related to the Junior Notes that mature in October 2007,there is no assurance that the exchange offer will be sufficient to alleviateour liquidity issues due to a lack of capital resources. In addition, with theconclusion of STS-118 in August 2007, we expect to have a materialdecrease in our revenue from our Flight Services business, which has accountedfor over 65% of our consolidated revenue during fiscal year 2007. Moreover, ourrevolving credit line expired on February 11, 2007. As a result, in orderto continue to fund our current operations, we will need additional capital. Noassurance can be given that we will be able to obtain a new source of capitalon terms that are acceptable to us. If we are unable to obtain new capital, wemay be forced to subject ourselves to bankruptcy, reorganization, liquidation,dissolution or similar proceeding.

 

If we are unable to complete the Exchange Offer forany reason, we may restructure through a bankruptcy proceeding. Our ability torestructure in bankruptcy is subject to numerous risks, including thefollowing:

 

·                  We may losecustomers in bankruptcy because our services are critical to our customers’businesses

·                  The costs ofbankruptcy will significantly exceed the costs of an out-of-court transaction

·                  We may be unable to arrangedebtor-in-possession financing or otherwise finance our operations duringbankruptcy

 

Our capital requirements for continuing operationsconsist of our general working capital needs, scheduled principal and interestpayments on our debt obligations, certain contractual commitments, and capitalexpenditures. This includes short-term capital to finance continuing operationsat the end of 2007, and long-term capital to finance our 

 

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growth. Our capital resources which are solelycomprised of cash reserves and cash generated from operations, may not besufficient to meet these capital requirements. While we believe that theexchange offer would help address our foreseeable refinancing risk related tothe Junior Notes that mature in October 2007, there is no assurance thatthe exchange offer will be sufficient to alleviate our liquidity issues due toa lack of capital resources.

 

Our contractual obligations as of June 30, 2007are as follows (in thousands):

 
| **Contractual Obligations**   | ** ** | **At  June 30,  2007** | ** ** | **Fiscal  Year  2008** | ** ** | **Fiscal  Year  2009** | ** ** | **Fiscal  Year  2010** | ** ** | **Fiscal  Year  2011** | ** ** | **Fiscal  Year  2012** | ** ** | **Thereafter** | ** ** |
|------------------------------------|------------|-----------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|----------------|------------|
| Short-term Debt                    |       | $                           | 10,306     |                   | $          | 10,306                 |       | $                      | —     |                   | —     |                   | $          | —         |       | $ | — |   | $ | — |   |
| Long-term Debt                     |       | 52,944                      |       | —                 |       | —                 |       | —                 |       | 52,944                 |       | —                 |       | —         |       |
| ICC/VCC                            |       | 1,389                       |       | 1,389                  |       | —                 |       | —                 |       | —                 |       | —                 |       | —         |       |
| Operating leases(1)                |       | 12,579                      |       | 2,662                  |       | 970                    |       | 982                    |       | 769                    |       | 547                    |       | 6,649          |       |
| Total Contractual Cash Obligations |       | $                           | 77,218     |                   | $          | 14,357                 |       | $                      | 970        |                   | $          | 982                    |       | $              | 53,713     |   | $ | 547 |   | $ | 6,649 |   |
|                                    |            |                             |            |                        |            |                        |            |                        |            |                        |            |                        |            |                |            |  |  |  |  |  |  |  |

 

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(1)           For fiscal years 2008 and2009 we expect to receive net payments of approximately $0.4 million and $0.1million, respectively, for subleases. Additionally, we agreed to terminate outICC and VCC leases (see Note 28) in FY2008.

 

# **Critical AccountingPolicies**

#  

*Revenue Recognition*.  Our business units’ revenue is derivedprimarily from long-term contracts with the U.S. Government and commercialcustomers. Revenues under these contracts are recognized using the methodsdescribed below. Estimating future costs and, therefore, revenues and profitsis a process requiring a high degree of management judgment. “Risk SeeFactors—Risks Related to Our Business—Our financial results could be affectedif the estimates that we use in accounting for contracts are incorrect and needto be changed.” We base our estimate on historical experience and on variousassumptions that are believed to be reasonable under the circumstancesincluding the negotiation of equitable adjustments on our fixed-price contractsdue to launch delays. Costs to complete include, when appropriate, material,labor, subcontracting costs, lease costs, commissions, insurance, anddepreciation. Our business units’ personnel perform periodic contract statusand performance reviews. In the event of a change in total estimated contractcost or profit, the cumulative effect of such change is recorded in the periodthat the change in estimate occurs.

** **

**A Summary of RevenueRecognition Methods Follows:**

 
| **Business  Unit**  | ** ** | **Services/Products Provided**                                                            | ** ** | **Contract Type**                                                                                   | ** ** | **Method of Revenue Recognition**                                                                                                                                                |
|---------------------|------------|-------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Flight Services     |       | Commercial Space  Habitat Modules,   Integration & Operations   Support Services |       | Firm Fixed Price                                                                                    |       | Percentage-of-completion  based on costs incurred                                                                                                                                |
| Astrotech           |       | Payload Processing   Facilities                                                           |       | Firm Fixed Price –   Mission SpecificFirm Fixed Price –   Guaranteed Number of   Missions |       | Ratably, over the  occupancy period of a satellite within the facility from arrival through  launchFor multi-year  contract payments recognized ratably over the contract period |
| Government Services |       | Configuration   Management,   Engineering Services                                        |       | Cost Reimbursable  Award/Fixed Fee                                                                  |       | Reimbursable costs  incurred plus award/fixed fee                                                                                                                                |

 

*Long-Lived Assets*.  In assessing the recoverability of long-livedassets, fixed assets, assets under construction and intangible assets, weevaluate the recoverability of those assets in accordance with the provisionsof the Statement of Financial Accounting Standards No. 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets.” This Statement requiresthat certain of our long-lived fixed assets be reviewed for impairment wheneverevents or changes in circumstances indicate that the carrying amount of anasset may not be recoverable. Recoverability of assets to be held and used ismeasured by a comparison of the carrying amount of an asset to future net cashflows expected to be generated by the asset. If such assets are considered tobe impaired, the impairment to be recognized 

 

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is measured by the amount by which the carrying amountof the asset exceeds the fair value of the asset. Assets to be disposed of arereported at the lower of the carrying amount or fair value less costs to sell.

 

**RESULTS OF OPERATIONS**

** **

# **Results ofOperations for the Years Ended June 30, 2007, 2006, and 2005**

#  

*Overview*. In this section wediscuss our results of operations, both on a consolidated basis and, whereappropriate, by business unit for our fiscal years ended June 30, 2007,2006, and 2005. Where we report earnings or loss on a per share basis, we havedone so on a “diluted earnings per share” basis. The weighted average number ofcommon shares applicable to diluted earnings for 2007, 2006, and 2005 were12,919,506, and 12,743,533, and 14,190,281, respectively.

 

We had net income (loss) of ($16,292,000) or ($1.26)per diluted share on revenues of $52,762,000 for our 2007 fiscal year comparedto ($12,397,000) or ($0.97) per diluted share on revenues of $50,746,000 for2006 and $5,249,000 or $0.37 per diluted share on revenues of $59,401,000 for2005.

 

*Revenue*. Our revenue for thetwelve months ended June 30, 2007, 2006, and 2005 was generated primarilyfrom the Lockheed Martin Cargo Mission Contract and contracts with relatedcommercial customers in the Flight Services business unit; the PI&Ccontract in our Government Services business unit; and our contracts withLockheed Martin, Boeing, NASA, and other commercial satellite providers in ourAstrotech business unit.

 

During fiscal year 2007, our Flight Services businessunit supported NASA’s spaceflight activities on both the STS-116 and 118missions. Our Flight Services business unit prepared a cargo carrier forshuttle mission STS-118, the External Stowage Platform 3 (“ESP3”) that wasdeployed and permanently mounted to the International Space Station during the August 2007mission. For both STS-116 and 118 missions under the Cargo Mission Contract, weprovided our pressurized single module and unpressurized integrated cargocarrier for transport of critical cargo and orbital replacement units to andfrom the International Space Station.

 

During the three and twelve months ended June 30,2007, deferred revenue decreased by $0.2 million and $0.2 million,respectively, as we recognized revenue on contracts where milestone paymentshad been received in prior periods. We expect further reduction of deferredrevenue due to customer prepayments through the next twelve months which willresult in revenue recognition on contracts for which the related cash wasreceived in a prior period.

 

*Costs of Revenue*. We have severaltypes of costs of revenue in our business segments. Costs of revenue for ourFlight Services business unit include integration and operations expensesassociated with the performance of two types of efforts, sustainingengineering in support of all missions under a contract and mission specificsupport. Costs associated with the performance of the contracts using thepercentage-of-completion method of revenue recognition are expensed asincurred. Costs associated with the cost-reimbursable award and fixed-feecontracts are expensed as incurred by our Government Services business unit.Other costs of revenue include depreciation expense and costs associated withthe Astrotech payload processing facilities. Flight-related insurance coveringtransportation of our modules from our payload processing facility to the spaceshuttle and third-party liability insurance are also included in costs ofrevenue and are recorded as incurred. Selling, general and administrative andinterest and other expenses are recognized when incurred.

 

*Non-GAAP Financial Measures*. Weuse income from operations before charges as one measure of financialperformance. Income from operations before charges is a non-GAAP financialmeasure and consists of operating income before unusual and infrequent eventssuch as: goodwill impairments, asset impairments, investment impairments andthe loss of the research double module. Income from operations before chargesalso does not include interest expense or income taxes, each of which isevaluated on a consolidated basis. Because we do not allocate interest expenseand income taxes by unit, we believe that income from operations is a usefulmeasure of our units’ operating performance for investors. Income fromoperations before charges should not be considered an alternative to, or moremeaningful than, net income or cash flows from operations as determined inaccordance with GAAP. The “Other” column in the presentation below is ourcorporate selling, general and administrative expenses that are incurred forour overall operations that are not allocable to any specific business unit andresults of operations for our SMI segment.

 

The following tables provide summary financial dataregarding our consolidated and segmented results of operations for our 2007,2006, and 2005 fiscal years, respectively (in millions):

 

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** **

**Fiscal Year Ended June 30, 2007**

 
| ** **                                   | ** ** | **Flight Services  Business Unit** | ** ** | **Astrotech  Business  Unit** | ** ** | **Government  Services  Business  Unit** | ** ** | **Other** | ** ** | **Total** | ** ** |
|----------------------------------------------|------------|----------------------------------------------|------------|-------------------------------|------------|------------------------------------------|------------|-----------|------------|-----------|------------|
|                                         |       |                                         |       |                          |       |                                     |       |      |       |      |       |
| Income (loss) from operations before charges |       | $                                            | 4.9        |                          | $          | 2.0                                      |       | $         | 0.9        |      | $          | (8.0 | ) | $ | (0.2 | ) |
| Asset impairment charge                      |       | (12.5                                        | )          | —                        |       | —                                   |       | (0.1      | )          | (12.6     | )          |
|                                         |       |                                         |       |                          |       |                                     |       |      |       |      |       |
| Operating income (loss)                      |       | (7.6                                         | )          | 2.0                           |       | 0.9                                      |       | (8.1      | )          | (12.8     | )          |
|                                         |       |                                         |       |                          |       |                                     |       |      |       |      |       |
| Other income/expense, net                    |       | —                                       |       | 0.1                           |       | —                                   |       | 0.6       |       | 0.7       |       |
| Interest expense                             |       | —                                       |       | —                        |       |                                     |       | (4.3      | )          | (4.3      | )          |
|                                         |       |                                         |       |                          |       |                                     |       |      |       |      |       |
| Pre-tax income (loss)                        |       | (7.6                                         | )          | 2.1                           |       | 0.9                                      |       | (11.8     | )          | (16.4     | )          |
| Income tax benefit                           |       | —                                       |       | —                        |       | —                                   |       | 0.1       |       | 0.1       |       |
|                                         |       |                                         |       |                          |       |                                     |       |      |       |      |       |
| Net income (loss)                            |       | $                                            | (7.6       | )                             | $          | 2.1                                      |       | $         | 0.9        |      | $          | (11.7 | ) | $ | (16.3 | ) |

** **

**Fiscal Year Ended June 30, 2006**

 
| ** **                                   | ** ** | **Flight Services  Business Unit** | ** ** | **Astrotech  Business  Unit** | ** ** | **Government  Services  Business  Unit** | ** ** | **Other** | ** ** | **Total** | ** ** |
|----------------------------------------------|------------|----------------------------------------------|------------|-------------------------------|------------|------------------------------------------|------------|-----------|------------|-----------|------------|
|                                         |       |                                         |       |                          |       |                                     |       |      |       |      |       |
| Income (loss) from operations before charges |       | $                                            | 4.7        |                          | $          | 2.5                                      |       | $         | 0.5        |      | $          | (8.6 | ) | $ | (0.9 | ) |
| Asset impairment charge                      |       | (6.3                                         | )          | —                        |       | —                                   |       | —    |       | (6.3      | )          |
|                                         |       |                                         |       |                          |       |                                     |       |      |       |      |       |
| Operating income (loss)                      |       | (1.6                                         | )          | 2.5                           |       | 0.5                                      |       | (8.6      | )          | (7.2      | )          |
| Other income/expense, net                    |       | —                                       |       | —                        |       | —                                   |       | 0.3       |       | 0.3       |       |
| Interest expense                             |       | —                                       |       | —                        |       | —                                   |       | (5.5      | )          | (5.5      | )          |
|                                         |       |                                         |       |                          |       |                                     |       |      |       |      |       |
| Pre-tax income (loss)                        |       | (1.6                                         | )          | 2.5                           |       | 0.5                                      |       | (13.8     | )          | (12.4     | )          |
| Income tax expense                           |       | —                                       |       | —                        |       | —                                   |       | —    |       | —    |       |
|                                         |       |                                         |       |                          |       |                                     |       |      |       |      |       |
| Net income (loss)                            |       | $                                            | (1.6       | )                             | $          | 2.5                                      |       | $         | 0.5        |      | $          | (13.8 | ) | $ | (12.4 | ) |

** **

**Fiscal Year Ended June 30, 2005**

 
| ** **                                   | ** ** | **Flight Services  Business Unit** | ** ** | **Astrotech  Business  Unit** | ** ** | **Government  Services  Business  Unit** | ** ** | **Other** | ** ** | **Total** | ** ** |
|----------------------------------------------|------------|----------------------------------------------|------------|-------------------------------|------------|------------------------------------------|------------|-----------|------------|-----------|------------|
|                                         |       |                                         |       |                          |       |                                     |       |      |       |      |       |
| Income (loss) from operations before charges |       | $                                            | 7.6        |                          | $          | 2.1                                      |       | $         | 0.9        |      | $          | (7.8 | ) | $ | 2.8 |   |
| Non recurring item net recovery              |       | 7.7                                          |       | —                        |       | —                                   |       | —    |       | 7.7       |       |
|                                         |       |                                         |       |                          |       |                                     |       |      |       |      |       |
| Operating income (loss)                      |       | 15.3                                         |       | 2.1                           |       | 0.9                                      |       | (7.8      | )          | 10.5      |       |
| Other Income/expense, net                    |       | —                                       |       | 0.1                           |       | —                                   |       | 0.2       |       | 0.3       |       |
| Interest expense                             |       | —                                       |       | —                        |       | —                                   |       | (5.7      | )          | (5.7      | )          |
|                                         |       |                                         |       |                          |       |                                     |       |      |       |      |       |
| Pre-tax income (loss)                        |       | 15.3                                         |       | 2.2                           |       | 0.9                                      |       | (13.3     | )          | 5.1       |       |
| Income tax benefit                           |       | —                                       |       | —                        |       | —                                   |       | 0.1       |       | 0.1       |       |
|                                         |       |                                         |       |                          |       |                                     |       |      |       |      |       |
| Net income (loss)                            |       | $                                            | 15.3       |                          | $          | 2.2                                      |       | $         | 0.9        |      | $          | (13.2 | ) | $ | 5.2 |   |

 

*Operating Income (Loss)*.Operating income (loss) was ($12.8) million in fiscal year 2007, compared to($7.2) million and $10.5 million for fiscal years 2006 and 2005, respectively.The following summarizes the activity in each of our operating segments:

 

14

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## *** ***

## ***SPACEHAB Flight Services***

## *** ***

Operating income (loss) for our Flight Servicesbusiness unit was ($7.6) million for fiscal year 2007, compared to ($1.6)million and $15.3 million for fiscal years 2006 and 2005, respectively.Operating loss for 2007 included an asset impairment charge of $12.5 millionfor the write down of our flight unit 2 module and other flight based assetsdue to our analysis of the remaining space shuttle flights and NASA’s potentialneed for our module. Operating loss for 2006 included an asset impairmentcharge of $6.3 million for the write down of our flight unit 3 module due to ouranalysis of the remaining space shuttle flights and NASA’s potential need forour module. Operating income for fiscal year 2005 includes an $8.2 millionpayment from NASA for the loss of our RDM in the Space Shuttle *Columbia* accident. It also includes $0.5 million expense forour settlement with Lloyd’s (see Item 3 – Legal Proceedings for more details).Operating income for 2007 included general and administrative expense of $1.2million and depreciation and amortization expense of $3.6 million as comparedto general and administrative expenses of $1.0 million and $0.5 million anddepreciation and amortization expense of $3.2 million and $2.8 million forfiscal years 2006 and 2005, respectively. Please see “Results of Operations forthe Years Ended June 30, 2007, 2006, and 2005 — Other” for a consolidateddiscussion of general and administrative expense and depreciation andamortization expense.

 

*Flight Services Business Unit Results of Operationsfor the Fiscal Year Ended June 30, 2007 as Compared to the Fiscal YearEnded June 30, 2006*

 

The Flight Services business unit’s operating incomebefore charges increased by $0.2 million from fiscal year 2006 to fiscal year2007. The following summarizes significant changes for our fiscal year ended June 30,2007 as compared to our fiscal year ended June 30, 2006:

 

Revenue increases of $1.1 million, consisting of thefollowing

 

·                  Increase inrevenue from STS-116 and STS-118 under the CMC with Lockheed Martin of $9.4million due to increased mission activities and change orders due to the launchof STS-116 in December 2006 and the launch of STS-118 in August 2007.

·                  Decrease inrevenue from External Stowage Platform 2 (“ESP2”) of $1.0 million due to thelaunch of STS-114 in July 2005.

·                  Decrease inrevenue from STS-121 of $5.3 million due to the launch of STS-121 in July 2006.

·                  Decrease inrevenue from the JETIS contract of $1.0 due to the contract being completedduring fiscal year 2006.

·                  Decrease inrevenue from the Concept Exploration and Refinement (“CE&R”) contract of$0.4 million due to the contract being completed during fiscal year 2006.

·                  Other contractrevenue decrease of $0.6 million mainly due to our contract with Astrium toprovide a new ICC pallet to replace ESP2 that was permanently affixed to thespace station during the STS-114 mission in July 2005.

 

Cost of Revenue decreases of $0.9 million, consistingof the following:

 

·                  Increase in costof revenue for STS-116 and STS-118 under the CMC with Lockheed Martin, otherthan depreciation expense, of $5.5 million due to increased mission activitiesdue to the launch of STS-116 in December 2006 and the scheduled launch ofSTS-118 in August 2007.

·                  Decrease in costof revenue of $4.4 million for STS-121 due to the launch of STS-121 in July 2006.

·                  Decrease in costof revenue of $0.8 million from External Stowage Platform 2 of $0.3 million dueto the launch of STS-114 in July 2005.

·                  Decrease in costof revenue for the JETIS contract of $0.5 million due to the contract beingcompleted during fiscal year 2006.

·                  Decrease in costof revenue from the Concept Exploration and Refinement (“CE&R”) contract of$0.2 million due to the contract being completed during fiscal year 2006.

·                  Other cost ofrevenue decrease of $0.5 million mainly due to our contract with Astrium toprovide a new ICC pallet to replace ESP2 that was permanently affixed to thespace station during the STS-114 mission in July 2005.

 

15

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Included in the revenue decreases is the reduction inworkforce for our Flight Services business unit in January 2007. Thisreduction resulted in a net decrease in personnel and related costs of $1.3million for the last six months of fiscal year 2007.

 

Our Flight Services business unit is currentlysupporting deintegration requirements for shuttle mission STS-118. The FlightServices business unit completed cargo services on the STS-121 mission thatlaunched during the first part of fiscal year 2007. For the space shuttleSTS-121 mission, we provided our non-deployable ICC to NASA for transport ofseveral critical International Space Station orbital replacement unit spares.For both shuttle missions STS-116 and 118, we provided our pressurizedLogistics Single Module and our unpressurized ICC for transport of critical cargoand orbital replacement units to and from the ISS. As previously described, theResearch and Logistics Mission Support contract expired January 31, 2004and support for shuttle missions STS-116 and 118 was continued under asubcontract agreement to Lockheed Martin effective February 1, 2004.

 

*Flight Services Business Unit Results of Operationsfor the Fiscal Year Ended June 30, 2006 as Compared to the Fiscal YearEnded June 30, 2005*

 

The Flight Services business unit’s operating incomebefore charges decreased by $2.9 million from fiscal year 2005 to fiscal year2006. The following summarizes significant changes for our fiscal year ended June 30,2006 as compared to our fiscal year ended June 30, 2005:

 

Revenue decreases of $8.8 million, consisting of the following:

 

·                  Decrease inrevenue from the Lockheed Martin Cargo Mission Contract of $1.5 million. Thisdecrease is a result of a(n):

·                  Decrease inrevenue for STS-116 by $2.4 million due to the slip of the launch date from April 2006to December 2006. During fiscal year 2005 we were performing the contractwith a projected launch date of April 2006. During the first quarter offiscal year 2006, the launch date was slipped to November 2006 andeventually to December 2006. Therefore, for most of fiscal year 2006, wewere working under the equitable adjustment clause of the contract.

·                  Decrease inrevenue for STS-121 by $1.3 million due to the slip of the launch date from September 2005to July 2006. During fiscal year 2005, we were performing the contractwith a projected launch date of September 2005. During the first quarterof fiscal year 2006, the launch date was slipped to May 2006 andeventually slipped to July 2006. Therefore, for most of fiscal year 2006we were working under the equitable adjustment clause of the contract.

·                  Increase inrevenue for STS-118 by $2.2 million due to additional project work beingperformed on the ESP3 portion of the mission during fiscal year 2006 ascompared to fiscal year 2005. Due to the successful return to flight missionsSTS-114 and STS-121, the Space Shuttle Program has an aggressive schedule tocomplete the assembly of the International Space Station. Therefore, contractedproject work increased on STS-118.

·                  Decrease inrevenue from the Concept Exploration and Refinement (“CE&R”) contract of$1.2 million that was started first quarter fiscal year 2005 and was completedfirst quarter fiscal year 2006.

·                  Decrease inrevenue from the External Stowage Platform 2 (“ESP2”) contract revenue of $5.1million due to the successful launch in July 2005 aboard STS-114.

·                  Decrease inrevenue from the Japanese Experiment Thermal Incubator Service of $1.6 milliondue to the completion of the contract in April 2006.

·                  The variousother contract revenue increased $0.6 million mainly due to our contract withAstrium to provide a new ICC pallet to replace the ESP2 that was permanentlyaffixed to the space station during the STS-114 mission in July 2005.

 

Cost of Revenue decrease of $6.2 million, consistingof the following:

 

·                  Decrease in costof revenue from the Lockheed Martin Cargo Mission Contract of $0.8 million.This decrease is a result of a(n):

·                  Increase in costof revenue for STS-116 by $0.3 million due to the slip of the launch date from April 2006to December 2006. During fiscal year 2005 we were performing the contractwith a projected launch date of April 2006. During the first quarter offiscal year 2006, the launch date was slipped to November 2006 andeventually to December 2006. Therefore, for most of fiscal year 2006 wewere working under the equitable adjustment clause of the contract but we weremaintaining the workforce for the entire period that is required to perform thecontract as though there were no launch slips. Also, due to the change in the

 

16

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depreciablelives of our flight assets, direct depreciation increased by $1.1 million fromfiscal year 2005 to fiscal year 2006.

·                  Decrease in costof revenue for STS-121 by $1.5 million due to the slip of the launch date from September 2005to July 2006. During fiscal year 2005 we were performing the contract witha projected launch date of September 2005. During the first quarter offiscal year 2006, the launch date was slipped to May 2006 and eventuallyslipped to July 2006. Therefore, for most of fiscal year 2006 we wereworking under the equitable adjustment clause of the contract. Before thelaunch slip during the first quarter of fiscal year 2006, the majority of thedeliverables for this flight were completed and delivered.

·                  Increase in costof revenue for STS-118 by $0.4 million due to more project work being performedon the ESP3 portion of the mission during fiscal year 2006 as compared tofiscal year 2005. Due to the successful return to flight missions STS-114 andSTS-121, the Space Shuttle Program has an aggressive schedule to complete theassembly of the International Space Station.

·                  Decrease in costof revenue of $4.1 million for ESP2 that launched on STS-114 in July 2005.

·                  Decrease inCE&R cost of revenue of $0.9 million that was started in the first quarterof fiscal year 2005 and completed in the first quarter of fiscal year 2006.

·                  Decrease in costof revenue from the Japanese Experiment Thermal Incubator Service of $0.8million due to the completion of the contract in April 2006.

·                  Other cost ofrevenue increase of $0.4 million mainly due to our contract with Astrium toprovide a new ICC pallet to replace ESP2 that was permanently affixed to thespace station during the STS-114 mission in July 2005.

·                  Increase in rentexpense of $0.3 million from fiscal year 2005 to fiscal year 2006 due to thesale-leaseback of our payload processing facility in fourth quarter fiscal year2005. This increase is offset by lower operating costs for the facility duringfiscal year 2006 as compared to fiscal year 2005.

 

## ***Astrotech Space Operations***

## *** ***

Operating income for our Astrotech business unit was$2.0 million for fiscal year 2007, compared to $2.5 million and $2.1 millionfor fiscal years 2006 and 2005, respectively. Operating income for 2007included selling, general and administrative expense of $0.3 million anddepreciation and amortization expense of $2.1 million as compared to selling,general and administrative expense of $0.3 million and $0.3 million and depreciationand amortization expense of $2.1 million and $2.1 million for fiscal years 2006and 2005, respectively. Please see “Results of Operations for the Years Ended June 30,2007, 2006 and 2005 — Other” for a consolidated discussion of selling, generaland administrative expense and depreciation and amortization expense.

 

*Astrotech Business Unit Operating Results forFiscal Year ended June 30, 2007 as Compared to the Fiscal Year Ended June 30,2006*

 

Our Astrotech business unit’s operating income before chargesdecreased by $0.5 million from fiscal year 2006 to fiscal year 2007. Thefollowing summarizes significant changes for our fiscal year ended June 30,2007 as compared to our fiscal year ended June 30, 2006:

 

Revenue increases of $1.1 million, consisting of thefollowing:

 

·                  Increase inrevenue of $1.3 million from a new contract to design a satellite processingfacility.

·                  Increase inrevenue of $1.6 million due to three different satellites in our Floridafacility, one of which was a carry-over from fiscal year 2006, for all of orportions of fiscal year 2007. Whereas, for the same period last fiscal year,there were only two satellites in our Florida facility.

·                  Increase inother revenue of $0.5 million mainly due to mission unique services requestedby the customer.

·                  Astrotechsupported three satellite launches at its Sea Launch facility during fiscalyear 2007 as compared to four for fiscal year 2006 which resulted in a decreasein revenue of $0.5 million. On January 30, 2007 Sea Launch experienced alaunch failure resulting in the loss of a satellite and damage to the floatinglaunch platform. A full inspection, evaluation, and repair operations of thedamage incurred and preliminary reports indicate that Sea Launch will return tooperations in October 2007. We are paid under our contract with Sea Launchupon launch of each mission; therefore, anticipated revenues have been delayeduntil the resumption of normal operations.

·                  Decrease inrevenue of $0.5 million at our Vandenberg facility due to the launch delay ofthe Calipso/Cloudsat mission during fiscal year 2006 which resulted inincreased revenue during fiscal year 2006 as compared to fiscal year 2007.

 

17

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·                  Decrease inrevenue of $0.3 million due to the reduction of revenue on our Lockheed Martinguaranteed missions contract for two future missions that will be processed forBoeing on Atlas launch vehicles partially offset by one Atlas mission (STP-1)processed at the Titusville facility that was contracted directly with Boeing.

·                  Decrease inrevenue from our Lockheed Martin guaranteed contract of $1.0 million due to theguarantee being reduced this calendar year as compared to the same period lastfiscal year.

 

Cost of revenue from our Astrotech business unitincreased for the fiscal year 2007 as compared to fiscal year ended 2006 by$1.6 million. The increase is mainly due to higher professional services of$0.4 million for the new contract to design a satellite processing facility.Additionally, mission specific expenses increased by $1.0 million due toincreased mission support services in Florida and Vandenberg. Also, althoughAstrotech’s labor force did not change significantly, they had higher labor andrelated costs of $0.2 million in fiscal year 2007 as compared to fiscal year2006 due to cost of living increases.

 

*Astrotech Business Unit Operating Results forFiscal Year ended June 30, 2006 as Compared to the Fiscal Year Ended June 30,2005*

 

Our Astrotech business unit’s operating income beforecharges increased by $0.4 million from fiscal year 2005 to fiscal year 2006.The following summarizes significant changes for our fiscal year ended June 30,2006 as compared to our fiscal year ended June 30, 2005:

 

Revenue from our ASO business unit increased fromfiscal year 2005 to fiscal year 2006 by $0.7 million. This increase isprimarily attributable to ASO receiving revenue for one additional guaranteedmission for calendar year 2006 under our Lockheed Martin satellite processingcontract in the amount of $0.9 million. This increase is partially offset by adecrease of $0.2 million of revenue due to satellite launch schedules.

 

Cost of revenue from our Astrotech business unitincreased for the fiscal year 2006 as compared to fiscal year ended 2005 by$0.2 million. The increase is mainly due to higher utility costs due to theincrease in fuel costs during fiscal year 2006 as compared to fiscal year 2005.Also, although Astrotech’s labor force did not change significantly, they hadhigher labor and related costs in fiscal year 2006 due to cost of livingincreases. Costs did not increase consistent with revenue due to the $0.9million guaranteed mission payments for which there was no incremental cost.

 

## ***SPACEHAB***Government Services

## *** ***

Operating income for our Government Services businessunit was $0.9 million for fiscal year 2007, compared to $0.5 million and $0.9million for fiscal years 2006 and 2005, respectively. Operating income for 2007included selling, general and administrative expense of $0.3 million anddepreciation and amortization expense of zero as compared to selling, generaland administrative expense of $0.4 and $0.4 and depreciation and amortizationexpense of zero and $0.1 million for fiscal years 2006 and 2005, respectively.Please see “Results of Operations for the Years Ended June 30, 2007, 2006and 2005 — Other” for a consolidated discussion of selling, general andadministrative expense and depreciation and amortization expense.

 

*Government Services Business Unit Results ofOperations for Fiscal year ended June 30, 2007 as Compared to the FiscalYear Ended June 30, 2006*

 

Our Government Services business unit’s operatingincome before charges increased by $0.4 million from fiscal year 2006 to fiscalyear 2007. The following summarizes significant changes for our fiscal yearended June 30, 2007 as compared to our fiscal year ended June 30,2006:

 

Revenue increases of $0.4 million, consisting of thefollowing:

 

·                  Increase inrevenue from a new contract with USA for support of the Constellation Programof $0.7 million.

·                  Increase inrevenue from the sale of our Destiny module to the Seattle Space Museum in theamount of $0.3 million during fiscal year 2007.

·                  Decrease inrevenue from our subcontract with ARES on the PI&C contract of $0.4million. This decrease is due to a reduction in our statement of workassociated with the contract.

·                  Decrease in other revenue of $0.2million primarily due to the contract closeout of our contract with ShanghaiScienceland in fiscal year 2006.

 

18

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Cost of revenue increaseof $0.0 million, consisting of the following:

 

·                  Increase in costof revenue of $0.6 million in our Government Services business unit due to thestartup of our contract with USA on the Constellation Program.

·                  Decrease in costof revenue of $0.3 million for the contract closeout of our contract withShanghai Scienceland.

·                  Decrease in cost of revenue from oursubcontract with ARES on the PI&C contract of $0.3 million. This decreaseis due to a reduction in our statement of work associated with the contract.

 

*Government Services Business Unit Results ofOperations for Fiscal year ended June 30, 2006 as Compared to the FiscalYear Ended June 30, 2005*

 

Our Government Services business unit’s operatingincome before charges decreased by $0.4 million from fiscal year 2005 to fiscalyear 2006. The following summarizes significant changes for our fiscal yearended June 30, 2006 as compared to our fiscal year ended June 30,2005:

 

Revenue decreased by $0.6 million for our fiscal yearended June 30, 2006 as compared to our fiscal year ended June 30,2005 primarily as a result of:

 

The decrease in revenue at the Government Servicesbusiness segment is primarily due to the delivery of the intravehicularactivity (“IVA”) handrails in the third quarter of fiscal year 2005. Thefollowing summarizes the significant items:

 

·                  Decrease inrevenue of $0.5 million due to the delivery of the IVA handrails in the secondquarter of fiscal year 2005.

·                  Increase inrevenue of $0.2 million for the contract closeout of our contract with ShanghaiScienceland.

·                  Decrease in other revenue of $0.3million.

 

The decrease in cost of revenue by $0.2 million isprimarily due to the delivery of the IVA handrails in the third quarter offiscal year 2005, which was partially offset by the costs of revenue associatedwith the closeout of the Shanghai Scienceland project for the period ending June 30,2006.

 

## ***Other***

## *** ***

Other operating loss was ($8.1) million for fiscalyear 2007, compared to ($8.6) million and ($7.8) million for fiscal years 2006and 2005, respectively. The $8.1 million operating loss for fiscal year 2007relates to primarily selling, general and administrative expenses anddepreciation and amortization expenses which were incurred at the corporatelevel and an impairment charge of $0.1 million attributable to our non-cashwrite-down of our investment in Applied Astronautics Corporation. The operatingloss for fiscal 2006 and 2005 relates primarily to selling, general, andadministrative expenses and depreciation and amortization expenses which wereincurred at the corporate level. Also included in other is the revenues andexpenses associated with Space Media, Inc. which included the operationsof the Space Store, LLC which was sold during fiscal year 2007.

 

Consolidated selling, general and administrativeexpenses, other than the asset impairment charges for our shuttle based assetsand our investment in Applied Astronautics Corporation, and research anddevelopment were $10.7 million in fiscal year 2007, compared to $11.1 millionand $9.5 million in 2006 and 2005, respectively. The $0.4 million decrease forfiscal year 2006 to 2007 is principally due to:

 

·                  Increase in ourFlight Services business segment labor and related costs of $0.1 million relatedto less direct contract support as compared to fiscal year 2006.

·                  Increase of $0.4million in research and development costs primarily related to our efforts onour micro electro mechanical system program.

·                  Increase of $0.1million in travel expenses due to increased efforts in business developmentactivities.

·                  Increase inaudit fees of $0.2 million due to an increase in audit and tax for fiscal year2007 as compared to fiscal year 2006.

·                  Decrease incorporate level labor and related costs of $0.1 million. The decrease isprimarily due our staff reductions in January 2007 at the corporate level.

·                  Decrease of $0.5million in consulting expenses primarily due to expenses related to marketstudies for space commerce and our on-going cost reduction efforts.

·                  Decrease of $0.3million in legal expenses primarily due to us dropping our claims against NASArelated to the loss of our RDM (see Item 3 Legal Proceedings).

 

19

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·                  Decrease inselling, general, and administrative expenses of $0.2 million for the SpaceStore, LLC due to the selling of the business in November 2006.

·                  Decrease in our Government Servicesbusiness segment labor and associated facilities costs of $0.1 million due tostaff reduction during fiscal year 2007.

 

The $1.6 million increase for fiscal year 2005 to 2006is principally due to:

 

·                  Increase in ourFlight Services business segment labor and related costs of $0.6 millionrelated to an increase in business development and bid and proposal activitiesin fiscal year 2006 and less direct contract support as compared to fiscal year2005. The bid and proposal costs were related to our response to NASA’s requestfor proposal for the Commercial Orbital Transportation Services contract.

·                  Increase of $0.3million in research and development costs related to the efforts of our Apexprogram.

·                  Increase incorporate level labor and related costs of $0.2 million. The increase isprimarily due to a rise in health care and insurance costs.

·                  Increase of $0.4million in consulting expenses primarily due to expenses related to marketstudies for space commerce.

·                  Increase of $0.3million in legal expenses primarily related to our claims against NASA for theloss of our RDM.

·                  Decrease incorporate depreciation expense of $0.2 million due to assets reaching the endof their useful lives during fiscal year 2006.

 

Consolidated depreciation and amortization expenseswere $5.9 million in fiscal year 2007 compared to $5.6 million and $5.2 millionin 2006 and 2005, respectively. The $0.3 million increase in fiscal year 2006compared to 2007 is primarily due to an increase in depreciation expense of$0.6 million resulting from the change in depreciable lives during the secondquarter of fiscal year 2006 of our flight assets based on NASA’s direction toretire the space shuttle fleet at the end of 2010. This increase is offset by adecrease in other depreciation expense of $0.3 million primarily due to aportion of fixed assets reaching the end of their useful lives.

 

The $0.4 million increase in fiscal year 2005 comparedto 2006 is primarily due to an increase in depreciation expense of $0.6 millionresulting from the change in depreciable lives of our flight assets based onNASA’s direction to retire the space shuttle fleet at the end of 2010. Thisincrease is offset by a decrease in other depreciation expense of $0.4 millionprimarily due to a portion of fixed assets reaching the end of their usefullives and the sale leaseback of our Florida payload facility and corporateheadquarters during the fourth quarter of fiscal year 2005.

 

*Interest Expense*. Interestexpense totaled $4.3 million for fiscal year 2007, compared with $5.5 millionand $5.7 million for 2006 and 2005, respectively. The $1.2 million decrease for2007 as compared to 2006 is related to:

 

·                  Decrease ininterest expense of $1.1 million due to the exchange of the 8% notes for the5.5% notes during fiscal year 2006 therefore, for all of fiscal year 2007, wehad the reduced interest expense for the $52.9 million of 5.5% convertiblenotes.

·                  Decrease of $0.1million resulting from the mortgage loan on our Astrotech facility reachingmaturity in January 2007 with the final payment being made in December 2006.

 

The $0.2 million decrease for 2006 as compared to 2005is related to:

 

·                  An increase ininterest expense due to the write-off of $0.6 million debt placement costs dueto the exchange of $52.9 million of our 8% notes for $52.9 million of 5.5%notes.

·                  Decrease ininterest expense of $0.7 million due to the exchange of the 8% notes for the5.5% notes during fiscal year 2006.

·                  Decrease of $0.1million resulting from the refinancing of our Astrotech spacecraft processingfacility and the reduced remaining term of the mortgage loan.

 

*Income Tax Provision (Benefit)*.  For fiscal year 2007 we recorded a taxbenefit of $0.07 million. We recorded an income tax expense for fiscal year2006 of $0.03 million, while we recorded an income tax benefit for fiscal year2005 of $0.1 million. As of June 30, 2007, we had approximately $38.3million of available net operating loss carryforwards expiring between 2020 and2025 to offset future regular taxable income.

 

*Inflation*.  The effects of inflation and changing priceshad no material effect on our revenue or income from continuing operationsduring the years ended June 30, 2007, 2006 and 2005.

 

20

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# **Market Risk**

#  

Our primary exposure to market risk relates tointerest rates. We do not currently use any interest rate swaps or derivativefinancial instruments to manage our exposure to fluctuations in interest rates.A one percent change in variable interest rates will not have a material impacton our financial condition.

 

# **Off Balance SheetArrangements**

#  

We did not have any off-balance sheet arrangements asof June 30, 2007.

 

# **Item 7A.  Quantitative and Qualitative Disclosuresabout Market Risk.**

#  

Our primary exposure to market risk relates tointerest rates. We do not currently use any interest rate swaps or derivativefinancial instruments to manage our exposure to fluctuations in interest rates.A one percent change in variable interest rates will not have a material impacton our financial condition.

 

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#  

# **Item 8.  Financial Statements and Supplementary Data.**

#  

# **Report of Independent Registered PublicAccounting Firm**

#  

The Board of Directors and Stockholders

 

SPACEHAB, Incorporated and Subsidiaries:

 

We have audited the accompanying consolidated balancesheet of SPACEHAB, Incorporated and subsidiaries (the “Company”) as of June 30,2007, and the related consolidated statements of operations, stockholders’equity (deficit) and comprehensive income (loss) and cash flows for the yearthen ended. These consolidated financial statements are the responsibility ofthe Company’s management. Our responsibility is to express an opinion on theseconsolidated financial statements based on our audit.

 

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. The Company is not required to have, nor were we engaged to performan audit of its internal control over financial reporting. Our audit includedconsideration of internal control over financial reporting as a basis fordesigning audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of the Company’sinternal control over financial reporting. Accordingly, we express no suchopinion. An audit also includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements, assessing theaccounting principles used, and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audit provides a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the consolidatedfinancial position of the Company as of June 30, 2007, and the results oftheir operations and their cash flows for the year then ended, in conformitywith accounting principles generally accepted in the United States of America.

 

The accompanying consolidated financial statementshave been prepared assuming the Company will continue as a going concern.  As discussed in Note 1 to the consolidatedfinancial statements, the Company has sustained recurring losses and negativecash flow from operations which raises substantial doubt about its ability tocontinue as a going concern.  Management’splans in regard to these matters are also described in Note 1.  The consolidated financial statements do notinclude any adjustment that might result from the outcome of this uncertainty.

 

/s/PMB HELIN DONOVAN LLP

 

Houston, Texas

September 5, 2007

 

except for Note 24 as to which the date is February 13,2008

 

22

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#  

# **Report ofIndependent Registered Public Accounting Firm**

#  

The Board of Directors and Stockholders

 

SPACEHAB, Incorporated and Subsidiaries:

 

We have audited the accompanying consolidated balancesheet of SPACEHAB, Incorporated and subsidiaries (the “Company”) as of June 30,2006, and the related consolidated statements of operations, stockholders’equity, and comprehensive income (loss) and cash flows for each of the twoyears in the period ended June 30, 2006. These consolidated financialstatements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these consolidated financialstatements based on our audits.

 

We conducted our audits in accordance with the standardsof the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. The Company is not required to have, nor were we engaged toperform an audit of its internal control over financial reporting. Our auditsincluded consideration of internal control over financial reporting as a basisfor designing audit procedures that are appropriate in the circumstances, butnot for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting. Accordingly, we express nosuch opinion. An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used, and significant estimates made by management,as well as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the consolidatedfinancial position of the Company as of June 30, 2006, and the results oftheir operations and their cash flows for each of the two years in the periodended June 30, 2006 in conformity with accounting principles generallyaccepted in the United States of America.

 

/s/GRANT THORNTON LLP

 

Houston, Texas

 

August 31, 2006

 

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**SPACEHAB,INCORPORATED AND SUBSIDIARIES**

** **

Consolidated Balance Sheets

(In thousands, exceptshare data)

 
| ** **                                                                                                                                              | ** ** | **June 30,**    | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                                                                                              | ** ** | **2007****Restated** | ** ** | **2006** | ** ** |
| **Assets**                                                                                                                                              | ** ** | ** **           | ** ** | ** ** | ** ** |
| Current assets                                                                                                                                          |       |                 |       |   |   |
| Cash and cash equivalents                                                                                                                               |       | $                    | 9,724      |   | $ | 6,317 |   |
| Accounts receivable, net                                                                                                                                |       | 8,224                |       | 11,379 |   |
| Inventory                                                                                                                                               |       | 695                  |       | 2,369 |   |
| Short term note receivable, net                                                                                                                         |       | 95                   |       | — |   |
| Prepaid expenses and other current assets                                                                                                               |       | 906                  |       | 610 |   |
| Total current assets                                                                                                                                    |       | 19,644               |       | 20,675 |   |
| Property and equipment                                                                                                                                  |       |                 |       |   |   |
| Flight assets                                                                                                                                           |       | 49,210               |       | 49,799 |   |
| Capital improvements in progress                                                                                                                        |       | 62                   |       | 1,612 |   |
| Payload processing facilities                                                                                                                           |       | 42,588               |       | 42,571 |   |
| Furniture, fixtures, equipment and leasehold  improvements                                                                                              |       | 18,869               |       | 18,275 |   |
|                                                                                                                                                    |       | 110,729              |       | 112,257 |   |
| Less accumulated depreciation and amortization                                                                                                          |       | (66,845              | )          | (50,620 | ) |
| Property and equipment, net                                                                                                                             |       | 43,884               |       | 61,637 |   |
| Restricted cash                                                                                                                                         |       | 6,282                |       | — |   |
| Deferred financing costs, net                                                                                                                           |       | 1,596                |       | 2,124 |   |
| Long term note receivable, net                                                                                                                          |       | 178                  |       | — |   |
| Other assets, net                                                                                                                                       |       | 891                  |       | 1,014 |   |
| Total assets                                                                                                                                            |       | $                    | 72,475     |   | $ | 85,450 |   |
| **Liabilities and Stockholders’  Equity (Deficit)**                                                                                                |       |                 |       |   |   |
| Current liabilities                                                                                                                                     |       |                 |       |   |   |
| Convertible subordinated notes payable – 8.0%                                                                                                      |       | $                    | 10,306     |   | $ | — |   |
| Mortgage loan payable, current portion                                                                                                                  |       | —               |       | 1,636 |   |
| Accounts payable                                                                                                                                        |       | 1,494                |       | 1,598 |   |
| Accounts payable- Astrium                                                                                                                               |       | 2,955                |       | 3,386 |   |
| Accrued interest                                                                                                                                        |       | 789                  |       | 804 |   |
| Accrued expenses                                                                                                                                        |       | 2,056                |       | 2,394 |   |
| Accrued subcontracting services                                                                                                                         |       | 3,669                |       | 6,562 |   |
| Deferred gains on sale of buildings                                                                                                                     |       | 221                  |       | 221 |   |
| Customer deposit                                                                                                                                        |       | 3,106                |       | — |   |
| Deferred revenue, current portion                                                                                                                       |       | 1,153                |       | 1,321 |   |
| Total current liabilities                                                                                                                               |       | 25,749               |       | 17,922 |   |
| Advances on construction contract                                                                                                                       |       | 5,722                |       | — |   |
| Accrued contract costs and other                                                                                                                        |       | 39                   |       | 96 |   |
| Deferred gains on sale of buildings                                                                                                                     |       | 1,152                |       | 1,373 |   |
| Convertible subordinated notes payable – 8.0%                                                                                                      |       | —               |       | 10,306 |   |
| Senior convertible subordinated notes payable –  5.5%                                                                                              |       | 52,944               |       | 52,944 |   |
| Total liabilities                                                                                                                                       |       | 85,606               |       | 82,641 |   |
| Commitments and contingencies                                                                                                                           |       |                 |       |   |   |
| Stockholders’ equity (deficit)                                                                                                                     |       |                 |       |   |   |
| Preferred stock, no par value, convertible,  authorized 2,500,000 shares, issued and outstanding 1,333,334 shares,  (liquidation preference of $12,000) |       | 11,892               |       | 11,892 |   |
| Common stock, no par value, 70,000,000 shares  authorized 13,143,296 and 12,976,264 shares issued, respectively                                         |       | 84,122               |       | 84,030 |   |
| Treasury stock, 116,100 shares at cost                                                                                                                  |       | (117                 | )          | (117 | ) |
| Additional paid-in capital                                                                                                                              |       | 544                  |       | 284 |   |
| Accumulated deficit                                                                                                                                     |       | (109,572             | )          | (93,280 | ) |
| Total stockholders’ equity (deficit)                                                                                                               |       | (13,131              | )          | 2,809 |   |
| Total liabilities and stockholders’ equity                                                                                                         |       | $                    | 72,475     |   | $ | 85,450 |   |

 

See accompanying notes to consolidated financialstatements.

 

24

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**SPACEHAB,INCORPORATED AND SUBSIDIARIES**

 

Audited Consolidated Statements of Operations

(In thousands, exceptshare data)

 
| ** **                                                           | ** ** | **Twelve Months Ended June 30,** | ** ** |
|----------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                           | ** ** | **2007**                                             | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                                 |       |                                                 |       |   |   |   |   |
| Revenue                                                              |       | $                                                    | 52,762     |   | $ | 50,746 |   | $ | 59,401 |   |
|                                                                 |       |                                                 |       |   |   |   |   |
| Costs of revenue                                                     |       | 40,638                                               |       | 40,572 |   | 47,158 |   |
|                                                                 |       |                                                 |       |   |   |   |   |
| Impairment of flight asset                                           |       | 10,391                                               |       | 6,283 |   | — |   |
|                                                                 |       |                                                 |       |   |   |   |   |
| Gross profit                                                         |       | 1,733                                                |       | 3,891 |   | 12,243 |   |
|                                                                 |       |                                                 |       |   |   |   |   |
| Operating expenses                                                   |       |                                                 |       |   |   |   |   |
| Selling, general and administrative                                  |       | 9,883                                                |       | 10,672 |   | 9,383 |   |
| Research and development                                             |       | 801                                                  |       | 410 |   | 77 |   |
| Asset impairment charge                                              |       | 3,879                                                |       | — |   | — |   |
| Nonrecurring items, net recovery related to RDM                      |       | —                                               |       | — |   | (7,744 | ) |
|                                                                 |       |                                                 |       |   |   |   |   |
| Total operating expenses                                             |       | 14,563                                               |       | 11,082 |   | 1,716 |   |
|                                                                 |       |                                                 |       |   |   |   |   |
| Income (loss) from operations                                        |       | (12,830                                              | )          | (7,191 | ) | 10,527 |   |
|                                                                 |       |                                                 |       |   |   |   |   |
| Interest expense                                                     |       | (4,290                                               | )          | (5,511 | ) | (5,716 | ) |
| Interest and other income, net                                       |       | 759                                                  |       | 337 |   | 292 |   |
|                                                                 |       |                                                 |       |   |   |   |   |
| Income (loss) before income taxes                                    |       | (16,361                                              | )          | (12,365 | ) | 5,103 |   |
|                                                                 |       |                                                 |       |   |   |   |   |
| Income tax (expense) benefit                                         |       | 69                                                   |       | (32 | ) | 146 |   |
|                                                                 |       |                                                 |       |   |   |   |   |
| Net income (loss)                                                    |       | $                                                    | (16,292    | ) | $ | (12,397 | ) | $ | 5,249 |   |
|                                                                 |       |                                                 |       |   |   |   |   |
| Income (loss) per share                                              |       |                                                 |       |   |   |   |   |
| Net income (loss) per share – basic                             |       | $                                                    | (1.26      | ) | $ | (0.97 | ) | $ | 0.42 |   |
| Shares used in computing net income (loss) per  share – basic   |       | 12,919,506                                           |       | 12,743,533 |   | 12,613,491 |   |
|                                                                 |       |                                                 |       |   |   |   |   |
| Net income (loss) per share – diluted                           |       | $                                                    | (1.26      | ) | $ | (0.97 | ) | $ | 0.37 |   |
| Shares used in computing net income (loss) per  share – diluted |       | 12,919,506                                           |       | 12,743,533 |   | 14,190,281 |   |

 

See accompanying notes to consolidated financialstatements.

 

25

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**SPACEHAB,INCORPORATED AND SUBSIDIARIES**

 

Consolidated Statements of Stockholders’ Equity (Deficit) and Comprehensive Income (Loss)

(In thousands, except share data)

 
| ** **                                             | ** ** | **Convertible Preferred Stock** | ** ** | **Common Stock** | ** ** | **Treasury  Stock** | ** ** | **Add’l.  Paid-In-** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Accumulated** | ** ** | **Total  Stockholders’   Equity** | ** ** |
|--------------------------------------------------------|------------|-------------------------------------------|------------|-----------------------|------------|---------------------|------------|---------------------------|------------|---------------------------------------|------------|-----------------|------------|---------------------------------------------|------------|
| ** **                                             | ** ** | **Shares**                                | ** ** | **Amount**            | ** ** | **Shares**          | ** ** | **Amount**                | ** ** | **Amount**                            | ** ** | **Capital**     | ** ** | **Income (Loss)**                      | ** ** | **Deficit** | ** ** | **(Deficit)** | ** ** |
|                                                   |       |                                      |       |                  |       |                |       |                      |       |                                  |       |            |       |                                        |       |   |   |   |   |
| Balance at June 30, 2004                          |       | 1,333,334                                 |       | $                     | 11,892     |                | 12,688,062 |                      | $          | 83,751                                |       | $               | (117       | )                                           | $          | 16 |   | $ | — |   | $ | (86,132 | ) | $ | 9,410 |   |
| Common Stock options exercised                         |       | —                                    |       | —                |       | 27,250              |       | 24                        |       | —                                |       | —          |       | —                                      |       | — |   | 24 |   |
| Common Stock issued under employee stock purchase plan |       |                                      |       | —                |       | —              |       | 65,967                    |       | 114                                   |       | —          |       | —                                      |       | — |   | 114 |   |
| Net income                                             |       | —                                    |       | —                |       | —              |       | —                    |       | —                                |       | —          |       | —                                      |       | 5,249 |   | 5,249 |   |
| Total comprehensive income                             |       |                                      |       |                  |       |                |       |                      |       |                                  |       |            |       |                                        |       |   |   | 5,249 |   |
|                                                   |       |                                      |       |                  |       |                |       |                      |       |                                  |       |            |       |                                        |       |   |   |   |   |
| Balance at June 30, 2005                          |       | 1,333,334                                 |       | $                     | 11,892     |                | 12,781,279 |                      | $          | 83,889                                |       | $               | (117       | )                                           | $          | 16 |   | $ | — |   | $ | (80,883 | ) | $ | 14,797 |   |
| Common Stock options exercised                         |       | —                                    |       | —                |       | 17,000              |       | 15                        |       | —                                |       | —          |       | —                                      |       | — |   | 15 |   |
| Stock-based compensation                               |       | —                                    |       | —                |       | —              |       | —                    |       | —                                |       | 268             |       | —                                      |       | — |   | 268 |   |
| Common Stock issued under employee stock purchase plan |       |                                      |       | —                |       | —              |       | 177,985                   |       | 126                                   |       | —          |       | —                                      |       | — |   | 126 |   |
| Net loss                                               |       | —                                    |       | —                |       | —              |       | —                    |       | —                                |       | —          |       | —                                      |       | (12,397 | ) | (12,397 | ) |
| Total comprehensive income                             |       |                                      |       |                  |       |                |       |                      |       |                                  |       |            |       |                                        |       |   |   | (12,397 | ) |
|                                                   |       |                                      |       |                  |       |                |       |                      |       |                                  |       |            |       |                                        |       |   |   |   |   |
| Balance at June 30, 2006                          |       | 1,333,334                                 |       | $                     | 11,892     |                | 12,976,264 |                      | $          | 84,030                                |       | $               | (117       | )                                           | $          | 284 |   | $ | — |   | $ | (93,280 | ) | $ | 2,809 |   |
| Stock-based compensation                               |       | —                                    |       | —                |       | —              |       | —                    |       | —                                |       | 260             |       | —                                      |       | — |   | 260 |   |
| Common Stock issued under employee stock purchase plan |       |                                      |       | —                |       | —              |       | 167,032                   |       | 92                                    |       | —          |       | —                                      |       | — |   | 92 |   |
| Net loss                                               |       | —                                    |       | —                |       | —              |       | —                    |       | —                                |       | —          |       | —                                      |       | (16,292 | ) | (16,292 | ) |
| Total comprehensive income                             |       |                                      |       |                  |       |                |       |                      |       |                                  |       |            |       |                                        |       |   |   | (16,292 | ) |
|                                                   |       |                                      |       |                  |       |                |       |                      |       |                                  |       |            |       |                                        |       |   |   |   |   |
| Balance at June 30, 2007                          |       | 1,333,334                                 |       | $                     | 11,892     |                | 13,143,296 |                      | $          | 84,122                                |       | $               | (117       | )                                           | $          | 544 |   | $ | — |   | $ | (109,572 | ) | $ | (13,131 | ) |

 

See accompanying notes to consolidated financialstatements.

 

26

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**SPACEHAB,INCORPORATED AND SUBSIDIARIES**

Consolidated Statements of Cash Flows

(In thousands)

 
| ** **                                                                                          | ** ** | **Twelve Months Ended June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                          | ** ** | **2007****Restated**                                 | ** ** | **2006** | ** ** | **2005** | ** ** |
| Cash flows from operating activities                                                                |       |                                                 |       |   |   |   |   |
| Net income (loss)                                                                                   |       | $                                                    | (16,292    | ) | $ | (12,397 | ) | $ | 5,249 |   |
| Adjustments to reconcile net income (loss) to  net cash (used in) provided by operating activities: |       |                                                 |       |   |   |   |   |
| Nonrecurring item, net recovery related to RDM                                                      |       | —                                               |       | — |   | (8,244 | ) |
| (Increase) decrease in restricted cash                                                              |       | (6,282                                               | )          | — |   | — |   |
| Stock-based compensation                                                                            |       | 260                                                  |       | 268 |   | — |   |
| Impairment of investment in AAC                                                                     |       | 100                                                  |       | — |   | — |   |
| Depreciation and amortization, including  deferred debt issuance                                    |       | 6,362                                                |       | 6,062 |   | 5,526 |   |
| Impairment of inventory                                                                             |       | 1,674                                                |       | — |   | — |   |
| Write-off of debt placement fees                                                                    |       | —                                               |       | 591 |   | 9 |   |
| Loss on asset sales and write-offs                                                                  |       | 12,496                                               |       | 6,304 |   | 3 |   |
| Recognition of deferred gain                                                                        |       | (221                                                 | )          | (214 | ) | (33 | ) |
| Changes in assets and liabilities:                                                                  |       |                                                 |       |   |   |   |   |
| (Increase) decrease in accounts receivable                                                          |       | 2,882                                                |       | 5,527 |   | (9,028 | ) |
| Decrease in prepaid expenses and other current  assets                                              |       | (296                                                 | )          | (22 | ) | (198 | ) |
| Increase in other assets                                                                            |       | 23                                                   |       | 108 |   | 1,341 |   |
| Decrease in deferred revenue                                                                        |       | (168                                                 | )          | (490 | ) | (5,429 | ) |
| Decrease in accounts payable and accrued  expenses and accounts payable-Astrium                     |       | (388                                                 | )          | (638 | ) | (1,504 | ) |
| (Decrease) increase in accrued subcontracting  services and other                                   |       | (2,893                                               | )          | (990 | ) | 4,876 |   |
| Increase in advances for construction contract                                                      |       | 5,722                                                |       | — |   | — |   |
| Increase in customer deposits                                                                       |       | 3,106                                                |       | — |   | — |   |
| (Decrease) increase in long-term contracts  costs and other liabilities                             |       | (57                                                  | )          | (125 | ) | 279 |   |
| Net cash (used in) provided by operating  activities                                                |       | 6,028                                                |       | 3,984 |   | (7,153 | ) |
| Cash flows from investing activities                                                                |       |                                                 |       |   |   |   |   |
| Purchases of property, equipment and leasehold  improvements                                        |       | (577                                                 | )          | (2,111 | ) | (3,429 | ) |
| Proceeds received from sale of property and  equipment                                              |       | —                                               |       | — |   | 6,767 |   |
| Proceeds from sales of investments                                                                  |       | —                                               |       | — |   | 6,641 |   |
| (Increase) decrease in cash securing credit  facilities                                             |       | —                                               |       | 970 |   | (540 | ) |
| Proceeds from contract indemnification                                                              |       | —                                               |       | — |   | 8,244 |   |
| Payment for legal claim settlement                                                                  |       | (500                                                 | )          | — |   | — |   |
| Net cash (used in) provided by investing  activities                                                |       | (1,077                                               | )          | (1,141 | ) | 17,683 |   |
| Cash flows from financing activities                                                                |       |                                                 |       |   |   |   |   |
| Proceeds from issuance of Common Stock                                                              |       | 92                                                   |       | 142 |   | 138 |   |
| Increase in deferred financing                                                                      |       | —                                               |       | (1,939 | ) | (456 | ) |
| Net repayments under revolving loan payable                                                         |       | —                                               |       | — |   | (1,445 | ) |
| Repayment of mortgage loan                                                                          |       | (1,636                                               | )          | (2,056 | ) | (1,946 | ) |
| Net cash used in financing activities                                                               |       | (1,544                                               | )          | (3,853 | ) | (3,709 | ) |
| Net change in cash and cash equivalents                                                             |       | 3,407                                                |       | (1,010 | ) | 6,821 |   |
| Cash and cash equivalents at beginning of  period                                                   |       | 6,317                                                |       | 7,327 |   | 506 |   |
| Cash and cash equivalents at end of period                                                          |       | $                                                    | 9,724      |   | $ | 6,317 |   | $ | 7,327 |   |

See accompanying notes to consolidated financialstatements.

 

27

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#  

# **NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

#  

(1)                      Description of the Company andOperating Environment

 

SPACEHAB is a developer and operator of space flighthardware assets, a provider of manned and unmanned payload processing services,and an entrepreneurial force in space commerce and developing space utilizationapplications such as microgravity processing.

 

A substantial portion of our revenue has beengenerated under contracts with NASA and our contracts are subject to periodicfunding allocations by the agency. NASA’s funding is dependent on receivingannual appropriations from the U.S. Government. During the years ended June 30,2007, 2006, and 2005 approximately 84%, 80%, and 81% of our revenues weregenerated under U.S. Government contracts, respectively.

 

Leveraging its heritage of supporting 23 spaceshuttle missions with the development and provision of flight qualifiedhardware assets, the Flight Services business unit is continuing to offer arange of engineering, research, logistics, integration, operations, and groundsupport services. Our experience with the integration of complex sciencepayloads enables our entrance into the field of microgravity processing of highvalue bioscience products for the benefit of the general public.

 

Our Astrotech subsidiary provides commercialspacecraft launch processing services and payload processing facilities in theU.S. These services are offered at the Astrotech facilities in Titusville,Florida and VAFB in California, and are provided on a fixed-price basis.Additionally, Astrotech supplies payload processing and facilities maintenancesupport services to Sea Launch Company, LLC for its Sea Launch program at theHome Port facilities in Long Beach, California.

 

Our Government Services subsidiary manages projectsin need of comprehensive engineering solutions, and provides uniquecapabilities such as specialty engineering, hardware design and development,and configuration and data management. Government Services also designs andfabricates space flight hardware. We continuously review and seek new businessopportunities with NASA, either through current contract expansion or teamingwith other aerospace companies on new contract bid initiatives.

 

We believe that NASA’s current major programs,including the Space Shuttle Program (through at least 2010) and theInternational Space Station Program will continue to be funded and supported bythe U.S. Government. While delays have occurred, we believe that it is highlyunlikely that any decision to discontinue these programs would be made duringthe next twelve months. However, we are subject to risks and uncertainties.

 

The Company has incurred net losses in the yearsended June 30, 2007 and 2006. Historically, the Company has financed itscapital expenditures, research and development and working capital requirementswith progress payments under its various contracts, as well as with proceedsreceived from both public and private debt and equity offerings and borrowingsunder credit facilities.

 

The accompanying consolidated financial statementshave been prepared on a going concern basis, which contemplates the realizationof assets and satisfaction of liabilities in the normal course of business. Thefinancial statements do not include any adjustments relating to therecoverability of assets and classification of liabilities that might benecessary should the Company be unable to continue as a going concern.

 

As of June 30, 2007 we had cash and restrictedcash on hand of $16.0 million and our working capital was approximately ($5.5)million. Restricted cash, which consists of advance payments on a governmentcontract to modify certain spacecraft processing facilities, totaled $6.3million at June 30, 2007. For fiscal year 2007 we generated $12.3 millionfrom operating activities. Our $5.0 million revolving credit facility expiredas of February 11, 2007 and we elected not to renew the facility.

 

Our $10.3 million of outstanding 8.0% convertiblenotes are due on October 15, 2007 and our $52.9 million of 5.5% senior convertiblenotes are due in October 2010. A covenant in our 5.5% note indenturerestricts us from using the proceeds from the sale or mortgage of our AstrotechFlorida assets for purposes other than reducing outstanding balances on ourbank loan, repaying our now extinguished mortgage loan, or redeemingoutstanding 5.5% senior convertible notes. We do not have sufficient liquidityto repay the principle and interest on our 8.0% convertible notes and theinterest on our 5.5% senior convertible notes when due on October 15, 2007unless our Exchange Transaction (see Note 27) is successfully consummated.

 

28

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On August 31, 2007 we filed a Schedule TOpursuant to Rule 13e-4 promulgated under the Securities Exchange Act of1934, as amended, in connection with the Company’s offer to exchange (the “ExchangeOffer”) 74 shares of common stock and 1.2 shares of Series C ConvertiblePreferred Stock for each $1,000 principal amount of outstanding 8% ConvertibleSubordinated Notes due 2007 (the “Junior Notes”) up to $10,306,000 in aggregateprincipal amount of the Junior Notes and 667 shares of common stock and 1 shareof Series C Convertible Preferred Stock for each $1,000 principal amountof outstanding 5.5% Senior Convertible Notes due 2010 (the “Senior Notes”) upto $52,944,000 in aggregate principal amount of the Senior Notes, upon theterms and subject to the conditions set forth in the Company’s offeringmemorandum, dated August 31, 2007 (the “Offering Memorandum”), and therelated Exchange Offer materials which are filed as Exhibits (a)(1)(B) to(a)(1)(I) of the Schedule TO (which Offering Memorandum and relatedExchange Offer materials, as amended or supplemented from time to time,collectively constitute the “Offer Materials”).

 

Additionally, on August 28, 2007, the Companyand Astrium, GmbH mutually agreed to terminate the lease agreement dated as of February 28,2001 in regards to the Company’s lease of the Integrated Cargo Carriers (ICC)assets from Astrium, GmbH. Also, we mutually agreed to terminate the leaseagreement dated as of July 3, 2001 in regards to the Company’s lease ofthe Vertical Cargo Carrier (VCC) assets from Astrium, GmbH. In order toterminate these two leases, we have mutually agreed that the Company willreimburse Astrium, GmbH $1,389,000 for the period March 1, 2007 through August 31,2007 for the ICC assets and incur no financial obligations for either the ICCor VCC after August 31, 2007.

 

We continue to focus our efforts on improvingoverall liquidity through identifying new business opportunities within theareas of our core competencies, reducing operating expenses, and limiting cashcommitments for future capital investments and new asset development. We havecontinued to restrict new capital investment and new asset development,limiting projects to those required to support current contracts and facilitymaintenance. Additionally, we continue to evaluate operating expenses in aneffort to reduce or eliminate costs not required for us to operate effectively.

 

Our capital resources which are solely comprised ofcash reserves and cash generated from operations, may not be sufficient to meetthese capital requirements. While we believe that the exchange offer would helpaddress our foreseeable refinancing risk related to the Junior Notes thatmature in October 2007, there is no assurance that the exchange offer willbe sufficient to alleviate our liquidity issues due to a lack of capitalresources. In addition, with the conclusion of STS-118 in August 2007, weexpect to have a material decrease in our revenue from our Flight Servicesbusiness, which has accounted for over 65% of our consolidated revenue duringfiscal year 2007. Moreover, our revolving credit line expired on February 11,2007. As a result, in order to continue to fund our current operations, we willneed additional capital. No assurance can be given that we will be able toobtain a new source of capital on terms that are acceptable to us. If we areunable to obtain new capital, we may be forced to subject ourselves tobankruptcy, reorganization, liquidation, dissolution or similar proceeding.

 

As discussed above, management has implementedsignificant strategies to address its liquidity requirements and expects thatit will be successful in accomplishing the remaining portion of the plan;however, no assurance can be given that the Company will be successful inachieving the remaining goals. If the Company is unable to complete itsstrategy, cash flow may be insufficient to cover the Company’s operating anddebt service requirements in fiscal year 2008.

 

**(2)****                    ****Summary of Significant AccountingPolicies**

## *** ***

## ***Principles of Consolidation and Basis ofPresentation***

## *** ***

The consolidated financial statements include theaccounts of SPACEHAB, Incorporated and its wholly-owned and majority-ownedsubsidiaries: Astrotech Space Operations, SPACEHAB Government Services, andSpace Media. The Company owns approximately 99% of Space Media, Inc. Allsignificant intercompany transactions have been eliminated in consolidation.

 

## ***Cash and Cash Equivalents***

## *** ***

The Company considers short-term investments withoriginal maturities of three months or less to be cash equivalents. Cashequivalents are primarily made up of money market investments and overnightrepurchase agreements recorded at cost, which approximate market value.

 

29

----

 

## ***Accounts Receivable***

## *** ***

The carrying value of the Company’s receivable, netof the allowance for doubtful accounts, represents their estimated net realizablevalue. We estimate the allowance for doubtful accounts based on type ofcustomer, age of outstanding receivable, historical collection trends, andexisting economic conditions. Accounts are considered past due after 90 daysfrom invoice date. If events or changes in circumstances indicate that aspecific receivable balance may be unrealizable, further consideration is givento the collectibility of those balances and the allowance is adjustedaccordingly. Receivable balances deemed uncollectible are written off againstthe allowance.

 

## ***Restricted Cash***

## *** ***

Restricted cash represents cash that is not readilyavailable for general purpose cash needs. As of June 30, 2007 there was$6.3 million in our restricted cash balance. As of June 30, 2006 there wasno restricted cash included in our cash balance.

 

## ***Inventories***

## *** ***

We state inventories at the lower of cost or marketas determined by the first-in-first-out (FIFO) method.

 

## ***Investments***

## *** ***

We account for investments in accordance withStatements of Financial Accounting Standards No. 115, “Accounting forCertain Investments in Debt and Equity Securities.”

 

Available-for-sale securities are recorded at fairvalue on the balance sheet, with the change in fair value during the periodexcluded from earnings and recorded as a component of other comprehensiveincome. On June 30, 2004 the fair market value of these securitiesapproximated cost. Maturities of the debt securities held by the Company rangedfrom April 13, 2005 to September 29, 2006. In February 2005 wesold all of our available-for-sale securities.

 

For the years ended June 30, 2007, 2006, and2005, interest income was $0.5 million, $0.3 million, and $0.2 million,respectively. Interest income is recorded as a component of other income.

 

## ***Property and Equipment***

## *** ***

Property and equipment are stated at cost. Allfurniture, fixtures, and equipment are depreciated using the straight-linemethod over the estimated useful lives of the respective assets, which isgenerally five years. Our payload processing facilities are depreciated usingthe straight-line method over their estimated useful lives ranging from sixteento forty years.

 

We have estimated the useful lives of our spaceflight assets, which is a component of property and equipment, through December 31,2010, based on current available information published by NASA.

 

Leasehold improvements are amortized over theshorter of the useful life of the building or the term of the lease. Repairsand maintenance are expensed when incurred.

 

From time to time, we purchase equipment or enhanceour facilities to meet specific customer requirements. These enhancements orequipment purchases are compensated through our contract with the customer. Thedifference between the amount reimbursed and the cost of the enhancements isrecognized as revenue.

 

## ***Deferred Financing Costs***

## *** ***

Deferred financing costs represent loan originationfees paid to the lender and related professional fees. These costs areamortized on a straight-line basis over the term of the respective loanagreements. Amortization expense for the years ended June 30, 2007, 2006,and 2005 were $0.5 million, $0.5 million, and $0.4 million, respectively.

 

## ***Investments in Affiliates***

## *** ***

We use the equity method of accounting for ourinvestments in, and earnings of, investees in which we exert significantinfluence. In accordance with the equity method of accounting, the carryingamount of such an investment is initially recorded at cost and is increased toreflect our share of the investor’s income and is reduced to reflect theCompany’s share of the investor’s losses. Investments in which the Company hasless 

 

30

----

 

than 20% ownership and no significant influence areaccounted for under the cost method and are carried at cost.

 

## ***Impairment of Long- Lived Assets***

## *** ***

We account for long-lived assets in accordance withthe provisions SFAS No. 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets.” This Statement requires long-lived assets and certainidentifiable intangibles be reviewed for impairment whenever events or changesin circumstances indicate that the carrying amount of an asset may not berecoverable. Recoverability of assets to be held and used is measured by acomparison of the carrying amount of an asset to future net cash flows expectedto be generated by the asset. If such assets are considered to be impaired, theimpairment to be recognized is measured by the amount by which the carryingamount of the assets exceeds the fair value of the assets (see Note 20). Assetsto be disposed of are reported at the lower of the carrying amount or fairvalue less costs to sell.

 

## ***Share Based Compensation***

## *** ***

Effective July 1, 2005 the Company adopted SFASNo. 123R to account for share-based awards to employees. SFAS No. 123Rrequires measurement of the cost of employee services received in exchange foran award based on the fair value of the award on the grant date. Prior to theadoption of SFAS No. 123R, the Company applied the provisions ofAccounting Principles Board (“APB”) Opinion No. 25, and relatedinterpretations to account for options granted under our various stock optionplans. Based on the provisions of this plan, no compensation expense had beenrecognized for options issued under this plan. The fair value of the stockoptions is estimated using expected dividend yields of the Company’s stock, theexpected volatility of the stock, the expected length of time the optionsremain outstanding and risk-free interest rates. Changes in one or more ofthese factors may significantly affect the estimated fair value of the stockoptions. Additionally, SFAS No. 123R requires the Company to estimate thenumber of instruments for which the required service is expected to berendered. The Company estimates forfeitures using historical forfeiture ratesfor previous grants of equity instruments.

 

## ***Revenue Recognition***

## *** ***

SPACEHAB recognizes revenue employing severalgenerally accepted revenue recognition methodologies across its businesssegments. The methodology used is based on contract type and the manner inwhich products and services are provided. Revenue generated under existingFlight Services contracts and for all other contract awards for which thecapability to successfully complete the contract can be reasonably assured and costsat completion can be reliably estimated at contract inception, is recognizedunder the percentage-of-completion method based on costs incurred over theperiod of the contract. Revenue provided by Government Services is primarilyderived from cost-plus award fee contracts, whereby revenue is recognized tothe extent of reimbursable costs incurred plus award fee. Award fees whichprovide earnings based on our contract performance, as determined by NASAevaluations, are recorded when the amounts are probable and can be reasonablyestimated. Changes in estimated costs to complete and provisions for contractlosses and estimated amounts recognized as award fees are recognized in theperiod they become known. Revenue generated by Astrotech’s payload processingservices is recognized ratably over the occupancy period of the satellite whilein the Astrotech facilities. For the multi-year contract with Lockheed Martin,revenue is billed and recognized on a quarterly basis.

 

## ***Deferred Revenue***

## *** ***

Deferred revenue represents amounts collected fromcustomers for projects, products, or services expected to be provided at afuture date. Deferred revenue is shown on the balance sheet as either ashort-term or long-term liability, depending on when the service or product isexpected to be provided.

 

## ***Research and Development***

## *** ***

Research and development costs are expensed asincurred.

 

## ***Income Taxes***

## *** ***

We recognize income taxes under the asset andliability method. Deferred tax assets and liabilities are recognized for thefuture tax consequences attributable to differences between the financialstatement carrying amounts of existing assets and liabilities and theirrespective tax bases and operating loss and tax 

 

31

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credit carry forward. Deferred tax assets andliabilities are measured using enacted tax rates expected to apply to taxableincome in the years in which those temporary differences are expected to berecovered or settled. The effect on deferred tax assets and liabilities of achange in tax rates is recognized in income in the period that includes theenactment date. A valuation allowance is established when it is more likelythan not that some portion or all of the deferred tax assets will not berealized.

 

## ***Net Income (Loss) Per Share***

## *** ***

Basic net income (loss) per share is calculated bydividing net income (loss) by the weighted average number of common sharesoutstanding during the period. Diluted net income (loss) per share includes allCommon Stock options and other Common Stock equivalents that potentially may beissued as a result of conversion privileges, including the convertiblesubordinated notes payable and convertible preferred stock (see Note 12).

 

## ***Accounting Estimates***

## *** ***

The preparation of consolidated financial statementsin conformity with accounting principles generally accepted in the U.S.requires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the consolidated financial statements and thereported amounts of revenue and expenses during the reporting periods. Actualresults could differ from these estimates.

 

## ***New Accounting Pronouncements***

## *** ***

In June 2006 the Financial Accounting StandardsBoard issued FASB Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”). FIN48 requires companies to determine whether it is more likely than not that atax position will be sustained upon examination by the appropriate taxingauthorities before any part of the benefit can be recorded in the financialstatements. This interpretation also provides guidance on derecognition,classification, accounting in interim periods, and expanded disclosure requirements.FIN 48 will become effective for the Company beginning in fiscal year 2008. Weare currently in the process of assessing the impact that FIN 48 will have onour consolidated financial statements.

 

**(3)****                    ****Statements of Cash Flows –Supplemental Information**

 

(a)          Cash paid for interest costswas approximately $3.8 million, $4.7 million, and $5.4 million for the yearsended June 30, 2007, 2006, and 2005, respectively. In fiscal year 2006there was $0.6 million of non-cash charges due to the acceleration of debtplacement fees related to the convertible notes. The bond exchange of$52,944,000 of 8% convertible subordinated notes for 5.5% of senior convertiblenotes resulted in no cash inflow or outflow.

 

(b)         The Company paid no incometaxes for the years ended June 30, 2007, 2006 and 2005.

 

**(4)****                    ****Accounts Receivable**

 

At June 30, 2007 and 2006, accounts receivableconsisted of the following (in thousands):

 
| ** **                                               | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------------------------|------------|----------|------------|----------|------------|
| U.S. Government contracts:                               |       |     |       |     |       |
| Billed                                                   |       | $        | 5,272      |     | $          | 5,674 |   |
| Unbilled:                                                |       |     |       |     |       |
| Revenues in excess of milestone and time-based  billings |       | 1,072    |       | 3,723    |       |
|                                                     |       |     |       |     |       |
| Total U.S. Government contracts                          |       | 6,344    |       | 9,397    |       |
|                                                     |       |     |       |     |       |
| Commercial contracts:                                    |       |     |       |     |       |
| Billed                                                   |       | 1,154    |       | 1,495    |       |
| Unbilled                                                 |       | 726      |       | 850      |       |
| Allowances                                               |       | —   |       | (363     | )          |
| Total commercial contracts                               |       | 1,880    |       | 1,982    |       |
| Total accounts receivable                                |       | $        | 8,224      |     | $          | 11,379 |   |

 

32

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The Company anticipates collecting all unreservedreceivables within one year.

 

The accuracy and appropriateness of our direct andindirect costs and expenses under government contracts, and therefore ouraccounts receivable recorded pursuant to such contracts, are subject toextensive regulation and audit by the U.S. Defense Contract Audit Agency or byother appropriate agencies of the U.S. Government. Such agencies have the rightto challenge our cost estimates or allocations with respect to any governmentcontract. Additionally, a substantial portion of the payments to the Companyunder government contracts are provisional payments that are subject topotential adjustment upon audit by such agencies. In the opinion of management,any adjustments likely to result from inquiries or audits of its contractswould not have a material adverse impact on our financial condition or resultsof operations.

 

**(5)****                    ****Long-term Debt**

 

## ***Revolving Loan Payable***

## *** ***

On February 11, 2005 we entered into arevolving one-year credit facility with a bank providing for loans up to $5.0million secured by the Company’s accounts receivable. In February 2006 therevolving credit facility was renewed and the term extended until February 11,2007 with substantially the same terms as the original agreement. The interestrate for the term loan was prime plus one percent (9.25% as of June 30,2006). The unused revolving credit facility balance was subject to interestcharges of 0.25% to 0.5%. Funds available under the revolving credit facilitywere limited to 80% of eligible accounts receivable and we were subject tovarious financial and other covenants including a minimum tangible net worthcovenant, a cash flow coverage covenant, and a secured debt coverage covenant.This credit facility expired on February 11, 2007 and we elected not torenew.

 

## ***Mortgage Loan Payable***

## *** ***

On August 30, 2001 our Astrotech subsidiarycompleted a $20.0 million financing of its spacecraft processing facilityexpansion project in Titusville, Florida with a financial institution. Theproceeds of this financing were used to complete the construction of thefacility and supporting infrastructure. The loan was collateralized primarilyby the multi-year payload processing contracts with Boeing and Lockheed Martinand by the building.

 

The loan agreement was amended on January 29,2004, whereby the maturity date was shortened to January 2007, the interestrate was fixed at 5.5%, and the hedge requirement was eliminated. For thefiscal year ended June 30, 2007, the remaining $1.6 million of principalwas repaid.

 

## ***Convertible Subordinated Notes Payable***

## *** ***

In October 1997 we completed a privateplacement offering for $63.3 million of aggregate principal of unsecured 8.0%Convertible Subordinated Notes due October 2007. Interest is payablesemi-annually. The notes are convertible into the Common Stock of the Companyat a rate of $13.625 per share. This offering provided us with net proceeds ofapproximately $59.9 million that were used for capital expenditures associatedwith the development and construction of space related assets and for othergeneral corporate purposes.

 

On November 22, 2005 we exchanged $52,944,000of 8.0% Convertible Subordinated Notes for a like amount of 5.5% SeniorConvertible Notes due 2010 and convertible into shares of the Company’s CommonStock at a per share price of $1.50 which include a mandatory conversionfeature once the stock price reaches $1.95 per share for twenty consecutivedays. The 5.5% Senior Convertible Notes will accrue interest from the issuedate at a rate of 5.5% per year. We will pay interest on the exchange notessemi-annually on each April 15 and October 15. The Senior ConvertibleNotes are convertible into 35,296,000 shares of Common Stock.

 

The remaining Convertible Subordinated Notes payableof $10,306,000 are convertible into 756,404 shares of Common Stock at $13.625per share. As a result of converting these notes in November 2005, wewrote-off $0.6 million of debt placement fees associated with the originalissuance of these notes. The Subordinated Convertible Notes accrue interest at8% annually, paid semiannually, and mature in October 2007.

 

The Senior Convertible Notes were amended in November 2005to include a covenant providing a limitation on disposition of Astrotech assetsand limitations on liens of Astrotech assets. Details of these covenants can beobtained via the Company’s Prospectus Supplement to Schedule TO (Amendment 5),public filing on the SEC’s web site dated October 27, 2005. (See  Note 27)

 

33

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The Company’s debt repayments are due as follows (inthousands):

 
| ** **                                         | ** ** | **Balance**   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------------------------------|------------|---------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                         | ** ** | **6/30/2007** | ** ** | **FY08**   | ** ** | **FY09**   | ** ** | **FY10**   | ** ** | **FY11**   | ** ** | **FY12**   | ** ** |
| Convertible Subordinated Notes Payable – 8.0% |       | $             | 10,306     |       | $          | 10,306     |       | $          |       |       | $          | —     |       | $ | — |   | $ | — |   |
|                                               |       |          |       |       |       |       |       |       |       |       |       |       |       |
| Senior Convertible Notes  Payable – 5.5%      |       | 52,944        |       | —     |       | —     |       | —     |       | 52,944     |       | $          | —     |   |
|                                               |       | $             | 63,250     |       | $          | 10,306     |       | $          | —     |       | $          | —     |       | $ | 52,944 |   |   |   |

**(6)****                    ****Fair Value of FinancialInstruments**

 

The following table presents the carrying amountsand estimated fair values of certain of the Company’s financial instruments asof June 30, 2007 and 2006 in accordance with SFAS No. 107, “Disclosuresabout Fair Value of Financial Instruments” (in thousands):

 
| ** **                                         | ** ** | **June 30, 2007** | ** ** | **June 30, 2006** | ** ** |
|----------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                         | ** ** | **Carrying****Amount**      | ** ** | **Fair****Value**           | ** ** | **Carrying****Amount** | ** ** | **Fair****Value** | ** ** |
|                                               |       |                        |       |                        |       |   |   |   |   |
| Mortgage Loan Payable                              |       | $                           | —     |                        | $          | — |   | $ | 1,636 |   | $ | 1,636 |   |
| Convertible Subordinated Notes Payable – 8.0% |       | 10,306                      |       | 5,501                       |       | 10,306 |   | 8,631 |   |
| Senior Convertible Notes Payable – 5.5%       |       | 52,944                      |       | 50,694                      |       | 52,944 |   | 47,650 |   |
|                                                    |            |                             |            |                             |            |  |  |  |  |  |  |  |  |

 

The fair value of our long-term debt is based onquoted market prices or is estimated based on the current rates offered to usfor debt of similar remaining maturities and other terms. The carrying amountsof cash and cash equivalents, investments, accounts receivable, accountspayable, and accrued expenses approximate their fair market value because ofthe relatively short duration of these instruments.

 

**(7)****                    ****NASA Contracts**

 

## ***Cargo Mission Contract***

## *** ***

In February 2004 and under NASA’s newconsolidated ISS contracts structure, we began providing services to NASA(similar to the services provided under the Research and Logistics MissionSupport contract) under subcontract to NASA’s Cargo Mission Contractcontractor, Lockheed Martin. Flight Services is currently under contract withLockheed Martin for unpressurized pallet and pressurized module servicessupporting STS-118 (module and ICC).

 

## ***External Stowage Platform Contract***

## *** ***

Flight Services’s contract with the prime ISScontractor, Boeing, for the STS-114 mission carrying the deployable ICC, wasnot affected by the ISS contract consolidation restructure. STS-114 was thefirst mission flown by NASA following the Columbia tragedy and launched in July 2005.

 

## ***Cargo Shipment Coordination Contract***

## *** ***

Flight Services is providing cargo shipmentcoordination services to NASA for all U.S. cargo shipped to the ISS via theRussian Progress space vehicle. These services are provided under contract toLockheed Martin, the Cargo Mission Contract contractor to NASA.

 

## ***Program Integration and Control***

## *** ***

In January 2004 we continued providing ISSConfiguration Management support to NASA as a major subcontractor on thePI&C contract. ARES Corporation is the prime contractor for PI&C. Thecontract has a base period of performance of four years and nine months plustwo one-year options.

 

34

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## ***Astrotech’s NASA Contracts***

## *** ***

During fiscal year 2004 Astrotech started directspacecraft processing support for NASA. Currently, Astrotech has three IDIQcontracts with NASA. One is valued at $4.9 million that has three task ordersauthorized. The second one is valued at $9.9 million that has two task ordersauthorized. The third one is valued at $35.0 million and was awarded in June 2007.As of June 30, 2007, there were no task orders authorized but one, OSTM,was awarded subsequent to year-end.

 

**(8)****                    ****Stockholder Rights Plan**

 

On March 26, 1999 the Board of Directorsadopted a Stockholder Rights Plan designed to deter coercive takeover tacticsand to prevent a potential acquirer from gaining control of the Company withoutoffering a fair price to all of the Company’s stockholders. The stockholderrights plan was amended and restated in February 2004. On July 13,2005 SPACEHAB entered into an amendment to the Amended and Restated RightsAgreement, dated as of February 23, 2004 between the Company and AmericanStock Transfer & Trust Company, as rights agent, accelerating theexpiration date of the Rights Agreement from April 9, 2009 to July 13,2005.

 

**(9)****                    ****Convertible Preferred Stock**

 

On August 2, 1999 Astrium (formerly EADS), arelated party and shareholder, purchased an additional $12.0 million equityinterest in SPACEHAB representing 1,333,334 shares of Series B SeniorConvertible Preferred Stock. Under the agreement, Astrium purchased all ofSPACEHAB’s 975,000 authorized and unissued shares of preferred stock. On October 14,1999, the shareholders approved the proposal to increase the number ofauthorized shares of preferred stock to 2,500,000, in order to complete thetransaction with Astrium allowing them to purchase the additional 358,334preferred shares. The preferred stock purchase increased Astrium’s votinginterest in SPACEHAB to approximately 11.5%. The Series B SeniorConvertible Preferred Stock is: convertible at the holders’ option on the basisof one share of Preferred Stock for one share of Common Stock, entitled to voteon an “as converted” basis the equivalent number of shares of Common Stock, andhas preference in liquidation, dissolution, or winding up of $9.00 perpreferred share. No dividends are payable on the convertible preferred shares(see Note 27).

 

**(10)****             ****Common Stock Options and StockPurchase Plans**

 

As of June 30, 2007, 3,185,774 shares of CommonStock were reserved for grants of stock options under the Company’s three stockoption plans.

 

## ***Non-qualified Options***

## *** ***

Non-qualified options are granted at the sole discretionof the Board of Directors. Prior to the adoption of the 1994 Stock IncentivePlan (the “1994 Plan”), stock options granted to the Company’s officers andemployees were part of their employment contract or offer. The number and priceof the options granted were defined in the employment agreements and suchoptions vest incrementally over a period of four years and generally expirewithin ten years of the date of grant.

 

## ***The 1994 Plan***

## *** ***

Under the terms of the 1994 Plan, the number andprice of the options granted to employees is determined by the Board ofDirectors and such options vest, in most cases, incrementally over a period offour years and expire no more than ten years after the date of grant. The totalnumber of options that are available under this plan is 3,950,000. As of June 30,2007 there are 3,005,774 available for grant.

 

## ***The Directors’ Stock Option Plan***

## *** ***

Each new non-employee director receives a one-timegrant of an option to purchase 10,000 shares of Common Stock at an exerciseprice equal to the fair market value on the date of grant. In addition,effective as of the date of each annual meeting of the Company’s stockholders,each non-employee director who is elected or continues as a member of the Boardof Directors of the Company shall be awarded an option to purchase 5,000 sharesof Common Stock. Options under the Director’s Plan vest after one year andexpire seven years from the date of grant. The total number of options that areavailable under this plan is 500,000. Through June 30, 2007 there are180,000 available for grant.

 

35

----

 

 

 

## ***1997 Employee Stock Purchase Plan***

## *** ***

We adopted an employee stock purchase plan thatpermits eligible employees to purchase shares of Common Stock of the Company atprices no less than 85% of the current market price. Eligible employees mayelect to participate in the plan by authorizing payroll deductions from 1% to10% of gross compensation for each payroll period. On the last day of eachquarter, each participant’s contribution account is used to purchase themaximum number of whole and fractional shares of Common Stock determined bydividing the contribution account’s balance by the lesser of 85% of the priceof a share of Common Stock on the first day of the quarter or the last day of aquarter. The number of shares of Common Stock that may be purchased under theplan is 1,500,000. Through June 30, 2007 employees have purchased1,482,645 shares under the plan. Employees purchased an aggregate of 167,032shares at an average price of $0.55 during the twelve-month period ended June 30,2007. The shares purchased under this plan are considered compensation foraccounting and reporting purposes (see SFAS No. 123R below). During thefourth quarter of fiscal year 2007, we discontinued the purchasing of CommonStock by the employees from this plan.

 

## ***Space Media, Inc. Stock Option Plan (“SMIPlan”)***

## *** ***

During the year ended June 30, 2000, SpaceMedia, Inc., a majority owned subsidiary of the Company, adopted an optionplan (SMI Plan) for employees, officers, directors and consultants of SMI.Under the terms of the SMI Plan, 1,500,000 shares have been reserved for futuregrants for which the number and price of the options granted is determined bythe Board of Directors and such options vest, in most cases, incrementally overa period of four years and expire no more than ten years after the date ofgrant. At June 30, 2007 and June 30, 2006, there were 388,750 optionsissued and outstanding under the SMI Plan at a weighted average exercise priceof $1.00. The options vest equally over a four-year period and have a life of10 years. There were 274,063 options exercisable as of June 30, 2007 and June 30,2006 with a weighted-average exercise price of $1.00 and a weighted-averageremaining contractual life of four to five years, respectively.

 

36

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## *** ***

## ***Stock Option Activity Summary***

## *** ***

The following tablesummarizes the Company’s stock option plans, excluding the SMI plan:

 
| ** **                                                                                                          | ** ** | **Non-qualified Options** | ** ** | **1994 Plan**                       | ** ** | **Directors’ Plan** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                                                          | ** ** | **Shares****Outstanding**      | ** ** | **Weighted****Average  Exercise  Price** | ** ** | **Shares  Outstanding**       | ** ** | **Weighted****Average  Exercise  Price** | ** ** | **Shares****Outstanding** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| Outstanding at June 30,  2004                                                                                  |       | 4,166                          |       | $                                        | 12.00      |                          | 1,732,331  |   | $ | 4.27 |   | 330,000 |   | $ | 6.68 |   |
| Granted                                                                                                             |       | —                         |       | —                                   |       | 249,000                       |       | 2.41 |   | 70,000 |   | 1.85 |   |
| Exercised                                                                                                           |       | —                         |       | —                                   |       | (27,250                       | )          | 0.91 |   | — |   | — |   |
| Forfeited                                                                                                           |       | (4,166                         | )          | 12.00                                    |       | (403,841                      | )          | 4.77 |   | (135,000 | ) | 10.06 |   |
| Outstanding at June 30,  2005                                                                                  |       | —                         |       | $                                        | —     |                          | 1,550,240  |   | $ | 3.89 |   | 265,000 |   | $ | 3.20 |   |
| Granted                                                                                                             |       | —                         |       | —                                   |       | 212,000                       |       | 1.43 |   | 30,000 |   | 0.77 |   |
| Exercised                                                                                                           |       | —                         |       | —                                   |       | (17,000                       | )          | 0.87 |   | — |   | — |   |
| Forfeited                                                                                                           |       | —                         |       |                                     |       | (413,039                      | )          | 5.28 |   | (50,000 | ) | 7.00 |   |
| Outstanding at June 30,  2006                                                                                  |       | —                         |       | $                                        | —     |                          | 1,332,201  |   | $ | 3.11 |   | 245,000 |   | $ | 2.14 |   |
| Granted                                                                                                             |       | —                         |       | —                                   |       | 310,000                       |       | 1.15 |   | 30,000 |   | 0.72 |   |
| Exercised                                                                                                           |       | —                         |       | —                                   |       | —                        |       | — |   | — |   | — |   |
| Forfeited                                                                                                           |       | —                         |       | —                                   |       | (835,266                      | )          | 2.48 |   | (5,000 | ) | (0.99 | ) |
| Outstanding at June 30,  2007                                                                                  |       |                           |       | $                                        |       |                          | 806,935    |   | $ | 2.81 |   | 270,000 |   | $ | 2.00 |   |
|                                                                                                                |       |                           |       |                                     |       |                          |       |   |   |   |   |   |   |
| Options exercisable at:                                                                                             |       |                           |       |                                     |       |                          |       |   |   |   |   |   |   |
|                                                                                                                |       |                           |       |                                     |       |                          |       |   |   |   |   |   |   |
| June 30, 2005                                                                                                  |       | —                         |       | $                                        | —     |                          | 1,031,740  |   | $ | 5.04 |   | 210,000 |   | $ | 3.50 |   |
| June 30, 2006                                                                                                  |       | —                         |       | —                                   |       | 860,701                       |       | 3.95 |   | 215,000 |   | 2.33 |   |
| June 30, 2007                                                                                                  |       | —                         |       | —                                   |       | 516,935                       |       | 3.59 |   | 240,000 |   | 2.16 |   |
|                                                                                                                |       |                           |       |                                     |       |                          |       |   |   |   |   |   |   |
| Weighted-average fair value  (pursuant to FAS 123) at date of grant of options issued during the fiscal year  ended |       |                           |       |                                     |       |                          |       |   |   |   |   |   |   |
| June 30, 2005                                                                                                  |       | —                         |       | $                                        | —     |                          | 249,000    |   | $ | 2.00 |   | 70,000 |   | $ | 1.49 |   |
| June 30, 2006                                                                                                  |       | —                         |       | —                                   |       | 212,000                       |       | 1.39 |   | 30,000 |   | 0.70 |   |
| June 30, 2007                                                                                                  |       | —                         |       | —                                   |       | 310,000                       |       | 0.54 |   | 30,000 |   | 0.98 |   |

 
| ** **                                  | ** **                                              | **Options outstanding** | ** ** | **Options exercisable**                                        | ** ** |
|---------------------------------------------|---------------------------------------------------------|------------------------------|------------|---------------------------------------------------------------------|------------|
| **Range of exercise prices** | ** **                                              | **Number****Outstanding**    | ** ** | **Weighted-  Average  Remaining  Contractual****Life (years)** | ** ** | **Weighted-  Average****Exercise  Price** | ** ** | **Number  Exercisable** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
| $                                           |     0.700 –    1.150 |                         | 404,000    |                                                                | 6.48       |   | $ | 0.971 |   | 206,000 |   | $ | 0.869 |   |
|   1.430 –    2.410 |                                                    | 274,000                      |       | 6.59                                                                |       | 1.899 |   | 152,000 |   | 1.993 |   |
|   2.600 –    5.125 |                                                    | 386,000                      |       | 2.33                                                                |       | 4.513 |   | 386,000 |   | 4.513 |   |
| 11.750 – 11.750                        |                                                    | 12,935                       |       | 0.00                                                                |       | 11.750 |   | 12,935 |   | 11.750 |   |
|                                        |                                                    | 1,076,935                    |       | 4.94                                                                |       | $ | 2.606 |   | 756,935 |   | $ | 3.139 |   |
|                                             |                                                         |                              |            |                                                                     |            |  |  |  |  |  |  |  |  |  |

 

37

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A summary of our stock option activity as of June 30,2007 and changes during fiscal year 2007 are presented in the following table:

 
| ** **                        | ** ** | **Shares Under  Fixed Options** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Weighted-  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|-----------------------------------|------------|-------------------------------------------|------------|-----------------------------------------|------------|------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding at June 30, 2006 |       | 1,577,201                                 |       | $                                       | 2.96       |                                                 | 5.52       |                            | $          | — |   |
| Granted                           |       | 340,000                                   |       | $                                       | 1.11       |                                                 | 5.97       |                            | $          | — |   |
| Exercised                         |       | —                                    |       | —                                  |       | —                                               |       | $                               | —     |   |
| Forfeited/Expired                 |       | (840,266                                  | )          | $                                       | 2.68       |                                                 | —     |                            | $          | — |   |
| Outstanding at June 30, 2007 |       | 1,076,935                                 |       | $                                       | 2.61       |                                                 | 4.94       |                            | $          | — |   |
| Exercisable                       |       | 756,935                                   |       | $                                       | 3.14       |                                                 | 4.94       |                            | $          | — |   |
| Vested at June 30, 2007      |       | 756,935                                   |       | $                                       | 3.14       |                                                 | 4.94       |                            | $          | — |   |

 

The weighted-averagegrant-date fair value of options granted during fiscal year 2007 was $0.58 pershare. The intrinsic value for stock options is defined as the differencebetween the current market value and the grant price. As of June 30, 2007there was $363,021 of unamortized expense related to our stock option plans.

 

## ***Statement of Financial Accounting Standard No. 123R***

## *** ***

Effective July 1, 2005we adopted SFAS No. 123 (revised 2004), “Share-Based Payment,” (“SFAS No. 123R”)which was issued by the FASB in December 2004. SFAS No. 123R revisesSFAS No. 123, “Accounting for Stock–Based Compensation,” and supersedesAPB No. 25, “Accounting for Stock Issued to Employees,” and its relatedinterpretations. SFAS No. 123R requires recognition of the cost ofemployee services received in exchange for an award of equity instruments inthe financial statements over the period the employee is required to performthe services in exchange for the award (presumptively the vesting period). SFASNo. 123R also requires measurement of the cost of employee servicesreceived in exchange for an award based on the grant-date fair value of theaward. SFAS No. 123R also amends SFAS No. 95, “Statement of CashFlows,” to require that excess tax benefits be reported as financing cashinflows, rather than as a reduction of taxes paid, which is included withinoperating cash flows. Before adoption of SFAS No. 123R, pro formadisclosures reflected the fair value of each option grant estimated on the dateof grant using the Black-Scholes option pricing model with the followingweighted-average assumptions:

 
| ** **                      | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Expected Dividend Yield         |       | 0        | %          | 0        | %          | 0        | %          |
| Expected Volatility             |       | 1.08     |       | 1.68     |       | 1.00     |       |
| Risk-Free Interest Rates        |       | 4.83     | %          | 4.31     | %          | 3.79     | %          |
| Expected Option Life (in years) |       | 6.25     |       | 6.25     |       | 6.25     |       |

 

Results of prior periods donot reflect any restated amounts and we had no cumulative effect adjustmentupon adoption of SFAS No. 123R under the modified prospective method. Ourpolicy is to recognize compensation for awards with only service conditions anda graded vesting schedule on a straight line basis over the requisite serviceperiod for the entire award.

 

The fair value of eachoption award is estimated on the date of grant using the Black Scholes optionpricing model, which determines inputs as shown in the following table. Becauseof differences in option terms and historical exercise patterns among theplans, we have segregated option awards into two homogenous groups for thepurpose of determining fair values for its options. Valuation assumptions aredetermined separately for the two groups which represent, respectively, the 1994Stock Incentive Plan and the Director’s Stock Option Plan. The assumptions areas follows:

 

·      We estimated volatility using our historicalshare price performance over the last ten years. Management considered theguidance in SFAS No. 123R and believes the historical estimated volatilityis materially indicative of expectations about expected future volatility.

 

·      We use the simplified method outlined inSEC Staff Accounting Bulletin No. 107 to estimate expected lives foroptions granted during fiscal year 2006.

 

38

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| · | The risk-free interest  rate is based on the U.S. Treasury yield curve in effect at the time of grant  for the expected term of the option.                                        |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                               |
| · | The expected dividend  yield is based on our current dividend yield and the best estimate of  projected dividend yield for future periods within the expected life of the  option. |

 

**(11)****             ****Income Taxes**

 

The Company accounts fortaxes under SFAS No. 109, “Accounting for Income Taxes.” Under SFAS 109,deferred tax liabilities and assets are determined based on the differencebetween the financial statement and tax basis of assets and liabilities usingenacted rates expected to be in effect during the year in which the differencesreverse.

 

The components of income taxexpense (benefit) from continuing operations are as follows (in thousands):

 
| ** **                   | ** ** | **Year Ended June 30,** | ** ** |
|------------------------------|------------|----------------------------------------|------------|
| ** **                   | ** ** | **2007**                               | ** ** | **2006** | ** ** | **2005** | ** ** |
| Current:                     |       |                                   |       |   |   |   |   |
| Federal                      |       | $                                      | (47        | ) | $ | — |   | $ | (176 | ) |
| State and local              |       | (22                                    | )          | 32 |   | 30 |   |
| Foreign                      |       | —                                 |       | — |   | — |   |
|                         |       | (69)                                   |       | 32 |   | (146 | ) |
| Deferred:                    |       |                                   |       |   |   |   |   |
| Federal                      |       | —                                 |       | — |   | — |   |
| State and local              |       | —                                 |       | — |   | — |   |
| Foreign                      |       | —                                 |       | — |   | — |   |
|                         |       |                                   |       |   |   |   |   |
| Income tax expense (benefit) |       | $                                      | (69        | ) | $ | 32 |   | $ | (146 | ) |

 

A reconciliation of thereported income tax expense to the amount that would result by applying theU.S. federal statutory rate to the income (loss) before income taxes to theactual amount of income tax expense (benefit) recognized follows (inthousands):

 
| ** **                                | ** ** | **Year Ended June 30,** | ** ** |
|-------------------------------------------|------------|----------------------------------------|------------|
| ** **                                | ** ** | **2007**                               | ** ** | **2006** | ** ** | **2005** | ** ** |
| Expected expense (benefit)                |       | $                                      | (5,563     | ) | $ | (4,204 | ) | $ | 1,735 |   |
| Change in  valuation allowance            |       | 6,514                                  |       | 3,593 |   | (4,838 | ) |
| Over-accrual of Federal Tax in prior year |       | (443                                   | )          | — |   | (290 | ) |
| State income taxes                        |       | —                                 |       | 21 |   | 30 |   |
| Expiration of general business credits    |       | (764                                   | )          | — |   | — |   |
| Other, primarily goodwill amortization    |       | 187                                    |       | 622 |   | 3,217 |   |
| Total                                     |       | $                                      | (69        | ) | $ | 32 |   | $ | (146 | ) |

 

39

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The Company’s deferred taxassets as of June 30, 2007 and 2006 consist of the following (inthousands):

 
| ** **                                                              | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax assets:                                                    |       |     |       |     |       |
| Net operating loss carryforwards                                        |       | $        | 13,014     |     | $          | 7,985 |   |
| General business credit carryforwards                                   |       | 200      |       | 964      |       |
| Alternative minimum tax credit  carryforwards                           |       | 640      |       | 640      |       |
| Accrued expenses                                                        |       | 401      |       | 425      |       |
| Capitalized start-up and organization costs                             |       | 485      |       | 142      |       |
| Deferred gain                                                           |       | 467      |       | 542      |       |
| Property and equipment, principally due to  differences in depreciation |       | 470      |       | —   |       |
| Other                                                                   |       | 5        |       | 5        |       |
| Total gross deferred tax assets                                         |       | 15,682   |       | 10,703   |       |
| Less - valuation allowance                                              |       | (15,537  | )          | (9,023   | )          |
| Net deferred tax assets                                                 |       | 145      |       | 1,680    |       |
| Deferred tax liabilities:                                               |       |     |       |     |       |
| Property and equipment, principally due to  differences in depreciation |       | —   |       | 1,596    |       |
| Other                                                                   |       | 145      |       | 84       |       |
| Total gross deferred tax liabilities                                    |       | 145      |       | 1,680    |       |
| Net deferred tax assets (liabilities)                                   |       | $        | —     |     | $          | — |   |

 

At June 30, 2007, theCompany had accumulated net operating loss carryforwards of approximately $38.3million for Federal income tax purposes, which are available to offset futureregular taxable income. These net operating loss carryforwards expire betweenthe years 2020 and 2025. Utilization of these net operating losses may besubject to limitations in the event of significant changes in stock ownershipof the Company.

 

Additionally, the Companyhas approximately $0.2 million of research and experimentation tax creditcarryforwards and $0.6 million of alternative tax credit carryforwards,respectively, available to offset future regular tax liabilities. The researchand experimentation credits expire between the years 2008 and 2009.

 

In assessing the need for avaluation allowance, management considers whether it is more likely than not thatsome portion or all of the net deferred tax assets will be utilized. Managementconsiders the scheduled reversal of deferred tax liabilities, projected futuretaxable income, and tax planning strategies in making this assessment. As of June 30,2007, the Company provided a full valuation allowance of approximately $15.5million against its net deferred tax assets.

 

**(12)****             ****Net Income (Loss) Per Share**

 

The following arereconciliations of the denominators of the basic and diluted net income (loss)per share computations for the years ended June 30, 2007, 2006, and 2005.There were no adjustments for the numerators.

 
| ** **                                               | ** ** | **June 30,** | ** ** |
|----------------------------------------------------------|------------|-------------------|------------|
| ** **                                               | ** ** | **2007**          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Weighted average outstanding common shares –  basic |       | 12,919,506        |       | 12,743,533 |   | 12,613,491 |   |
| Common Stock equivalents                                 |       | —            |       | — |   | 1,576,790 |   |
| Weighted average outstanding common shares  - diluted    |       | 12,919,506        |       | 12,743,533 |   | 14,190,281 |   |

 

For fiscal years 2007, 2006, and 2005, 1,076,935,1,601,786 and 1,306,486, respectively, of options to purchase shares of CommonStock were excluded for the computations of diluted net income because theimpact of such options are anti-dilutive.

 

40

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For fiscal years 2007 and 2006, $52,944,000 ofSenior Convertible Notes that are convertible into 35,296,000 shares of CommonStock were excluded for the computations of diluted net income because theimpact of such notes are anti-dilutive.

 

For fiscal years 2007, 2006, and 2005, the$10,306,000 of Convertible Subordinate Notes that are convertible into 756,404shares of Common Stock were excluded for the computations of diluted net incomebecause the impact of such notes are anti-dilutive.

 

For fiscal years 2007, 2006, and 2005, the$12,000,000 of Preferred Stock (1,333,334 shares at $9.00 per share) wereexcluded for the computations of diluted net income because the impact of suchstock would be anti-dilutive.

 

**(13)****             ****Employee Benefit Plan**

 

We have a defined contribution retirement plan,which covers substantially all employees and officers. For the years ended June 30,2007, 2006, and 2005, we have contributed the required match of $0.6 million,$0.6 million, and $0.6 million, respectively, to the plan. We have the right,but not an obligation, to make additional contributions to the plan in futureyears at the discretion of the Company’s Board of Directors. We have not madeany such contributions for the years ended June 30, 2007, 2006, and 2005.

 

**(14)****             ****Commitments**

 

## ***Construction Contract Contingency***

## *** ***

In August 2007 we entered into a $14.0 millionmodification to our existing Vandenberg construction contract. The modificationrequires us to complete the construction on the redesigned facility by September 30,2009. The modification contains penalties if we do not meet the contracted completiondate. As a result we have a contingency of up to $3.0 million in penalties.

 

## ***Leases***

## *** ***

The Company is obligated under noncancelableoperating leases for equipment, office space, storage space, and the land for apayload processing facility, and certain flight assets. Future minimum paymentsunder these noncancelable operating leases are as follows (in thousands):

 
| ** **                      | ** ** | **Operating** | ** ** |
|---------------------------------|------------|---------------|------------|
| **Year  ending June 30,**  | ** ** | **Leases**    | ** ** |
|                            |       |          |       |
| 2008                            |       | $2,662        |       |
| 2009                            |       | 970           |       |
| 2010                            |       | 982           |       |
| 2011                            |       | 769           |       |
| 2012                            |       | 547           |       |
| 2013 and thereafter             |       | 6,649         |       |
| Subtotal                        |       | 12,579        |       |
|                            |       |          |       |
| Less: payments due for sublease |       | 479           |       |
| Total                           |       | $12,100       |       |

 

Rent expense for the years ended June 30, 2007,2006, and 2005 was approximately $4.6 million, $4.8 million, and $4.8 million,respectively, including lease expenses for the ICC and VCC asset leases of $3.8million in 2007, $3.9 million in 2006, and $3.8 million in 2005 (see Note 28for Agreement to Termination of ICC and VCC Leases). For fiscal years 2008 and2009 the Company expects to receive net payments of approximately $0.4 millionand $0.1 million, respectively, for subleases.

 

**(15)****             ****Segment Information**

 

Based on our organization, we operate in threebusiness segments: Flight Services, Astrotech, and Government Services. FlightServices was founded to commercially develop space habitat modules to operatein the cargo bay of the space shuttles. Flight Services provides access to themodules and integration and operations support services for both NASA andcommercial customers. Astrotech provides payload processing facilities andservices to serve the satellite manufacturing and launch services industry.

 

41

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Government Services is primarily engaged inproviding engineering services and products to the Federal government includingNASA.

 

The Company’s chief operating decision makerutilizes both revenue and income (loss) before income taxes, in assessingperformance and making overall operating decisions and resource allocations.The Other segment represents corporate selling, general and administrativeexpenses and interest expense for the Company, as well as the results ofoperations for SMI, Inc.

 

The accounting policies of the segments are the sameas those described in the summary of significant accounting policies (Note 2).Information about the Company’s segments is as follows (in thousands):

 
| **Year ended June 30, 2007:** | ** ** | ** **  | ** ** | ** **                        | ** ** | **Net**    | ** ** | **Depreciation** | ** ** |
|---------------------------------------------------|------------|-------------|------------|-----------------------------------|------------|------------|------------|------------------|------------|
| ** **                                        | ** ** | ** **  | ** ** | **Income (loss)**            | ** ** | **Fixed**  | ** ** | **And**          | ** ** |
| ** **                                        | ** ** | **Revenue** | ** ** | **before income taxes** | ** ** | **Assets** | ** ** | **Amortization** | ** ** |
| Flight Services                                   |       | $           | 34,422     |                              | $          | (7,637     | )          | $                | 705        |   | $ | 3,612 |   |
| Government Services                               |       | 5,965       |       | 909                               |       | —     |       | —           |       |
| Astrotech                                         |       | 12,136      |       | 1,989                             |       | 42,633     |       | 2,088            |       |
| Other                                             |       | 239         |       | (11,622                           | )          | 546        |       | 662              |       |
|                                              |       | $           | 52,762     |                              | $          | (16,361    | )          | $                | 43,884     |   | $ | 6,362 |   |

 
| **Year ended June 30, 2006:** | ** ** | ** **  | ** ** | ** **                        | ** ** | **Net**    | ** ** | **Depreciation** | ** ** |
|---------------------------------------------------|------------|-------------|------------|-----------------------------------|------------|------------|------------|------------------|------------|
| ** **                                        | ** ** | ** **  | ** ** | **Income (loss)**            | ** ** | **Fixed**  | ** ** | **And**          | ** ** |
| ** **                                        | ** ** | **Revenue** | ** ** | **before income taxes** | ** ** | **Assets** | ** ** | **Amortization** | ** ** |
| Flight Services                                   |       | $           | 33,275     |                              | $          | (1,678     | )          | $                | 16,784     |   | $ | 3,219 |   |
| Government Services                               |       | 5,518       |       | 475                               |       | -          |       | -                |       |
| Astrotech                                         |       | 11,061      |       | 2,541                             |       | 44,228     |       | 2,149            |       |
| Other                                             |       | 892         |       | (13,703                           | )          | 625        |       | 694              |       |
|                                              |       | $           | 50,746     |                              | $          | (12,365    | )          | $                | 61,637     |   | $ | 6,062 |   |

 
| **Year ended June 30, 2005:** | ** ** | ** **  | ** ** | ** **                        | ** ** | **Net**    | ** ** | **Depreciation** | ** ** |
|---------------------------------------------------|------------|-------------|------------|-----------------------------------|------------|------------|------------|------------------|------------|
| ** **                                        | ** ** | ** **  | ** ** | **Income (loss)**            | ** ** | **Fixed**  | ** ** | **And**          | ** ** |
| ** **                                        | ** ** | **Revenue** | ** ** | **before income taxes** | ** ** | **Assets** | ** ** | **Amortization** | ** ** |
| Flight Services                                   |       | $           | 42,144     |                              | $          | 15,376     |       | $                | 27,329     |   | $ | 2,768 |   |
| Government Services                               |       | 6,093       |       | 896                               |       | 50         |       | 24               |       |
| Astrotech                                         |       | 10,367      |       | 2,079                             |       | 45,710     |       | 2,087            |       |
| Other                                             |       | 797         |       | (13,248                           | )          | 558        |       | 647              |       |
|                                              |       | $           | 59,401     |                              | $          | 5,103      |       | $                | 73,647     |   | $ | 5,526 |   |

 

Foreign revenue for the years ended June 30,2007, 2006, and 2005 was approximately zero, $0.2 million, and zero,respectively. The foreign revenue was mainly generated in China and Japan.Domestic revenue for the years ended June 30, 2007, 2006, and 2005 wasapproximately $52.8 million, $50.6 million, and $59.4 million, respectively.

 

**(16)****             ****Related Party Transactions**

 

The Company engaged in certain transactions withdirectors, executive officers, shareholders, and certain former officers duringfiscal years 2007, 2006, and 2005. Following is a description of thesetransactions:

 

## ***Astrium (formerly EADS Space Transportation)***

## *** ***

Astrium provides unpressurized payload andintegration efforts to SPACEHAB on a fixed price basis in addition to providingengineering services as required. For the years ended June 30, 2007, 2006,and 2005, Astrium’s payload and integration services included in cost ofrevenue was approximately $13.8 million, $11.4 million, and $15.3 million,respectively.

 

42

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## ***Executive Credit Cards***

## *** ***

Certain named executive officers of the Company havecompany paid credit cards for ordinary business expenses. Although the Companypays the amounts on the credit cards, the executive officer is obligated tosubstantiate the charges and reimburse the Company for any non-business relatedcharges. As of June 30, 2007 the Company has a receivable due from anexecutive officer for $12,354.

 

**(17)****             ****Summary of Selected QuarterlyFinancial Data (Unaudited)**

 

The following is a summary of selected quarterlyfinancial data (in thousands, except per share data):

 
| ** **                        | ** ** | **Three months ended** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|
| ** **                        | ** ** | **September 30**            | ** ** | **December 31** | ** ** | **March 31** | ** ** | **June 30** | ** ** |
| Year ended June 30, 2007     |       |                             |       |   |   |   |   |   |   |
| Revenue                           |       | $                                | 14,898     |   | $ | 12,851 |   | $ | 12,183 |   | $ | 12,830 |   |
| Income (loss) from operations     |       | 886                              |       | (1,073 | ) | (348 | ) | (12,295 | ) |
| Net loss                          |       | (32                              | )          | (1,840 | ) | (1,195 | ) | (13,225 | ) |
| Net loss per share – basic   |       | (0.00                            | )          | (0.14 | ) | (0.09 | ) | (1.02 | ) |
| Net loss per share – diluted |       | (0.00                            | )          | (0.14 | ) | (0.09 | ) | (1.02 | ) |
|                                   |            |                                  |            |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                  | ** ** | **Three months ended** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|
| ** **                                  | ** ** | **September 30**            | ** ** | **December 31** | ** ** | **March 31** | ** ** | **June 30** | ** ** |
| Year ended June 30, 2006               |       |                             |       |   |   |   |   |   |   |
| Revenue                                     |       | $                                | 11,985     |   | $ | 11,793 |   | $ | 12,400 |   | $ | 14,568 |   |
| Income (loss) from operations               |       | (585                             | )          | (7,067 | ) | (593 | ) | 1,054 |   |
| Net income (loss)                           |       | (1,916                           | )          | (8,856 | ) | (1,673 | ) | 48 |   |
| Net income (loss) per share –  basic   |       | (0.15                            | )          | (0.70 | ) | (0.13 | ) | 0.00 |   |
| Net income (loss) per share –  diluted |       | (0.15                            | )          | (0.70 | ) | (0.13 | ) | 0.00 |   |
|                                             |            |                                  |            |  |  |  |  |  |  |  |  |  |  |

 

**(18)****             ****Sale Lease-back Transactions**

 

On May 26, 2005 SPACEHAB purchased and enteredinto a sale lease-back of the Company’s 90,000 square-foot administrativefacility in Webster, Texas. We purchased the building and the adjacent threeacres of land from American National Insurance Corporation for the value of$2.0 million. We then sold the building excluding the three acres of adjacentundeveloped land to R&H Investments and Irving Levine Investments for $3.25million. The sale resulted in net cash to us of approximately $0.9 million. Wehave leased back 100% of the facility for an initial period of ten years, withtwo five-year options. The annual rent for the first year of this lease is $0.3million and gradually increases through the tenth year of the lease toapproximately $0.4 million. We retained the adjacent 3.0 acres parcel forfuture development or sale.

 

On May 2, 2005 SPACEHAB entered into a salelease-back of the Company’s 58,000 square-foot processing facility in CapeCanaveral, Florida in a transaction with Tamir Silvers LLC valued at $4.8million. The sale resulted in net cash to us of approximately $3.8 million. Wehave leased back 100% of the facility for an initial period of five years, withan option period of an additional five years. The annual rent for the firstfive years of this lease is approximately $0.45 million.

 

These two sale lease-backs were recorded accordingto SFAS No. 13, “Accounting for Leases.” This statement requires gainsrecognized on sale lease-backs to be recorded over the term of the leases.Therefore, the gain of $0.5 million on the sale lease-back of the Floridafacility is recognized over the five year lease term. The gain of $1.4 millionon the sale lease-back of the Headquarters building in Webster, Texas isrecognized over the ten year lease term.

 

**(19)****             ****Bond Exchange – SeniorConvertible Notes**

 

On November 22, 2005 we exchanged $52,944,000of 8.0% Convertible Subordinated Notes for a like amount of 5.5% SeniorConvertible Notes due 2010 and convertible into shares of the Company’s Common 

 

43

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Stock at a per share price of $1.50 which included amandatory conversion feature once the stock price reaches $1.95 per share fortwenty consecutive days. The 5.5% Senior Convertible Notes will accrue interestfrom the issue date at a rate of 5.5% per year. We will pay interest on theexchange notes semi-annually on each April 15 and October 15. TheSenior Convertible Notes are convertible into 35,296,000 shares of CommonStock.

 

The remaining Convertible Subordinated Notes payableof $10,306,000 are convertible into 756,404 shares of Common Stock at $13.625per share. As a result of converting these notes in November 2005, wewrote-off $0.6 million of debt placement fees associated with the originalissuance of these notes. The Subordinated Convertible Notes accrue interest at8% annually, paid semiannually, and mature in October 2007 (see Note 27).

 

**(20)****             ****Asset Write Down**

 

During the quarter ended December 31, 2005 NASArevised the flight manifest for the International Space Station build out forwhich funding was approved and signed into law on December 30, 2005. As aresult, we have written down the Flight Services flight unit 3 module asset asit has been determined that the asset is unlikely to generate significantfuture cash flows and revenue. We believed it was more likely for NASA tosimply utilize the flight unit 2 module for future missions under the revisedmanifest and related funding approved by Congress in December 2005.Therefore, we wrote-down flight unit 3 module to a salvage value of $0.1million resulting in a cost of revenue expense of $6.3 million for the quarterended December 31, 2005. The $6.3 million is included in cost of revenuefor the Flight Services segment because costs associated with the use of thisasset, including depreciation expense, have historically been recorded here.

 

During the quarter ended June 30, 2007, weperformed a SFAS No. 144 analysis of our remaining shuttle based assetsdue to STS-118 being our last contracted shuttle mission. As a result, we havewritten down the Flight Services flight unit 2 module asset and other shuttlebased assets as it has been determined that the asset is unlikely to generatesignificant future cash flows and revenue. Therefore, we wrote-down our flightunit 2 module to a salvage value of $0.1 million, excluding depreciationexpense for July and August 2007. This non-cash write-down resultedin a cost of revenue expense of $10.4 million for the quarter ended June 30,2007. The $10.4 million is included in cost of revenue for the Flight Servicessegment because costs associated with the use of this asset, includingdepreciation expense, have historically been recorded here.

 

Additionally, we wrote-down other assets and work inprogress related to the modules and the unpressurized carriers for $3.8million. This amount is included in operating expenses. Included in this $3.8million write-down is $1.6 million write-down of inventory that was being heldfor future use. The write-down is based on current market conditions.

 

**(21)****             ****Accounting Change in Estimate –Depreciation**

 

Effective October 1, 2005 we have changed ourdepreciable lives used to depreciate our Flight Services flight assets frombeing fully depreciated by June 2016 to being fully depreciated by December 2010.We have reviewed the latest NASA planning manifest schedule for the shuttlesand the manifest carries the scheduled shuttle flights out to 2009 with anadditional one year period for mission delays. Our analysis has taken intoconsideration the association of our assets to the shuttle fleet based on thefact that our assets have been designed to fly on the shuttles, and the revenuegenerated from the assets is directly related to the NASA shuttle missions. Theshuttle retirement could occur at an earlier or later date which would changefuture depreciation recognized upon revision of the useful life.

 

Effective July 1, 2007, we have changed our depreciablelives to depreciate our Flight Services flight assets from being fullydepreciated by December 2010 to being fully depreciated August 31,2007. This is due to our last contracted mission, STS-118, being completed in August 2007.

 

**(22)****             ****Gain on Sale of The Space StoreLLC**

 

On October 13, 2006 the Company consummated atransaction in which Space Media, Inc., a majority-owned subsidiary ofSPACEHAB, Inc., sold the assets of The Space Store LLC, consisting ofretail and internet identity, inventory, furniture, fixtures, and other items.Due to the immaterial amount and insignificant impact this transaction willhave on our financial statements, we elected to not present this discontinuedoperation as a separate component in our consolidated statements of operationsfor the three months ended December 31, 2006. The gain on the sale isreflected in the interest and other income section on our financial statements.

 

44

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**(23)****             ****Legal Proceedings**

 

In January 2004 theCompany initiated a formal proceeding against NASA in which the Company wasseeking damages in the amount of $87.7 million for the loss of its ResearchDouble Module (“RDM”) as a result of the Columbia accident. In October 2004,NASA responded to this claim with the determination that its liability was $8.2million, including interest, and paid SPACEHAB this amount. SPACEHABsubsequently filed an appeal with the Armed Services Board of Contract Appealsand over the past two years, the two parties have proceeded with preparationsfor a court hearing planned for July 2008. The Company also filed a tortclaim in November 2004, seeking damages of $79.7 million for the loss ofthe RDM, to which the court granted a motion in June 2006 to stay the caseuntil resolution of the Company’s contract claim appeal.

 

In October 2004 we received payment from NASAin the amount of $8.2 million which included $0.2 million of interest. NASA’sclaims were that their liability was limited to $8.0 million under the Researchand Logistics Mission Support contract (NAS9-97199), as specifically identifiedin clause H.11 – titled “Contingent Property Liability.”

 

This $8.2 million indemnification payment andinterest payment was accordingly recorded as a “Recovery of nonrecurring charge”in the September 30, 2004 financials, resulting in a change in cash flowsfrom operating activities.

 

On February 21, 2007, the Company dismissedwith prejudice all litigation against NASA relating to losses incurred by theCompany as a result of the February 2003 Space Shuttle Columbia accident.

 

As a result of the claim dismissal, the Company paidLloyd’s of London, the insurer of the RDM, $0.5 million in accordance with the May 12,2005 agreement with Lloyd’s.

 

Except as above, the Company is not a party to anypending or threatened proceedings, which in management’s opinion, would have amaterial adverse effect on our business, financial condition, or results ofoperation.

 

**(24)****             ****Restricted Cash and Advances onConstruction Contract**

 

In December 2006 our Astrotech subsidiary wasawarded a contract with a governmental agency to modify one of our payloadprocessing facilities to specific requirements of a programmed mission. Underthe terms of this $20.0 million fixed price contract, we will own theimprovements after completion of the contract obligations. We have entered intoa firm fixed price construction subcontract with J. P. Donovan Construction, Inc.to provide a significant portion of the design and construction work that willbe required under our contract. In accordance with our contracts, payments willbe received from our customer on a milestone schedule that generally providesreceipt of cash before payments are required to the contractor under theirmilestone schedule. Receipts in advance of disbursements will be retained in arestricted cash account within our subsidiary company and used exclusively forpurposes of the contract obligations. As of June 30, 2007, net cashreceipts of $6.3 million have been designated as restricted cash and $5.7million has been designated as a liability.

 

Restricted cash is excluded from current assetsunder ARB 43 as resources designated for the expenditure in the acquisition orconstruction of non current assets and is classified as other assets. The liabilityfor advances of such construction contract is included as a non currentliability.

 

**(25)****             ****Adverse Event**

 

On January 30, 2007 Sea Launch experienced alaunch failure resulting in the loss of a satellite and damage to the floatinglaunch platform. A full inspection, evaluation, and repair operations of thedamage incurred and preliminary reports indicate that Sea Launch will return tooperations in October 2007. We are paid under our contract with Sea Launchupon launch of each mission; therefore, anticipated revenues have been delayeduntil the resumption of normal operations.

 

**(26)****             ****Customer Deposits**

 

During the quarter ended March 31, 2007 webilled to our customer $3.1 million for in-flight insurance on our pressurizedmodule for use on STS-118. STS-118 launched mid-August 2007. This amountis included in cash and in customer deposits as of June 30, 2007. Theinsurance payment was paid to the insurance carrier in July 2007.

 

45

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**(27)****             ****Subsequent Events**

 

## ***Tender Offer***

## *** ***

On August 31, 2007 we filed a Schedule TOpursuant to Rule 13e-4 promulgated under the Securities Exchange Act of1934, as amended, in connection with the Company’s offer to exchange (the “ExchangeOffer”) 74 shares of common stock and 1.2 shares of Series C ConvertiblePreferred Stock for each $1,000 principal amount of outstanding 8% ConvertibleSubordinated Notes due 2007 (the “Junior Notes”) up to $10,306,000 in aggregateprincipal amount of the Junior Notes and 667 shares of common stock and 1 shareof Series C Convertible Preferred Stock for each $1,000 principal amountof outstanding 5.5% Senior Convertible Notes due 2010 (the “Senior Notes”) upto $52,944,000 in aggregate principal amount of the Senior Notes, upon theterms and subject to the conditions set forth in the Company’s offeringmemorandum, dated August 31, 2007 (the “Offering Memorandum”), and therelated Exchange Offer materials which are filed as Exhibits (a)(1)(B) to(a)(1)(I) of the Schedule TO (which Offering Memorandum and relatedExchange Offer materials, as amended or supplemented from time to time,collectively constitute the “Offer Materials”).

 

The Junior Notes were issued pursuant to anIndenture, dated as of October 15, 1997, as amended by a FirstSupplemental Indenture, dated as of November 22, 2005, among the Companyand U.S. Bank National Association (formerly, Wachovia Bank, NationalAssociation). The Senior Notes were issued pursuant to an Indenture, dated asof November 22, 2005, among the Company and U.S. Bank National Association(formerly, Wachovia Bank, National Association).

 

The Exchange Offer expires on October 1, 2007,which we refer to as the expiration date, unless extended.

 

## ***Agreement to Termination of ICC and VCC Leases***

## *** ***

On August 28, 2007, the Company and Astrium,GmbH mutually agreed to terminate the lease agreement dated as of February 28,2001 in regards to the Company’s lease of the Integrated Cargo Carriers (ICC)assets from Astrium, GmbH. Also, we mutually agreed to terminate the leaseagreement dated as of July 3, 2001 in regards to the Company’s lease ofthe Vertical Cargo Carrier (VCC) assets from Astrium, GmbH. In order toterminate these two leases, we have mutually agreed that the Company willreimburse Astrium, GmbH $1,389,000 for the period March 1, 2007 through August 31,2007 for the ICC assets and incur no financial obligations for either the ICCor VCC after August 31, 2007.

 

# **Item 9.  Changes in and Disagreements with Accountantson Accounting and Financial Disclosure.**

#  

In January 2007, we discharged Grant Thornton LLPas our independent auditors and engaged PMB Helin Donovan LLP as ourindependent auditors. We had no disagreements as to accounting policy ordisclosure with Grant Thornton LLP at the time.

 

# **Item 9A.  Controls and Procedures.**

#  

Under the supervision and with the participation ofour management, including our principal executive officer and principalfinancial officer, we have evaluated the effectiveness of our design andoperation of our disclosure controls and procedures as of the end of the periodcovered by this annual report, and, based on the evaluation, our principalexecutive officer and principal financial officer have concluded that thesecontrols and procedures are effective. There have been no changes in ourinternal control over financial reporting that occurred during our last fiscalquarter that have materially affected, or are reasonably likely to materiallyeffect, our internal control over financial reporting.

 

Disclosure controls and procedures are our controlsand other procedures that are designed to ensure that information required tobe disclosed by us in the reports that we file or submit under the Exchange Actis recorded, processed, summarized, and reported, within the time periodsspecified in the Securities and Exchange Commission’s rules and forms.Disclosure controls and procedures include, without limitation, controls andprocedures designed to ensure that information required to be disclosed by usin the reports that we file under the Exchange Act is accumulated andcommunicated to our management, including our principal executive officer andprincipal financial officer, as appropriate to allow timely decisions regardingrequired disclosure.

 

# **Item 9B.  Other Information.**

#  

None to reportfor the period ended June 30, 2007.

 

46

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**PART IV**

** **

# **Item15.  Exhibits, Financial StatementSchedules.**

#  

| 1.     |   | The  following documents are filed as part of the report:                                                                                                                                     |     |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------|
|   |   |                                                                                                                                                                                          |     |
| a.     |   | Financial  Statements.                                                                                                                                                                        |     |
|   |   |                                                                                                                                                                                          |     |
|   |   | The  following consolidated financial statements of SPACEHAB, Incorporated and its  wholly-owned and majority-owned subsidiaries and related notes, are set forth  herein as indicated below. |     |
|   |   |                                                                                                                                                                                          | **Page** |
|   |   | Report of PMB Helin Donovan LLP, Independent  Registered Public Accounting Firm                                                                                                               | 22       |
|   |   | Report of Grant Thornton LLP, Independent Registered  Public Accounting Firm                                                                                                                  | 23       |
|   |   | Consolidated Balance  Sheets                                                                                                                                                                  | 24       |
|   |   | Consolidated Statements of Operations                                                                                                                                                         | 25       |
|   |   | Consolidated Statements of Stockholders’ Equity and  Comprehensive Income (Loss)                                                                                                         | 26       |
|   |   | Consolidated  Statements of Cash Flows                                                                                                                                                        | 27       |
|   |   | Notes to Consolidated Financial Statements                                                                                                                                                    | 28       |
|   |   |                                                                                                                                                                                          |     |
| 2.     |   | Financial Statement  Schedules                                                                                                                                                                | 47       |
|   |   |                                                                                                                                                                                          |     |
| 3.     |   | Exhibits                                                                                                                                                                                      | 48       |

 

47

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| **Exhibit No.** | ** ** | **Description of Exhibit** |
|----------------------|------------|----------------------------|
| ** **           |
| **(2)**              | ** ** | ** **                 | **Articles  of Incorporation and Bylaws** |
| ** **           |       |                       |   |
| ** **           | 2.1**      |                       | Amended and Restated  Articles of Incorporation of the Registrant, as amended (incorporated by  reference to Exhibit 4.1 of the Registrant’s Registration Statement  (Reg. No. 333-126772), and all amendments thereto, filed with the  Securities and Exchange Commission on July 21, 2005) |
| ** **           |       |                       |   |
| ** **           | 2.2**      |                       | Bylaws of the  Registrant (incorporated by reference to the Registrant’s registration  statement on Form S-1, File No. 33- 97812, and all amendments  thereto, filed with the Securities and Exchange Commission on October 5,  1995) |
| ** **           |       |                       |   |
| **(4)**              | ** ** | ** **                 | **Instruments Defining the Rights of  Security Holders, including Indentures** |
| ** **           |       |                       |   |
| ** **           | 4.1**      |                       | Designation of Rights,  Terms and Preferences of Series B Senior Convertible Preferred Stock of  the Registrant (incorporated by reference to Exhibit 4.3 of the  Registrant’s Registration Statement (Reg. No. 333-126772), and all  amendments thereto, filed with the Securities and Exchange Commission on  July 21, 2005) |
| ** **           |       |                       |   |
| ** **           | 4.2**      |                       | Preferred Stock  Purchase Agreement between the Registrant and DaimlerChrysler Aerospace AG  dated as of August 2, 1999 (incorporated by reference to  Exhibit 4.2 of the Registrant’s Report on Form 8-K filed with the  Securities and Exchange Commission on August 19, 1999) |
| ** **           |       |                       |   |
| ** **           | 4.3**      |                       | Registration Rights  Agreement between the Registrant and DaimlerChrysler Aerospace AG dated as of  August 5, 1999 (incorporated by reference to Exhibit 4.3 of the  Registrant’s Report on Form 8-K filed with the Securities and Exchange  Commission on August 19, 1999) |
| ** **           |       |                       |   |
| ** **           | 4.4**      |                       | Indenture dated as of  October 15, 1997 between the Registrant and First Union National Bank,  as Trustee, relating to the Registrant’s 8% Convertible Subordinated Notes  due 2007 (incorporated by reference to Exhibit 4.1 of the Registrant’s  Registration Statement on Form S-3 (Reg. No. 333-43221) filed with  the Securities and Exchange Commission on December 24, 1997) |
| ** **           |       |                       |   |
| **(10)**             | ** ** | ** **                 | **Material  Contracts** |
| ** **           | ** ** | ** **                 | ** ** |
| ** **           | 10.1**     |                       | Letter Agreement dated  August 15, 1995, by and between the Registrant and Mitsubishi  Corporation (incorporated by reference to Exhibit 10.7 of the  Registrant’s Registration Statement on Form S-1 (Reg. No. 33-97812)  filed with the Securities and Exchange Commission on October 5, 1995) |
| ** **           |       |                       |   |   |   |
| ** **           | 10.2**     |                       | SPACEHAB, Incorporated  1995 Directors’ Stock Option Plan as amended and restated effective  October 21, 1997 (incorporated by reference to Exhibit B of the  Registrant’s Definitive Proxy Statement on Schedule 14A filed with the  Securities and Exchange Commission on September 12, 1997) |
| ** **           |       |                       |   |   |   |
| ** **           | 10.3**     |                       | Office Building Lease  Agreement, dated October 6, 1993, between Astrotech and the Secretary of  the Air Force (Lease number SPCVAN – 2-94-001) (incorporated by reference to  Exhibit 10.52 of the Registrant’s Annual Report on Form 10-K for  the fiscal year ended June 30, 1997 filed with the Securities and  Exchange Commission on September 12, 1997) |
| ** **           |       |                       |   |   |   |
| ** **           | 10.4**     |                       | SPACEHAB, Incorporated  1994 Stock Incentive Plan as amended and restated effective October 14,  1999 (incorporated by reference to Exhibit 10.90 of the Registrant’s  Annual Report on Form 10-K for the fiscal year ended June 30, 1999  filed with the Securities and Exchange Commission on September 17, 1999) |
| ** **           |       |                       |   |   |   |
| ** **           | 10.5**     |                       | Agreement, dated  September 30, 2004, between the Registrant and Dr. Shelley A.  Harrison (incorporated by reference to Exhibit 10.7 of the Registrant’s  Registration Statement (Reg. No. 333-126772), and all amendments  thereto, filed with the Securities and Exchange Commission on July 21,  2005) |
|                      |            |                            |  |  |  |  |

 

48

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| ** ** | 10.6**  |   | Lease for property at  300 D Street, SW, Suite#814, Washington, DC, dated as of December 16,  1998, by and between the Registrant and The Washington Design Center, LLC  (incorporated by reference to Exhibit 10.8 of the Registrant’s  Registration Statement (Reg. No. 333-126772), and all amendments  thereto, filed with the Securities and Exchange Commission on July 21, 2005) |
|------------|---------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** |    |   |                                                                                                                                                                                                                                                                                                                                                                                                             |
| ** ** | 10.7**  |   | Sublease Agreement,  dated as of July, 2002, between the Registrant and The Boeing Company  (incorporated by reference to Exhibit 10.9 of the Registrant’s  Registration Statement (Reg. No. 333-126772), and all amendments  thereto, filed with the Securities and Exchange Commission on July 21,  2005)                                                                                  |
| ** ** |    |   |                                                                                                                                                                                                                                                                                                                                                                                                             |
| ** ** | 10.8**  |   | SPACEHAB, Incorporated  1997 Employee Stock Purchase Plan (incorporated by reference to  Exhibit C of the Registrant’s Definitive Proxy Statement on Schedule 14A  filed with the Securities and Exchange Commission on September 12, 1997)                                                                                                                                                       |
| ** ** |    |   |                                                                                                                                                                                                                                                                                                                                                                                                             |
| ** ** | 10.9**  |   | Agreement between  Astrotech Space Operations, Inc. and McDonnell Douglas Corporation,  dated January 7, 2000 (incorporated by reference to Exhibit 10.103  of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended  March 31, 2000 filed with the Securities and Exchange Commission on  May 12, 2000)                                                       |
| ** ** |    |   |                                                                                                                                                                                                                                                                                                                                                                                                             |
| ** ** | 10.10** |   | Agreement between  Astrotech Space Operations, Inc. and Lockheed Martin Commercial Launch  Services, Inc., dated January 24, 2000 (incorporated by reference  to Exhibit 10.104 of the Registrant’s Quarterly Report on Form 10-Q  for the quarter ended March 31, 2000 filed with the Securities and  Exchange Commission on May 12, 2000)                              |
| ** ** |    |   |                                                                                                                                                                                                                                                                                                                                                                                                             |
| ** ** | 10.11** |   | Credit agreement dated  as of August 30, 2001 by and between Astrotech Florida  Holdings, Inc. and SouthTrust Bank (incorporated by reference to  Exhibit 10.114 of the Registrant’s Quarterly Report on Form 10-Q  for the quarter ended September 30, 2001 filed with the Securities and  Exchange Commission on November 8, 2001)                                          |
| ** ** |    |   |                                                                                                                                                                                                                                                                                                                                                                                                             |
| ** ** | 10.12** |   | Employment and  Non-Interference Agreement, dated as of April 1, 2003, between the  Registrant and Michael E. Kearney (incorporated by reference to  Exhibit 10.119 of the Registrant’s Quarterly Report on Form 10-Q for  the quarter ended March 31, 2003 filed with the Securities and Exchange  Commission on May 14, 2003)                                                    |
| ** ** |    |   |                                                                                                                                                                                                                                                                                                                                                                                                             |
| ** ** | 10.13** |   | First amendment to the  Credit Agreement dated as of August 30, 2001 by and between Astrotech  Florida Holdings, Inc. and SouthTrust Bank (incorporated by reference to  Exhibit 10.122 of the Registrant’s Quarterly Report on Form 10-Q  for the quarter ended December 31, 2003 filed with the Securities and  Exchange Commission on February 13, 2004)                   |
| ** ** |    |   |                                                                                                                                                                                                                                                                                                                                                                                                             |
| ** ** | 10.14** |   | Employment and  Non-Interference Agreement, dated as of January 9, 2004, between the  Registrant and Brian K. Harrington (incorporated by reference to  Exhibit 10.123 of the Registrant’s Quarterly Report on Form 10-Q  for the quarter ended March 31, 2004 filed with the Securities and  Exchange Commission on May 12, 2004)                                                 |
| ** ** |    |   |                                                                                                                                                                                                                                                                                                                                                                                                             |
| ** ** | 10.15** |   | 50 Year Lease, dated as  of February 1, 1991, between the Registrant and Canaveral Port Authority  (incorporated by reference to Exhibit 10.17 of the Registrant’s  Registration Statement (Reg. No. 333-126772), and all amendments  thereto, filed with the Securities and Exchange Commission on July 21,  2005)                                                                     |
| ** ** |    |   |                                                                                                                                                                                                                                                                                                                                                                                                             |
| ** ** | 10.16** |   | Commercial Contract,  dated as of March 3, 2005, between the Registrant and Tamir Silvers, LLC  (incorporated by reference to Exhibit 10.18 of the Registrant’s  Registration Statement (Reg. No. 333-126772), and all amendments  thereto, filed with the Securities and Exchange Commission on July 21,  2005)                                                                        |
| ** ** |    |   |                                                                                                                                                                                                                                                                                                                                                                                                             |
| ** ** | 10.17** |   | Lease Agreement, dated  as of February 18, 2005, between the Registrant and R & H  Investments, a California partnership (incorporated by reference to  Exhibit 10.19 of the Registrant’s Registration Statement (Reg.  No. 333-126772), and all amendments thereto, filed with the Securities  and Exchange Commission on July 21, 2005)                                      |

 

49

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| ** ** | 10.18** |   | Fixed Price Subcontract  889208 for Wideband Gapfiller Satellite Program Launch Site Payload  Processing Facilities and Services, dated as of January 18, 2005,  between Boeing Satellite Systems, Inc. and Astrotech Space  Operations, Inc. (incorporated by reference to Exhibit 10.20 of the  Registrant’s Registration Statement (Reg. No. 333-126772), and all  amendments thereto, filed with the Securities and Exchange Commission on  July 21, 2005) |
|------------|---------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** |    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| ** ** | 10.19** |   | Loan Agreement, dated  as of February 11, 2005, between the Registrant and First American Bank,  SSB (incorporated by reference to Exhibit 10.125 to the Registrant’s  Quarterly Report on Form 10-Q for the quarter ended December 31,  2004 filed with the Securities and Exchange Commission on February 14,  2005)                                                                                                                                              |
| ** ** |    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| ** ** | 10.20** |   | Letter Contract  No. GF80726B11, dated as of February 18, 2004, between the  Registrant and Lockheed Martin Corporation (incorporated by reference to  Exhibit 10.23 of the Registrant’s Registration Statement (Reg.  No. 333-126772), and all amendments thereto, filed with the Securities  and Exchange Commission on July 21, 2005)                                                                                                                            |
| ** ** |    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |   |
| ** ** | 10.21** |   | ISS Program Integration  and Control Contract, between SPACEHAB Government Services, Inc. and  ARES Corporation (incorporated by reference to Exhibit 10.24 of the  Registrant’s Registration Statement (Reg. No. 333-126772), and all  amendments thereto, filed with the Securities and Exchange Commission on  July 21, 2005)                                                                                                                                         |
| ** ** |    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |   |
| ** ** | 10.22** |   | Asset Purchase  Agreement, dated as of December 19, 2000, between the Registrant and  Astrium GmbH. (incorporated by reference to Exhibit 10.27 of the  Registrant’s Registration Statement (Reg. No. 333-126772), and all  amendments thereto, filed with the Securities and Exchange Commission on July 21,  2005)                                                                                                                                                     |
| ** ** |    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |   |
| ** ** | 10.23** |   | Amendment No. 1 to  Asset Purchase Agreement, dated as of December 19, 2000, between the  Registrant and Astrium GmbH, dated July 3, 2001 (incorporated by  reference to Exhibit 10.28 of the Registrant’s Registration Statement  (Reg. No. 333-126772), and all amendments thereto, filed with the  Securities and Exchange Commission on July 21, 2005)                                                                                                     |
| ** ** |    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |   |
| ** ** | 10.24** |   | Lease Agreement, dated  as of February 28, 2001, between the Registrant and Astrium GmbH  (incorporated by reference to Exhibit 10.29 of the Registrant’s  Registration Statement (Reg. No. 333-126772), and all amendments  thereto, filed with the Securities and Exchange Commission on July 21,  2005)                                                                                                                                                               |
| ** ** |    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |   |
| ** ** | 10.25** |   | Binding Term Sheet,  dated as of December 19, 2001, between the Registrant and Astrium GmbH,  amending the Lease Agreement, dated as of February 28, 2001, between the  Registrant and Astrium GmbH (incorporated by reference to Exhibit 10.30  of the Registrant’s Registration Statement (Reg. No. 333-126772), and  all amendments thereto, filed with the Securities and Exchange Commission on  July 21, 2005)                                                |
| ** ** |    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |   |
| ** ** | 10.26** |   | Lease Agreement, dated  as of July 3, 2001, between the Registrant and Astrium GmbH  (incorporated by reference to Exhibit 10.31 of the Registrant’s  Registration Statement (Reg. No. 333-126772), and all amendments  thereto, filed with the Securities and Exchange Commission on July 21,  2005)                                                                                                                                                                    |
| ** ** |    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |   |
| ** ** | 10.27** |   | Agreement  No. 48801 for Provision of Payload Processing Facilities and Support in  Conjunction with Commercial Atlas Launches, between Astrotech Space  Operations, Inc. and Lockheed Martin Commercial Launch  Services, Inc. (incorporated by reference to Exhibit 10.32 of the  Registrant’s Registration Statement (Reg. No. 333-126772), and all  amendments thereto, filed with the Securities and Exchange Commission on  July 21, 2005)               |
| ** ** |    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |   |
| ** ** | 10.28** |   | Contract  No. NNK04LA75C, dated as of July 2, 2004, between Astrotech Space  Operations, Inc. and John F. Kennedy Space Center, NASA (incorporated by  reference to Exhibit 10.33 of the Registrant’s Registration Statement  (Reg. No. 333-126772), and all amendments thereto, filed with the  Securities and Exchange Commission on July 21, 2005)                                                                                                          |

 

50

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| ** ** | 10.29** |   | Agreement and Statement  of Work, dated as of April 25, 1996 and as amended by Amendment  No. 3 as of December 6, 2002, between Astrotech Space  Operations, Inc. and Sea Launch Company, L.L.C. (incorporated by  reference to Exhibit 10.34 of the Registrant’s Registration Statement  (Reg. No. 333-126772), and all amendments thereto, filed with the  Securities and Exchange Commission on July 21, 2005)                                                                                |
|------------|---------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** |    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |   |
| ** ** | 10.30** |   | Employment and  Non-Interference Agreement, dated as of May 12, 2005, between the  Registrant and Michael E. Bain (incorporated by reference to  Exhibit 10.35 of the Registrant’s Registration Statement (Reg.  No. 333-126772), and all amendments thereto, filed with the Securities  and Exchange Commission on July 21, 2005)                                                                                                                                                                              |
| ** ** |    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |   |
| ** ** | 10.31** |   | Employment and  Non-Interference Agreement, dated as of May 12, 2005, between the  Registrant and E. Michael Chewning (incorporated by reference to  Exhibit 10.36 of the Registrant’s Registration Statement (Reg.  No. 333-126772), and all amendments thereto, filed with the Securities  and Exchange Commission on July 21, 2005)                                                                                                                                                                          |
| ** ** |    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |   |
| ** ** | 10.32** |   | Settlement Agreement  and Mutual Release of All Claims, dated as of May 25, 2005, among the  Registrant and Lloyd’s of London, Goshawk Syndicate No. 102, Euclidian  Syndicate No. 1243, Ascot Underwriting Ltd. Syndicate No. 1414, and  R.J. Kiln Syndicate No. 510 (incorporated by reference to  Exhibit 10.37 of the Registrant’s Registration Statement (Reg.  No. 333-126772), and all amendments thereto, filed with the Securities  and Exchange Commission on July 21, 2005) |
| ** ** |    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |   |
| ** ** | 10.33** |   | Lease  No. SPCVAN-2-94-0001, between the Secretary of the Air Force and  Astrotech Space Operations, L.P. (incorporated by reference to  Exhibit 10.39 of the Registrant’s Registration Statement (Reg.  No. 333-126772), and all amendments thereto, filed with the Securities  and Exchange Commission on July 21, 2005)                                                                                                                                                                                      |
| ** ** |    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |   |
| ** ** | 10.34** |   | Strategic Collaboration  Agreement, dated as of August 5, 1999, between the Registrant and  DaimlerChrysler Aerospace AG (incorporated by reference to Exhibit 10.40  of the Registrant’s Registration Statement (Reg. No. 333-126772), and  all amendments thereto, filed with the Securities and Exchange Commission on  July 21, 2005)                                                                                                                                                                       |
| ** ** |    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |   |
| ** ** | 10.35** |   | Guaranty Agreement,  dated as of August 30, 2001, between the Registrant and SouthTrust Bank  (incorporated by reference to Exhibit 10.41 of the Registrant’s  Registration Statement (Reg. No. 333-126772), and all amendments  thereto, filed with the Securities and Exchange Commission on July 21,  2005)                                                                                                                                                                                                  |
| ** ** |    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |   |
| ** ** | 10.36** |   | Guaranty Agreement,  dated as of August 30, 2001, between Astrotech Space  Operations, Inc. and SouthTrust Bank (incorporated by reference to  Exhibit 10.42 of the Registrant’s Registration Statement (Reg.  No. 333-126772), and all amendments thereto, filed with the Securities  and Exchange Commission on July 21, 2005)                                                                                                                                                                           |
| ** ** |    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |   |
| ** ** | 10.37** |   | Stock Pledge and  Security Agreement, dated as of August 30, 2001, between the Registrant  and SouthTrust Bank (incorporated by reference to Exhibit 10.43 of the  Registrant’s Registration Statement (Reg. No. 333-126772), and all  amendments thereto, filed with the Securities and Exchange Commission on  July 21, 2005)                                                                                                                                                                                 |
| ** ** |    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| ** ** | 10.38** |   | Stock Pledge and  Security Agreement, dated as of August 30, 2001, between Astrotech Space  Operations, Inc. and SouthTrust Bank (incorporated by reference to  Exhibit 10.44 of the Registrant’s Registration Statement (Reg.  No. 333-126772), and all amendments thereto, filed with the Securities  and Exchange Commission on July 21, 2005)                                                                                                                                                          |
| ** ** |    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| ** ** | 10.39** |   | Assignment of CLIN 1  Rights, dated as of August 30, 2001, between Astrotech Space  Operations, Inc. and SouthTrust Bank (incorporated by reference to  Exhibit 10.45 of the Registrant’s Registration Statement (Reg.  No. 333-126772), and all amendments thereto, filed with the Securities  and Exchange Commission on July 21, 2005)                                                                                                                                                                  |
| ** ** |    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| ** ** | 10.40** |   | Termination Agreement,  dated as of June 1, 2004, between the Registrant and Vladimir J. Fishel  (incorporated by reference to Exhibit 10.46 of the Registrant’s  Registration Statement (Reg. No. 333-126772), and all amendments  thereto, filed with the Securities and Exchange Commission on July 21,  2005)                                                                                                                                                                                               |

 

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| ** ** | 10.41**    |       | Memorandum of  Understanding, dated as of June 8, 2005, between the Registrant and SMH  Capital Advisors, Inc. (incorporated by reference to Exhibit 10.47  of the Registrant’s Registration Statement (Reg. No. 333-126772), and  all amendments thereto, filed with the Securities and Exchange Commission on  July 21, 2005)                                                                                      |
|------------|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** |       |       |
| ** ** | 10.42**    |       | Space Media, Inc.  Stock Option Plan (incorporated by reference to Exhibit 10.48 of the  Registrant’s Registration Statement (Reg. No. 333-126772), and all  amendments thereto, filed with the Securities and Exchange Commission on  July 21, 2005)                                                                                                                                                                     |
| ** ** |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   |
| ** ** | 10.43**    |       | First Amendment to Loan  Agreement (incorporated by reference to Exhibit 10.49 of the  Registrant’s Current Report on 8-K filed with the Securities Exchange  Commission on November 10, 2005), effective September 30, 2005  between SPACEHAB, Incorporated (the “Borrower”) and Citibank Texas, N.A.,  formerly known as First American Bank, SSB (the “Lender”), as executed on  November 10, 2005 |
| ** ** |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   |
| ** ** | 10.44**    |       | Second Amendment to  Loan Agreement (incorporated by reference to Exhibit 10.50 of the  Registrant’s Current Report on 8-K filed with the Securities Exchange  Commission on March 3, 2006), dated February 11, 2006 between  SPACEHAB, Incorporated (the “Borrower”) and Citibank Texas, N.A., formerly  known as First American Bank, SSB (the “Lender”), as executed on  February 28, 2006         |
| ** ** |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   |
| ** ** | 10.45**    |       | Separation Agreement  and Mutual Release, dated as of December 15, 2006, between the  Registrant and Michael E. Kearney (incorporated by reference to  Exhibit 10.1 of the Registrant’s Current Report on Form 8-K, filed  with the Securities and Exchange Commission on December 15, 2006)                                                                                                                              |
| ** ** |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   |
| ** ** | 10.46**    |       | Separation Agreement  and Mutual Release, dated as of January 19, 2007, between the Registrant  and Michael E. Bain (incorporated by reference to Exhibit 10.1 of the  Registrant’s Quarterly Report on 10-Q, filed with the Securities and Exchange  Commission on February 14, 2007)                                                                                                                                         |
| ** ** |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   |
| ** ** | 10.47**    |       | Separation Agreement  and Mutual Release, dated as of January 19, 2007, between the Registrant  and E. Michael Chewning (incorporated by reference to Exhibit 10.2 of  the Registrant’s Quarterly Report on 10-Q, filed with the Securities and  Exchange Commission on February 14, 2007)                                                                                                                                     |
| ** ** |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   |
| ** ** | 10.48**    |       | Employment and  Non-Interference Agreement, dated as of June 4, 2007, between the  Registrant and Michael J. Bowker (incorporated by reference to  Exhibit 10.1 of the Registrant’s Current Report on Form 8-K, filed  with the Securities and Exchange Commission on June 12, 2007)                                                                                                                                      |
| ** ** |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   |
| ** ** | 10.49**    |       | Contract  No. NNK07LA79C, dated as of June 15, 2007, between Astrotech Space  Operations, Inc. and NASA Kennedy Space Center                                                                                                                                                                                                                                                                                                        |
| ** ** |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   |
| **(16)**   | ** ** | ** ** | **Letter  Regarding Change in Certifying Accountant**                                                                                                                                                                                                                                                                                                                                                                                              |
| ** ** | ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| ** ** | 16.1**     |       | Letter from Grant  Thornton LLP regarding change in certifying accountant, dated  January 18, 2007 (incorporated by reference to Exhibit 16 of the  Registrant’s Current Report on Form 8-K filed with the Securities and  Exchange Commission on January 19, 2007)                                                                                                                                                       |
| ** ** |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   |
| **(21)**   | ** ** | ** ** | **SPACEHAB, Incorporated and Subsidiaries –  Subsidiaries of the Registrant**                                                                                                                                                                                                                                                                                                                                                                 |
| ** ** | ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| **(23)**   | ** ** | ** ** | **Consents of Experts and Counsel**                                                                                                                                                                                                                                                                                                                                                                                                                |
| ** ** | ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| ** ** | 23.1**     |       | Consent of PMB Helin Donovan  LLP                                                                                                                                                                                                                                                                                                                                                                                                                  |
| ** ** |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| ** ** | 23.2**     |       | Consent of Grant Thornton LLP                                                                                                                                                                                                                                                                                                                                                                                                                      |
| ** ** |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| **(31)**   | ** ** | ** ** | **Rule 13a-14(a) Certifications**                                                                                                                                                                                                                                                                                                                                                                                                        |
| ** ** | ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| ** ** | 31.1**     |       | Certification of Thomas  B. Pickens, III, the Company’s Chief Executive Officer, pursuant to 18  U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002, file herewith                                                                                                                                                                                                                     |

 

52

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| ** ** | 31.2**     |       | Certification of Brian  K. Harrington, the Company’s Senior Vice President and Chief Financial  Officer, pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002, file herewith |
|------------|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** |       |       |                                                                                                                                                                                                                                             |
| **(32)**   | ** ** | ** ** | **Section 1350  Certifications**                                                                                                                                                                                                            |
| ** ** | ** ** | ** ** | ** **                                                                                                                                                                                                                                       |
| ** ** | 32.1**     |       | Certification of Thomas  B. Pickens, III, the Company’s Chief Executive Officer, pursuant to 18  U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002, file herewith                   |
| ** ** |       |       |                                                                                                                                                                                                                                             |
| ** ** | 32.2**     |       | Certification of Brian  K. Harrington, the Company’s Senior Vice President and Chief Financial  Officer, pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002, file herewith |
| ** ** |       |       |                                                                                                                                                                                                                                             |
| **(99)**   | ** ** | ** ** | **Additional Exhibits**                                                                                                                                                                                                                          |
| ** ** | ** ** | ** ** | ** **                                                                                                                                                                                                                                       |
| ** ** | 99.1**     |       | Schedule II – Valuation  and Qualifying Accounts                                                                                                                                                                                            |

----

**previously submitted

 

53

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**SIGNATURES**

** **

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.

 

SPACEHAB, Incorporated

 
|                         |   | By:                                   |  /s/Thomas B. Pickens, III |
|------------------------------|--------|---------------------------------------|--------------------------------------|
|                         |   | Thomas B.  Pickens, III          |
|                         |   | Chief  Executive Officer and Director |
|                         |   |                                  |
| Date: February 28, 2008 |   |                                  |
|                         |   |                                  |
|                         |   | By:                                   |  /s/Brian K. Harrington         |
|                         |   | Brian K.  Harrington                  |
|                         |   | Senior Vice  President and            |
|                         |   | Chief  Financial Officer              |
|                         |   |                                  |
| Date: February 28, 2008 |   |                                  |

 

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