**UNITED STATES**

**SECURITIES ANDEXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 10-K**

| **(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                               ** |
|                |            |                                                                                                                                                                                                                                                                                                                                                                                                                           |  |  |

** **

**CommissionFile No. 0-27206**

**SPACEHAB,Incorporated**

(Exact name of registrant as specified 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)      (Zip code)

**(713) 558-5000**

(Registrant’s telephone number, 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**       |       | **NASDAQ  Capital Market** |
| (no par value)          |       | ** **                 |

 

**Securities registered pursuant to Section 12(g) ofthe Act:**None

Indicate by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES o NO x

Indicate by check mark if the registrant isnot required to file reports pursuant to Section 13 or Section 15(d) of theAct. YES o NO x

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

YES x NO o

Indicate by check mark if disclosure ofdelinquent filers pursuant to Item 405 of Regulation S-K (229.405 of thischapter) is not contained herein, and will not be contained, to the best ofregistrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K. o

Indicateby check mark whether the registrant is a large accelerated filer anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Checkone):

Large accelerated filer o Accelerated filer o Non-accelerated filer x

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).

YES o NO x

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

As of September 19, 2007, 13,027,196 shares ofthe registrant’s Common Stock, no par value, were outstanding.

DOCUMENTSINCORPORATED BY REFERENCE:

Information called for inPart III of this Form 10-K is incorporated by reference to the registrant’sdefinitive Proxy Statement to be filed within 120 days after the end of theregistrant’s fiscal year in connection with the registrant’s annual meeting ofshareholders.

 

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**Table of Contents**
| **PART 1**   | ** ** | ** **                                                                                                          | ** ** |
|--------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|
| Item 1.      | ** ** | Business                                                                                                            | ** ** |
| Item 1A.     | ** ** | Risk Factors                                                                                                        | ** ** |
| Item 1B.     | ** ** | Unresolved  Staff Comments                                                                                          | ** ** |
| Item 2.      | ** ** | Properties                                                                                                          | ** ** |
| Item 3.      | ** ** | Legal Proceedings                                                                                                   | ** ** |
| Item 4.      | ** ** | Submission  of Matters to a Vote of Security Holders                                                                | ** ** |
| ** **   | ** ** | ** **                                                                                                          | ** ** |
| **PART II**  | ** ** | ** **                                                                                                          | ** ** |
| Item 5.      | ** ** | Market for  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities | ** ** |
| Item 6.      | ** ** | Selected  Financial Data                                                                                            | ** ** |
| Item 7.      | ** ** | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         | ** ** |
| Item 7A.     | ** ** | Quantitative  and Qualitative Disclosures about Market Risk                                                         | ** ** |
| Item 8.      | ** ** | Financial  Statements and Supplementary Data                                                                        | ** ** |
| Item 9.      | ** ** | Changes in  and Disagreements with Accountants on Accounting and Financial Disclosure                               | ** ** |
| Item 9A.     | ** ** | Controls and  Procedures                                                                                            | ** ** |
| Item 9B.     | ** ** | Other Information                                                                                                   | ** ** |
| ** **   | ** ** | ** **                                                                                                          | ** ** |
| **PART III** | ** ** | ** **                                                                                                          | ** ** |
| Item 10.     | ** ** | Directors  and Executive Officers of the Registrant                                                                 | ** ** |
| Item 11.     | ** ** | Executive  Compensation                                                                                             | ** ** |
| Item 12.     | ** ** | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                    | ** ** |
| Item 13.     | ** ** | Certain  Relationships and Related Transactions and Director Independence                                           | ** ** |
| Item 14.     | ** ** | Principal  Accounting Fees and Services                                                                             | ** ** |
| ** **   | ** ** | ** **                                                                                                          | ** ** |
| **PART IV**  | ** ** | ** **                                                                                                          | ** ** |
| Item 15.     | ** ** | Exhibits,  Financial Statement Schedules                                                                            | ** ** |
| ** **   | ** ** | ** **                                                                                                          | ** ** |
| SIGNATURES   | ** ** |

 

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**FORWARD-LOOKINGSTATEMENTS**

This Form 10-K contains “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of 1933 andSection 21E of the Securities Exchange Act of 1934. All statements other thanstatements of historical fact are “forward-looking statements” for purposes offederal and state securities laws. Forward-looking statements may include thewords “may,” “will,” “plans,” “believes,” “estimates,” “expects,” “intends” andother similar expressions. Such statements are subject to risks anduncertainties that could cause our actual results to differ materially fromthose projected in the statements. Such risks and uncertainties include, butare not limited to:

·                  Ourability to raise sufficient capital to meet our long and short-term liquidityrequirements;

·                  Ourability to successfully pursue our business plan;

·                  Uncertaintyabout our future liquidity;

·                  Whetherwe will fully realize the economic benefits under our NASA and other customercontracts;

·                  Completionof the International Space Station, and the continued availability and use ofthe U.S. Space Shuttle and the International Space Station;

·                  Technologicaldifficulties and potential legal claims arising from any technologicaldifficulties;

·                  Productdemand and market acceptance risks, including our ability to develop and sellproducts and services to be used by the manned and unmanned space programs thatreplace the Space Shuttle Program;

·                  Theeffect of economic conditions in the U.S. or other space faring nations thatcould impact our ability to access space and support or gain customers;

·                  Uncertaintyin government funding and support for key space programs;

·                  Theimpact of competition on our ability to win new contracts;

·                  Delaysand uncertainties in future space shuttle and the International Space Stationprograms;

·                  Uncertaintyin securing reliable and consistent access to space;

·                  Delaysin the timing of performance of other contracts; and

·                  Risksdescribed in the “Risk Factors” section of this Form 10-K.

Although we believe thatthe assumptions underlying our forward-looking statements are reasonable, anyof the assumptions could be inaccurate, and, therefore, we cannot assure youthat the forward-looking statements included in this Form 10-K will prove to beaccurate. In light of the significant uncertainties inherent in ourforward-looking statements, the inclusion of such information should not beregarded as a representation by us or any other person that our objectives andplans will be achieved. Some of these and other risks and uncertainties thatcould cause actual results to differ materially from such forward-lookingstatements are more fully described under the heading “Risk Factors” beginningon page four of this Form 10-K and elsewhere in this Form 10-K, or in thedocuments incorporated by reference herein. Except as may be required byapplicable law, we undertake no obligation to publicly update or advise of anychange in any forward-looking statement, whether as a result of newinformation, future events or otherwise. In making these statements, wedisclaim any obligation to address or update each factor in future filings withthe SEC or communications regarding our business or results, and we do notundertake to address how any of these factors may have caused changes todiscussions or information contained in previous filings or communications. Inaddition, any of the matters discussed above may have affected our past resultsand may affect future results, so that our actual results may differ materiallyfrom those expressed in this Form 10-K and in prior or subsequentcommunications.

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**PART1**

# DEFINITIONS

As used in this Form 10-K, the abbreviations and acronyms containedherein have the meanings set forth below. Additionally, the terms “SPACEHAB”, “theCompany”, “we”, “us” and “our” refer to SPACEHAB, Incorporated and itssubsidiaries, unless the context clearly indicates otherwise.
| 1994 Plan           | 1994 Stock Incentive Plan                     |
|---------------------|-----------------------------------------------|
| AAC                 | Applied Astronautics Corporation              |
| APB                 | Accounting Principles Board                   |
| ASO                 | Astrotech Space Operations                    |
| Astrium             | Astrium GmbH                                  |
| Astrotech           | Astrotech Space Operations                    |
| ATV                 | Automated Transfer Vehicle                    |
| Boeing              | The Boeing Company                            |
| CE&R            | Concept Exploration and Refinement            |
| Common Stock        | SPACEHAB Common Stock                         |
| ESP2                | External Stowage Platform 2                   |
| ESP3                | External Stowage Platform 3                   |
| FASB                | Financial Accounting Standards Board          |
| Flight Services     | SPACEHAB Flight Services                      |
| GAAP                | Generally Accepted Accounting Principles      |
| Government Services | SPACEHAB Government Services, Inc.            |
| ICC                 | Integrated Cargo Carrier                      |
| ISS                 | International Space Station                   |
| IVA                 | Intravehicular Activity                       |
| JAXA                | Japan Aerospace Exploration Agency            |
| Lloyd’s        | Lloyd’s of London                        |
| Lockheed Martin     | Lockheed Martin Corporation                   |
| NASA                | National Aeronautics and Space Administration |
| OSTM                | Ocean Surface Topography Mission              |
| PI&C            | Program Integration and Control               |
| RDM                 | Research Double Module                        |
| ReALMS              | Research and Logistics Mission Support        |
| RSC Energia         | Rocket Space Corporation-Energia              |
| SEC                 | Securities and Exchange Commission            |
| SFAS                | Statement of Financial Accounting Standards   |
| SMI                 | Space Media, Inc.                             |
| SMI Plan            | Space Media, Inc. Stock Option Plan           |
| USAF                | United States Air Force                       |

 

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**Item 1.  Business.**

# **Our Company**

We were incorporated as a Washington corporation in 1984. We provide arange of products and services that focus on the needs of industry, governmentsand academia requiring access to, and utilization of the unique environment ofspace. We employ a staff of engineers and technicians who have supportedapproximately 250 manned and unmanned missions to space from multiple locationsworldwide, including 23 space shuttle missions. We offer products and servicesin 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, and fabrication.

# **Our Business Units**

Our company is currently comprised of three primary business segmentswhich provide the following products and services to the government andcommercial 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 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. During fiscal year 2007, our Flight Services businessunit accounted for 65% of our consolidated revenues.

*Astrotech Space Operations*. OurAstrotech business unit provides modern facilities and support for thepreparation of multi-million dollar satellites and payloads for launch onexpendable launch vehicles. Since 1985, our Astrotech business unit has beenproviding government and commercial customers with a commercial alternative tousing government-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.

*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 and Control contractfor the International Space Station. The base contract period extends throughSeptember 2008 and can be extended for two additional one year terms at theelection of our NASA customer. Under this contract, we facilitate the assurancethat the tens of thousands of hardware and software parts and components meetapproved design and the configuration requirements for the International SpaceStation. During fiscal year 2007, our Government Services business unitaccounted for 11% of our consolidated revenues.

# **Short-Term Liquidity Issues**

Until August 2007, our primary source of revenues and cash flows wasour Flight Services unit. This business unit represented 65% of ourconsolidated revenues during fiscal year 2007. For the reasons discussed below,in August, the Company completed its last designated space shuttle mission employingmodules. We have written off the book value of these space assets and haveterminated our leases on certain other space shuttle assets. As a result, asubstantial component of historical revenue and cash flow will not be achievedin future periods.

We currently have $10,306,000 of Junior Notes which mature in October2007 and $52,944,000 of Senior Notes which mature in October 2010. If we do notconsummate our proposed exchange offer (see Note 27 of our audited consolidatedfinancial statements), we do not anticipate that we will be able to make theprincipal payments due on our Junior Notes in October 2007 without additionalfinancing.

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# **New Business Vision**

In anticipation of the planned 2010 space shuttle retirement, we begandeveloping new products and services. We are now focusing our business onapplying our core capabilities for the commercial exploitation of space. Thesenew 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

·                  Providingend-to-end services for commercial and government satellite operations.

Although we are developing products and services in support of the newbusiness vision, we currently do not have contracts or other arrangements toprovide these products and services. We cannot assure you that we will be ableto successfully develop these new products and services in the future. Weanticipate that we will require substantial additional capital to develop thesenew products and services, and that this additional financing will likelysubstantially dilute current holders of our common stock.

The following is a summary of our new business initiatives.

## ***Microgravity***

*Overview*. In the early days ofthe space program, it was determined that the effects of microgravity provideda unique environment that could potentially benefit humans. Over the life ofthe space shuttle and International Space Station programs, NASA has spentbillions of dollars on microgravity infrastructure and research experiments inorder to understand these effects. Many of these products and services have notbeen developed and we have been responsible for the logistics for severalhundred of these experiments on the space shuttle, the Russian Progressvehicle, the Mir Space Station, and the International Space Station.

On August 14, 2007, in an announcement that we believe bolsters thedevelopment of our microgravity business, NASA stated that it was seekingprivate industry proposals for research and manufacturing concepts andopportunities onboard the International Space Station. This announcement, alongwith Congress’ designation of the International Space Station as a NationalLaboratory, indicates NASA’s desire to open the International Space Station forthe benefit and profit of commercial projects. Because of our experience withmicrogravity, believe that we are well positioned to transition from handlingthe logistics of microgravity research projects to a fully commercializedmicrogravity design, transportation and processing operation.

*Microgravity Mission Design Initiative*.Based upon our microgravity logistics experience, we expect to prepare and sendcomplex processing facilities to space. This end-to-end service requires ourcore capabilities including:

·                  Payloadanalysis;

·                  Process andcontrol analysis;

·                  Product design;

·                  Flight hardwaremanufacturing;

·                  Hardware testand certification;

·                  Robotic facilitydevelopment;

·                  Payloadcontainment systems;

·                  Datacommunication systems; and

·                  Safetyanalysis and certification.

*Microgravity Transportation Initiative*.SPACEHAB microgravity transportation will encompass the planning andpreparation of microgravity payloads for installation and launch on a varietyof launch systems including the space shuttle, Russian Soyuz, Progress andPhoton, European ATV, Japanese HTV, our planned ARCTUS spacecraft, the SpaceXCorporation’s Dragon and Rocketplane Kistler’s K-1. These preparations willinclude preparing complex life science and material processing payloads tosurvive the extremities and complexities of a launch to microgravity. We expectto provide specialized transportation of payloads to the launch site andintegrate payloads into the launch vehicle. Returning payloads will then berecovered at the landing site where our personnel will remove the payload andtransport it to the post processing destination.

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*Microgravity Processing Initiative*.As part of our microgravity processing initiative, we have analyzed the resultsof a number of the experiments that we were logistically responsible for on thespace shuttle, the Russian Progress vehicle, the Mir Space Station, and theInternational Space Station. We have targeted potential products that webelieve can be developed in microgravity, that are within our core capabilitiesand that we believe provide proven value. In anticipation of this function, ourLogistics Training Module, located at the SPACEHAB Payload Processing Facilityin Cape Canaveral Florida, is being retrofitted as a training facility forapplications under our new microgravity processing initiative. We believe thatthis training facility will assist us with executing the very complex in-spaceprocessing procedures that will be necessary for us to successfully produceproducts developed in microgravity that are capable of being commercialized. Inaddition, we expect to also improve upon microgravity processing hardware,software, and production techniques to further improve our on-orbit processingcapabilities and results. This includes remote process controls, robotics, datacommunications and flight hardware design and certification.

*SPACETECH Initiative*. In 2007,SPACETECH was formed to serve as a ‘technology incubator’. Through SPACETECH,we intend to commercialize products that we plan to produce in microgravity,secure the rights to and commercialize hardware and software designed for andused in space, and manufacture, sell, and distribute the end product togovernment and commercial consumers. SPACETECH has identified the followingproducts that are in various stages of their product life cycles:

·                  Under a SpaceAct Agreement with NASA, we began development of a mini-mass spectrometer, asmall, portable, low power unit capable of detecting chemical compounds such asexplosives, weapons of mass destruction, and toxic gases. We believe that thisnew ion trap technology will have many commercial terrestrial applicationsincluding Homeland Security applications such as airport, shipping port, andborder control; medical applications including anesthesia expelled gas analysisand medicine production and contamination detection; chemical applicationsincluding polymer process control; and food processing applications whichinclude process control, contamination, and spoil detection. Mockups of ourmini-mass spectrometer have been tested and we are currently refining thedesign for commercial manufacturing. We are currently in negotiations with a companyrelating to the licensing, sales and distribution of the mini-massspectrometer.

·                  The FederalAviation Administration and Department of Transportation have enacted newregulations for airline transportation of oxygen containers to enhance safety inthe event of a fire. Applying decades of experience in the development ofspecialized containers, we are working with an industry partner to develop andcertify a container to meet these new requirements. Early testing has provensuccessful. If we are successful in developing this product, we may have anopportunity to enter a new market.

·                  With our manyyears of experience in human spaceflight, we became aware of various persistentproblems regarding cargo transportation to and from Earth. One such problem isthe containment of liquids in commonly used soft bag containers. These softbags are widely used over hard containers due to the lighter weight materialsthey are constructed from and the need for more flexible materials that allowmore efficient packing configurations. The inherent problem with soft bags isthe difficulty in keeping them “water tight” in the microgravity environmentand in such extreme conditions such as launch and reentry. The SPACEHABContainment Bag was successfully designed and developed and flew its firstmission on STS-118. We are in the process of having this product “flightqualified” for use by NASA on future space flights. We believe that thistechnology can also be used in Earth-based applications such as hazardous wastecontainment, bio-hazard containment, environmental clean-up operations, medicaltransportation applications, disaster recovery operations, and militaryapplications.

·                  Beginning withSTS-9, NASA conducted numerous microgravity research projects related to proteincrystal growth in space. However, due to the realignment of NASA’s goals, thereare no further NASA-sponsored protein crystal growth efforts planned. Throughthe execution of our microgravity processing initiative, we expect to take fulladvantage of the microgravity protein crystal growth findings andinfrastructure established by NASA. Protein crystals lead to the development oftreatments that target diseases caused by aberrant protein function. Previousspaceflight research suggests that growing protein crystals in the microgravityenvironment of space offers the possibility of significantly increasing thex-ray diffraction quality of protein crystals. We believe that because of thehigh quality of these protein crystal structures, they may be used to betterdefine the protein structures of diseases such as diabetes, cystic fibrosis,sickle cell anemia, Alzheimer’s, Parkinson’s disease, Lou Gehrig’s disease andcertain forms of cancer, which in turn may lead to the development of drugscapable of combating these diseases. If we are successful in developing proteincrystals in microgravity, we expect to pre-sell these crystals topharmaceutical companies.

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·                  Amongthe many life science experiments that were flown in our science module weretissue growth cultures. Spaceflight results suggested that skin grown undermicrogravity conditions has the potential for being utilized more effectivelyin skin grafting therapies. This is important for many medical applicationsincluding burn victims that would greatly benefit from the more complete tissuethat can be grown in the microgravity environment of the International SpaceStation. We will attempt to establish relationships with therapeutic companiesin the sales and distribution of product related to this initiative.

## ***New AstrotechServices***

We believe that Astrotech is a recognized leader in commercialspacecraft processing services. Astrotech intends to expand its market byoffering end-to-end assurance services to both commercial and governmentcustomers. These new services would extend Astrotech’s current relationshipswith customers’ satellites from a few weeks of ground processing to multipleyears of services throughout a satellite’s lifecycle. Specifically, we believethat there are hundreds of commercial and government satellites that could eachbe served for 10 years or longer by Astrotech’s new end-to-end space missionassurance services. We have been and will continue to research, along with ourgovernment and commercial customers, the capability to provide a wide range ofon orbit services that includes the capability to provide additional stationtime, fleet management services, surveillance systems, and de-orbit services.The pursuit of these new offerings is expected to increase Astrotech revenuedramatically, but may require Astrotech to invest in new terrestrial andorbital capabilities.

## ***New SPACEHABEngineering Services Contracts***

Our exceptional performance under the Program Integration and Controlcontract, including the government awarding us a perfect score of 100, led tous securing a contract for additional configuration and data management work insupport of NASA’s Constellation Program. Additionally, we are currentlyresponding to formal requests for proposals for similar support on the OrionProject Integration Contract and the Constellation Program Support Contract.

## ***New Flight ServicesInitiatives***

The primary goal of our Flight Services business will be to providegovernment and commercial customers the same quality mission design flighthardware design and fabrication, and payload integration services that we haveperformed for NASA for the past 23 years. We expect launch providers to usethese services because of our experience in this area and the complexity inpreparing cargo for launch.

## ***Advanced Researchand Conventional Technology Utilization Spacecraft (ARCTUS)***

We are assembling a team of industry partners with the common goal ofdeveloping a commercial transportation system providing lower cost, lower riskspace transportation services, than conventional government-developedtransportation systems. ARCTUS is designed to provide cargo transportationservices to the International Space Station under the unfunded Space ActAgreement signed with NASA in June 2007. The ARCTUS design uses flight-provencomponents to reduce development costs and program risk. This approacheliminates a large percentage of most of the non-recurring engineering laborcosts. The ARCTUS design is expected to be compatible with existing,flight-proven launch vehicles, payload requirements, and interfaces, as well asthe interface requirements for vehicles visiting the International SpaceStation. If completed, we believe that ARCTUS will be able to provide us withan additional space access solution for our microgravity processing productsand for commercial cargo delivery to the International Space Station.

# **Our Competitive Strengths**

We believe that during our 23 year history, we have developedspecialized experience in providing space products and services. We believethat it is this solid foundation, along with the following competitivestrengths, that will enable us to achieve our business strategy:

·                  *Industry-unique Expertise*. We have completed 23 spaceshuttle missions, prepped nearly 250 satellites for launch, and beenresponsible for the logistics of experiments flown in space. We are the onlycommercial company that designed and flew habitable volume for use by the spaceshuttle crews as additional living and working space. Further, the ability tointegrate products into a variety of containers and ultimately, vehicles, is asignificant competitive advantage for us.

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·                  *Employees*. From five locations nationwide, our team iscomprised of highly specialized personnel closely familiar with both the spaceindustry and/or governmental space agencies who have special expertise incommercial space and human space flight.

·                  *Government Services Achievement*. We have become highlyvalued for our support of the International Space Station configuration anddata management requirements as evidenced by our receipt of a perfect awardscore of ‘100’ and near perfect scores during subsequent evaluation periods.

·                  *Recognizable and Respected Brand*. We believe the SPACEHABname and ‘mark’ is one of a select few brands that has appeared in countlessmedia photos and video footage featuring on orbit activities and crew membersin action on the space shuttle.

 

# **Competition**

Our competition and the barriers to entry vary amongst our businessunits. For our Flight Services segment, the modules and other assets that weown represent a capital investment that many new entrants into the market wouldhave difficulty matching. Although our modules are currently not scheduled foruse on another space shuttle mission, we estimate that it would take anotherorganization three to five years to develop, and certify for use by NASA, amodule service similar to that operated by our Flight Services business unit.NASA has elected to utilize competing government-developed systems (i.e. theItalian Space Agency-built Multi Purpose Logistics Module, etc.) for theremaining logistics requirements. However, we believe our assets provide moreutility in supporting powered experiments and are able to carry more weight andvolume than the other solutions available to NASA.

A robust commercial space industry is developing with SpaceX and RpKachieving grants in 2006 under the COTS Space Act Agreement (SAA) to developcommercial based cargo capability and other competitors such as SpaceDev,Andrews Aerospace, ourselves, and others continuing with developingalternatives under unfunded SAAs. In September, the Company and several othercommercial space companies responded to NASA’s Request for Information (RFI)for Phase II commercial ISS cargo transportation services. NASA’s stated goalwas to use responses from the RFI to help craft a formal solicitation for theseservices, however there is no guarantee that a solicitation will be issued.NASA has also committed to utilize the Russian Progress and Soyuz vehicles tosupplement and replace capability of the space shuttle as it is phased out. TheEuropean ATV and Japanese HTV will also provide alternatives to NASA andcommercial uses as access to space.

We expect that our space based microgravity processing will compete withboth foreign and domestic institutional supported research from governments andacademia.

Our Astrotech spacecraft and payload processing facilities are locatedin Florida and California and process satellites constructed in the UnitedStates. Due to the costs of transporting spacecraft internationally, ourAstrotech business unit generally does not compete with launch services basedin other countries. At present, our Astrotech business unit’s commercial U.S.competition is limited to the California launch site at Vandenberg Air ForceBase where California Commercial Spaceport Systems International (SSI) islocated. SSI acquired surplus United States Air Force (“USAF”) facilitiesthrough a lease agreement with the USAF at Vandenberg Air Force Base before weestablished our facilities there. SSI does not have payload processingfacilities in Florida, where the majority of U.S. commercial satellite launchesoccur. In addition, as the commercial space industry continues to evolve, weexpect to face increasing competition from new companies. Our new initiative inend to end mission assurance capabilities faces the competitors of OSSL inEurope, GEORing in Europe, the U.S. military, NASA, and other government fundedon orbit servicing entities.

NASA previously instituted a policy that required Agency spacecraftprograms to utilize commercial payload processing facilities for all missionsthat do not have a nuclear power source or planetary protection requirement. Asstated in NASA’s Commercialization Plan issued in August 2006, a trade studywas recently performed, comparing commercial facilities, such as SPACEHAB’sAstrotech campus, with government-owned facilities. The study also reexaminedthe policy of using mostly commercial payload processing services at theKennedy Space Center. NASA concluded that it was in the Agency’s best interestto continue the current policy of using commercial facilities for nominalpayload processing.

Our Government Services business unit competes with companies thatprovide operations support, configuration management, and engineering andfabrication services to NASA. These competitors include aerospace contractorssuch as Boeing, Lockheed Martin, United Space Alliance, ARES Corporation,Barrios Technologies Inc., Bastion Technologies, Cimarron, and OceaneeringSpace Systems. However, this business unit’s primary source of revenue comesfrom a subcontract arrangement that expires in 2008 with options to extend upto two years.

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We expect SPACETECH to develop and market new products, based uponspace technologies. This new initiative’s two primary business developmentefforts are the mini-mass spectrometer and the plane box specialized container.Competition to the mini-mass spectrometer will come in two forms: incumbentmass spectrometer companies (i.e., Griffin Analytical, Torion, and Inficon) andnew competing technologies (Smiths Detection, GE Security, and OI Analytical).SPACEHAB’s design incorporates an approach which we expect to lead to a lowercost and higher volume capacity than our competitors. We expect the competitionfor our plane box product will be minimal given that the container is beingdesigned in response to a new DoT and FAA rule. One potential competitor,Viking Packaging, began pursuing the opportunity but has since halted theproject as their concept encountered issues during preliminary testing.Currently we are not aware of any competitors. However, large companies withgreater capital resources may enter this field.

# **Dependence on a Single Customeror Limited Number of Customers**

Approximately 75% of our revenue in fiscal year 2007 was generated byvarious NASA contracts or subcontracts. While other contracts with commercialcustomers provide revenue from varying sources, we anticipate that contractsservicing NASA will continue to account for a significant amount of our revenuein the near future. Although we cannot make any assurances that NASA willrequire our services in the future, we are under firm contracts with NASA tosupport a variety of activities for the next several years. We continue to workon diversifying our customer base to include other government agencies, foreignspace agencies, aerospace partners, and private companies.

Similar to contracts with other agencies of the U.S. Government, ourcontracts servicing NASA contain provisions pursuant to which NASA or the primecontractor may terminate the contract “for convenience.” Our contractsservicing NASA depend upon their receipt of adequate annual appropriations fromthe U.S. Congress, and failure to receive adequate funds could prompt NASA toterminate its contracts with us or the prime contractor “for convenience.”There is no assurance that future funding will be adequate for NASA to completeall of its initiatives including those relating to contracts with us. Weanticipate that a portion of our revenue for our next fiscal year will bederived from contracts with entities other than agencies of the U.S. Governmentthat will not be subject to federal contract regulations such as termination “forconvenience” or government funding restrictions.

Our Astrotech business unit serves the satellite launch industry whichis dominated domestically by Lockheed Martin and Boeing. We have a contract inplace with United Launch Alliance, successor to Lockheed Martin to supportpayload processing for the Atlas launch vehicle program and we also providepayload processing services for Boeing’s Delta launch vehicle program. Thiscontract guaranteed us a minimum of four launches annually through December2006 and was extended through December 2007. In March 2007, United LaunchAlliance extended the contract for one more year and has the option to extendit for an additional three years. We have other current contracts in place withNASA and Boeing for support of spacecraft processing activities in both Floridaand California. Our Astrotech business unit manages the Sea Launch facilityunder a long-term contract with Sea Launch Company, LLC which expires in 2011.

# **Backlog Update**

As of June 30, 2007 our contract backlog was approximately $26.8million, of which $13.7 million represented U.S. Government backlog and $13.1million, represented non-U.S. Government contracts. See “Risk Factors —Termination of our backlog orders could negatively impact our revenues” for additionaldiscussion of our backlog.

# **Research and Development**

We incurred $0.8 million, $0.4 million, and $0.1 million in researchand development expense during fiscal years 2007, 2006, and 2005, respectively.Research and development in fiscal year 2007 has been directed towardsdevelopment of our mini-mass spectrometer product. Research and development infiscal year 2006 and 2005 had been directed towards development of commercialresponses to the National Vision for Space Exploration.

# **Certain Regulatory Matters**

We are subject to federal, state, and local laws and regulationsdesigned to protect the environment and to regulate the discharge of materialsinto the environment. We believe that our policies, practices, and proceduresare properly designed to prevent unreasonable risk of environmental damage andconsequential financial liability to us. Compliance with environmental laws andregulations and technology export requirements has not had in the past, and, webelieve, will not have in the future, material effects on our capitalexpenditures, earnings, or competitive position. Our operations are subject tovarious regulations under federal laws relative to the international transferof

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technology as well as to various federal and state laws relative to businessoperations. In addition, we are subject to federal contracting procedures,audit, and oversight under Federal Acquisition Regulations.

Significant federal regulations impacting our operations include thefollowing:

*Federal Regulation of International Business*.  We are subject to various federal regulationsrelative to the export of certain goods, services, and technology. Theseregulations, which include the Export Administration Act of 1979 administeredby the Commerce Department and the Arms Export Control Act administered by theState Department, impose substantial restrictions on the sharing or transfer oftechnology to foreign entities. Our activities in the development of spacetechnology and in the processing of commercial satellites deal with technologyof the type subject to these regulations. Our operations are conducted pursuantto a comprehensive export compliance policy that provides close review anddocumentation of activities subject to these laws and regulations.

*Foreign Corrupt Practices Act*.  The Foreign Corrupt Practices Act establishesrules for U.S. companies doing business internationally. Compliance with theserules is achieved through established and enforced corporate policies anddocumented procedures in our internal procedures and financial controls.

*Iran Nonproliferation Act of 2000*.  This act includes specific prohibitions oncommercial activities with certain specified Russian entities engaged inproviding goods or services to the International Space Station. Our activitieswith RSC Energia of Russia are not subject to this act.

*Federal Acquisition Regulations*.  Goods and services provided by us to NASA andother U.S. Government agencies are subject to Federal Acquisition Regulations.These regulations provide rules and procedures for invoicing, documenting, andconducting business under contract with such entities. The Federal AcquisitionRegulations also subject us to audit by federal auditors to confirm suchcompliance.

*Truth in Negotiations Act*.  The Truth in Negotiations Act was enacted forthe purpose of providing for full and fair disclosure by contractors in theconduct of negotiations with the U.S. Government. The most significantprovision included in the Truth in Negotiations Act is the requirement thatcontractors submit certified cost and pricing data for negotiated procurementsabove a defined threshold.

*Defense Security Service*.** From time to time weare requested to process government spacecraft payloads that must be handledunder federal security clearances. To accommodate these requirements, wemaintain facility security clearances within certain subsidiaries of theCompany and have persons engaged by the Company with necessary active securityclearances to support these requirements. Maintenance of an active facilityclearance requires dedicated trained personnel, specified facility standardsand recordkeeping.

# **Regulatory Compliance and RiskManagement**

We maintain compliance with regulatory requirements and manage ourrisks through a program of compliance, awareness, and insurance which includesthe following:

*Safety*.  We place a continual emphasis on safetythroughout our organization. At the corporate level, safety programs andtraining are monitored by a corporate safety manager. A staff of senior safetyprofessionals within our Flight Services business unit provides safety as acomponent of our space flight operations and augments the safety awareness andoversight available at the corporate level.

*Export Control Compliance*.  We have a designated senior officerresponsible for export control issues and the procedures detailed in our exportcontrol policy. This officer and the designated export compliance administratormonitor training and compliance with regulations relative to foreign businessactivities. Employees are provided comprehensive training in compliance withregulations relative to export and foreign activities through our interactivetraining program and are certified as proficient in such regulations as arerelative to their job responsibilities.

*Insurance*.  Our operations are subject to the hazardsassociated with operating assets in the severe environment of space. Thesehazards include the risk of loss or damage to the assets during storage,preparation for launch, in transit to the launch site, and during the spacemission itself. We maintain insurance coverage against these hazards withreputable insurance underwriters. Although we did not fully insure our flightassets in the past, we now insure our flight assets at replacement value for riskof loss during future space flight missions.

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# **Employees Update**

As of June 30, 2007 we employed 176 regular full-time employees. Thebreakdown by area is as follows: SPACEHAB corporate and executive management is24; 68 are employed by Flight Services; Government Services personnel total 46;and 33 are employed by Astrotech. Of these employees, approximately 15.2% holdadvanced degrees beyond a bachelor’s degree. Additionally, a significant numberof our employees have experience in both the space industry and/or governmentalspace agencies, with a special expertise in commercial space and human spaceflight. None of our employees are covered by collective bargaining agreements.

# **Item 1A.  Risk Factors.**

The risks and uncertainties described below are not the only risksfacing us. Additional risks not presently known to us or which we considerimmaterial based on information currently available may also materiallyadversely affect us. If any of the following risks or uncertainties actuallyoccurs, our business, financial condition, and results of operations could bematerially adversely affected.

# **Risks Related to Our Business**

## ***After August 2007,our cash flows from operations associated with space shuttle missions will bematerially reduced.***

During fiscal year 2007, our Flight Services business unit derived over98% of its revenues, which represented approximately 64% of consolidatedrevenues for fiscal year 2007, from the use of our modules and integrated cargocarriers by the space shuttle fleet. We have no contracted missions afterAugust 2007 for our modules and we have terminated our leases for theintegrated cargo carriers and will no longer have the use of the integratedcargo carrier. Our inability to generate new contracts on a timely basis willhave a material adverse effect on our business, financial condition, andresults of operations.

## ***If we are unable toanticipate technological advances and customer requirements, including NASA’srequirements for products and services, our business and financial conditionwill be adversely affected.***

Our growth and future financial performance depend in part upon ourability to anticipate technological advances and customer requirements. Therecan be no assurance that we will be able to achieve the technological advancesthat may be necessary for us to remain competitive. In 2007, we commenced newbusiness initiatives for the commercial exploitation of space. These newbusiness initiatives will require large investments of capital and technicalexpertise. We may not be able to develop products and services in connectionwith these new business initiatives. Our failure to anticipate or respondadequately to changes in technology and NASA requirements, or delays inadditional product development or introduction, could have a material adverseeffect on our business and financial performance.

## ***We plan to developnew products and services for the space industry. No assurances can be giventhat we will be able to successfully develop these products and services.***

Our business strategy is to use the experience we have accumulated toexpand the services and products we offer to the international space industry.These services and products generally involve the commercial exploitation ofspace, and involve new and untested technologies and business models. Thesetechnologies and business models may not be successful, which could result inthe loss of any investment we make in developing them.

## ***Our attempt todevelop new technologies and business models to commercially exploit space willrequire substantial additional capital, which may not be available to us, andwhich, if available may substantially dilute equity owners.***

Our future business operations will be focused on developing newtechnologies and business models for the commercial exploitation of space. Weexpect that these technologies and models will require substantial additionalcapital. No assurances can be given that capital will be available to us. Thecost of future capital, if available, is likely to be very expensive, and islikely to substantially dilute holders of equity, including those that tenderin the exchange offer.

## ***We incur fixed leaseobligations for our payload processing facilities used to support our moduleand space shuttle operations and have no contracts for such future business.***

A substantial portion of our operating costs is a fixed leaseobligation for our Cape Canaveral payload processing facility used to supportour module and space shuttle operations. The balance of this lease extends overa period of

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four more years. We currently have no revenue-generating contracts forfuture business that would support our module and space shuttle operations. Wemust obtain new contracts in order to generate future revenue. Our inability togenerate new contracts would have a material adverse effect on our business,financial condition, and results of operations. In addition, since a largeportion of our operating costs are relatively fixed due to this leaseobligation, variations in the timing and progress of future contracts canmaterially affect our business, financial condition, and results of operations.

## ***The completion ofour space shuttle module mission in August 2007 will result in the redeploymentor reduction of technical and operations personnel, which may result in usincurring severance obligations.***

Due to the completion of our space shuttle module mission in August2007, we will either have to redeploy technical and operational personnel toother contracts, or reduce our workforce in order to lower our cost structureas part of a reorganization of operations. Any future reduction in workforcewould be accompanied by the payment of severance obligations which could have amaterial adverse effect on our financial condition. In addition, a futurereduction in workforce would be accompanied by a risk of litigation, which ifinitiated or successful, could harm our business and financial position.

## ***Since we aredependent on NASA as a customer, if the products and services we are currentlydeveloping for use by NASA’s successor to the Space Shuttle Program are notused, our financial condition and results of operations will be materiallyadversely affected.***

Approximately 85% of our revenue for fiscal year 2007 was generatedfrom eight contracts supporting NASA. We anticipate that revenue fromNASA-related projects will continue to account for a material amount of ourrevenue in the future. In the past, we have developed products without any firmcommitments from NASA. Although we may invest substantial amounts developingproducts for the shuttle’s replacement program without any contracts with NASA,we cannot provide any assurances that such products will be used. Since thefinal program that will be chosen by NASA is not currently known, we cannotprovide any assurances that the products and services we may develop will besuitable for such replacement programs. If NASA or its contractors do notpurchase the products and services we are developing for the shuttle’sreplacement programs, our financial condition and results of operations will beadversely affected.

## ***Termination of ourbacklog of orders could negatively impact our revenues.***

As of June 30, 2007, we had a firm backlog of approximately $26.8. Firmbacklog consists of aggregate contract values, excluding the portion previouslyrecognized as revenues, in work change orders on existing contracts, and ourestimate of potential award fees. Backlog as of June 30, 2007 does not giveeffect to new orders received or any terminations or cancellations since thatdate. Approximately 51% of our firm contract backlog as of June 30, 2007 wasderived from contracts with the U.S. Government and its agencies or fromsubcontracts with the U.S. Government’s prime contractors. Since our governmentcontracts are contingent upon Congressional appropriations and are terminable “forconvenience,” we cannot assure that our backlog will ultimately result inrevenues.

## ***Our existing NASAcontracts are subject to continued appropriations by Congress and may beterminated if future funding is not made available, which would have a materialadverse effect on our business.***

Our financial performance is substantially dependent on the revenuegenerated from our contracts supporting NASA which, similar to contracts withother agencies of the U.S. Government, are conditioned upon the continuingavailability of Congressional appropriations. The U.S. Congress usuallyappropriates funds for a given program on a fiscal year basis even thoughcontract performance may extend over many years. Failure to receive sufficientfunds from Congress or a withdrawal by Congress of prior appropriations wouldpermit NASA to terminate its contracts with us “for convenience.” Therefore, noassurances can be made that Congress will continue to fund NASA at levels whichwill permit space shuttle missions to continue on their current schedules orthat Congress will appropriate the funds necessary for NASA to fulfill itsobligations under its contracts with us. Any substantial reduction inCongressional funding for space shuttle missions or annual appropriations toNASA to fulfill, among other things, NASA’s contracts with us or the U.S.commitment to the International Space Station, would have a material adverseeffect on our financial condition and results of operations. In addition,termination of large programs or multiple contracts affecting our FlightServices business unit could require us to evaluate the continued viability ofoperating that business.

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## ***As a U.S. Governmentcontractor, we are subject to a number of rules and regulations, the violationof which could result in us being barred from future U.S. Government contracts.***

We must comply with and are affected by laws and regulations relatingto the award, administration, and performance of U.S. Government contracts. Theselaws and regulations, among other things:

·                  Requirecertification and disclosure of all cost or pricing data in connection withcertain contract negotiations.

·                  Imposeacquisition regulations that define allowable and unallowable costs andotherwise govern our right to reimbursement under certain cost-based U.S.Government contracts.

·                  Restrict the useand dissemination of information classified for national security purposes andthe exportation of certain products and technical data.

A violation of specific laws and regulations could result in theimposition of fines and penalties, the termination of our contracts, ordebarment from bidding on U.S. Government contracts. In some instances, theselaws and regulations impose terms or rights that are more favorable to theGovernment than those typically available to commercial parties in negotiatedtransactions. For example, the Government may terminate any of our governmentcontracts for convenience, as well as for default based on performance. Inaddition, U.S. Government contracts generally contain provisions that allow theGovernment to unilaterally suspend us from receiving new contracts pendingresolution of alleged violations of certain federal laws or regulations, reducethe value of existing contracts, issue modifications to a contract, and controland potentially prohibit the export of our services and associated materials.Since a majority of our revenues are currently, and a material portion offuture revenues are expected to be, derived from contracts supporting NASA,material modifications to our existing contracts or a prohibition againstbidding on future U.S. Government contracts would have a material adverseaffect on our financial condition and results of operations.

## ***Our business couldbe adversely affected by a negative audit by the U.S. Government.***

U.S. Government agencies, including NASA, routinely audit andinvestigate government contractors. These agencies review a contractor’sperformance under its contracts, cost structure, and compliance with applicablelaws, regulations, and standards. The U.S. Government also may review theadequacy of, and a contractor’s compliance with, its internal control systemsand policies, including the contractor’s purchasing, property, estimating,compensation, and management information systems. Any costs found to beimproperly allocated to a specific contract will not be reimbursed, while suchcosts already reimbursed must be refunded. If an audit uncovers improper orillegal activities, we may be subject to civil and criminal penalties andadministrative sanctions, including termination of contracts, forfeiture ofprofits, suspension of payments, fines, and suspension or prohibition fromdoing business with the U.S. Government. In addition, we could suffer seriousreputational harm that affects our non-governmental business if allegations ofimpropriety were made against us.

## ***Most of ourcompetitors have much greater financial resources than we do.***

The U.S. Government, the governments of other countries and privatecompanies participate in the highly competitive space industry often as bothsuppliers and end-users of space services. Our long-term strategy growth is tocommercially exploit space. These strategies could require us to compete withcommercial companies such as The Boeing Company, Lockheed Martin Corporationand other large aerospace companies, many of which have existing NASA supportcontracts, substantially greater financial resources and manufacturingcapabilities, more established and larger marketing and sales organizations,and larger technical staffs than we have.

United Space Alliance, which is equally owned by The Boeing Company andLockheed Martin Corporation, is the primary contractor for NASA’s Space ShuttleProgram. United Space Alliance is responsible for the day-to-day operation andmanagement of the U.S. Space Shuttle fleet. United Space Alliance is currentlythe primary contractor in the market for civil ground operations and payloadprocessing services. We believe that the privatization of space stationoperations and successor programs will continue to result in intensecompetitive pressure among contractors to retain their current contracts and/orcapture new payload processing work from other contractors. To the extent thatthese contractors are able to retain or enlarge their roles in payloadprocessing operations, our ability to successfully compete for a share in thismarket could be impeded, which could have a material adverse effect on ourfuture financial performance.

At present, competition in the United States for our Astrotechspacecraft launch processing services is limited to the California (Vandenberg)launch site, where a competing company called California Commercial SpaceportSystems International is located. California Commercial Spaceport SystemsInternational does not have payload processing

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facilities in Florida, which is where the majority of U.S. commercialsatellite launches occur. However, if California Commercial Spaceport SystemsInternational or another satellite launch processing service provider were tobuild in Florida, or NASA were to expand its facilities in Florida, ourfinancial performance could be adversely affected.

The Astrotech strategy of extending the life of satellites has been indevelopment for years by Boeing, DARPA, U.S. Naval Research Labs the U.S. AirForce and various European companies. Advancement by these entities or theirability to secure early contracts in this new sector could adversely affect ourfuture growth plans and financial performance.

## ***A branch of the U.S.Government could construct spacecraft ground processing facilities at one ormore of the domestic launch sites served by Astrotech which could significantlyreduce the number of missions using Astrotech’s facilities.***

Astrotech currently provides services for domestic launch sites. In theevent that the U.S. Government constructs spacecraft ground processingfacilities that would compete with the launch sites currently serviced byAstrotech, there would be a reduced need for use of Astrotech’s facilities.This would result in the U.S. Government competing directly with us for ourexisting customers in connection to servicing domestic launch sites, which inthe aggregate could significantly reduce our revenues. The U.S. Government, asa competitor to Astrotech, may have more extensive or more specializedengineering, manufacturing and marketing capabilities than we do in this areaof spacecraft ground processing facilities. There can be no assurance that wewill be able to compete successfully against the U.S. Government as a potentialcompetitor in this area or that these competitive pressures we may face willnot result in reduced revenues and market share for us.

## ***Our earnings andmargins may vary because many of our contracts are fixed-price contracts.***

As of June 30, 2007, we had one significant cost-reimbursable and 11significant fixed-price contracts. Cost-reimbursable contracts generally havelower profit margins than fixed-price contracts. Our Flight Services andAstrotech spacecraft processing business units’ contracts are mainlyfixed-price contracts.

Under fixed-price contracts, we receive a fixed price irrespective ofthe actual costs we incur and, consequently, any costs in excess of the fixedprice are absorbed by us. Cost overruns also may adversely affect our abilityto sustain existing programs and obtain future contract awards. Under afixed-price contract, if we are unable to control costs we incur in performingunder the contract, our financial condition and operating results could bematerially adversely affected.

## ***We are under afixed-price contract to construct building improvements for a government clientat Astrotech’s facilities and could incur losses or performance penalties incompleting the work.***

We currently have a contract to construct building improvements for theU.S. Government at Astrotech’s facilities on a fixed-price basis. While afixed-price contract allows us to benefit from cost savings, it also exposes usto the risk of cost overruns. If the initial estimates we used to calculate thecontract price and the cost to perform the work prove to be incorrect, we couldincur losses. In addition, this contract has specific provisions relating tocost, schedule, and performance. If we fail to meet the terms specified in suchcontract, then our cost to perform the work could increase or our price couldbe reduced, which would adversely affect our financial condition. Moreover,successful performance of this contract depends on our ability to meet productionspecifications and delivery rates. If we are unable to perform and deliverunder contract requirements, our contract price could be reduced through theincorporation of performance penalties, such as liquidated damages, terminationof the contract for default, or other financially significant exposure. Thus,this fixed-price contract has a substantial risk for potential losses if ourestimated costs exceed our estimated price or if we cannot perform inaccordance with the terms of the contract.

## ***Most of the costsfor our Astrotech business unit are fixed regardless of the number ofspacecraft that are processed at our facility.***

The primary costs related to our Astrotech business unit are associatedwith operating and running our three spacecraft launch processing facilities.These costs remain relatively unchanged regardless of whether or not customersare using the facilities. As a result, if we do not properly estimate thenumber of satellites that will be processed when calculating our pricestructure for our spacecraft processing services, our financial results couldbe adversely affected.

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## ***Our financialresults could be adversely affected if the estimates that we use in accountingfor contracts are incorrect and need to be changed.***

Contract accounting requires judgment relative to assessing risks,estimating contract revenues and costs, and making assumptions for schedule andtechnical issues. The estimation of total revenues and cost at completion formany of our contracts is complicated and subject to many variables. Assumptionshave to be made regarding the length of time to complete the contract becausecosts also include expected increases in wages and prices for materials.Incentives or penalties related to performance on contracts are considered inestimating revenue and profit rates, and are recorded when there is sufficientinformation for us to assess anticipated performance. Estimates of award andincentive fees are also used in billing customers and estimating revenue andprofit rates based on actual and anticipated awards. If our performance under acost reimbursable contract results in an award fee that is lower than we haveestimated, we would be required to refund previously billed fee amounts andwould have to adjust our revenue recognition accordingly. If our performancewas determined to be significantly deficient, we may be required to reimburseour customer for the entire amount of previously billed awards.

Because of the significance of the judgments and estimation processesdescribed above, it is likely that materially different amounts could berecorded if we used different assumptions or if the underlying circumstanceswere to change. Changes in underlying assumptions, circumstances, or estimatesmay adversely affect future period financial performance.

## ***If we are unable tofind users of future products we develop without a contract for such product,we will have to write-off the value of such assets.***

We have in the past, and expect to continue in the future, to funddevelopment of certain projects prior to being awarded a contract for suchprojects. No assurances can be made that any funds we may spend in the futurein connection with the development of new products will lead to the award of acontract or that any such contract will be awarded on terms that areeconomically favorable to us. In addition, we depreciate space hardware, andintend to depreciate future capital assets that are dedicated to supporting thespace shuttle over a period that approximates the useful life of the spaceshuttles. However, since we do not expect to receive additional contracts forthe use of our modules, we will be required to write-off the remaining value ofour modules. In addition, in the event we are not awarded contracts for the useof future products or services, we could be required to write-off the value ofany future capital assets, and/or costs of prepaid services performed, whichcould have a material adverse effect on our financial condition and results ofoperations.

## ***Our spacecraftpayload processing facilities are specifically designed to process satellitesand other payloads and we would lose a substantial portion of their value if weno longer provided these services.***

Our Astrotech spacecraft processing facilities and the payloadprocessing facilities for our Flight Services business unit were builtspecifically to process satellites and our modules and integrated cargocarriers. These facilities are not well suited for other uses. Currently, ourAstrotech facilities in Titusville, Florida are depreciated using thestraight-line method over their estimated useful lives which range from 16 to40 years. If we were required to terminate our satellite or module processingbusinesses, the value of these facilities would be significantly impaired. Inaddition to having to take a substantial write-down of the value of ourTitusville, Florida facility on our books, if we attempted to sell thisfacility we do not think that we would be able to recover the amounts we haveinvested. If we were able to sublease our leased facilities, we do not thinksuch subleases would be sufficient to cover our current rental payments. Due toour substantial capital expenditures for our spacecraft processing facilitiesand the limited uses of these facilities, the termination of operations at ourTitusville, Florida facility that we own, or one or more of our other leasedfacilities could have a material adverse effect on our financial condition andresults of operations.

## ***We incur substantialcosts in preparing proposals to bid on contracts that we may not be awarded.***

Preparing a proposal to bid on a contract is generally a three to sixmonth process. This process is time consuming and results in the incurrence ofsubstantial costs that are generally not reimbursable even if the contract isawarded. We have prepared proposals for and bid on contracts that were notawarded to us in the past and anticipate that we could incur substantial costsrelated to contracts that are not ultimately awarded to us in the future. Inaddition, even if we are awarded a contract, we generally do not beginperforming work for several months after the bidding process is complete. Iffunding problems by the party awarding the contract or other matters furtherdelay our commencement of work on the contract, these delays may lower thevalue of the contract to us, even rendering it unprofitable.

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## ***Because ouroperating results are highly dependent on the timing of space shuttle missionsand spacecraft launches, they may fluctuate significantly from quarter toquarter.***

Our microgravity product processing strategy relies on sending ourpayload samples to and from space which requires us to rely on access to spaceon-board the space shuttle, Progress, Soyuz, ATV, Falcon, HTV, ARCTUS or K-1rockets. The timing and availability of space shuttles or spacecraft missionsthat could carry our samples, the availability of third party launch vehicles,the number and types of missions flown, the number and timing of satellitelaunches that use our Astrotech spacecraft processing facilities, and otherfactors can cause our results of operations to fluctuate significantly fromquarter to quarter.

Most obligations under our contracts, including contract-relatedengineering, research and development, and selling, general and administrativeexpenses, are recorded in the periods in which they are incurred. Accordingly,we may report routine operating losses in quarters in which no space missionsare in process.

In addition, we have incurred significant losses in the past and, assuch, we believe that period-to-period comparisons of our results of operationsare not necessarily meaningful and should not be relied upon as indications offuture performance.

## ***Compliance withenvironmental and other government regulations could be costly and couldnegatively affect our financial condition.***

Our business, particularly our Astrotech spacecraft processing businessunit, is subject to numerous laws and regulations governing the operation andmaintenance of our facilities and the release or discharge of hazardous ortoxic substances, including spacecraft fuels and oxidizers, into theenvironment or otherwise relating to environmental protection. Under these lawsand regulations, we could be liable for personal injury and clean-up costs andother environmental and property damages, as well as administrative, civil, andcriminal penalties in the event of a violation of these laws, or a release of ahazardous substances at or from our facilities, and such liabilities could havea material adverse effect on our business, financial condition, and results ofoperations.

## ***Our failure tocomply with U.S. export control laws and regulations could adversely affect ourbusiness.***

We are obligated by law and under our NASA contracts to comply, and toensure that our subcontractors comply, with all U.S. export control laws andregulations, including the International Traffic in Arms Regulations and theExport Administration Regulations. We are responsible for obtaining allnecessary licenses or other approvals, if required, for exports of hardware,technical data, and software, or for the provision of technical assistance. Weare also required to obtain export licenses, if required, before utilizingforeign persons in the performance of our NASA contracts if the foreign personwill have access to export-controlled technical data or software. The violationof any of the applicable export control laws and regulations, whether by us orany of our subcontractors, could subject us to administrative, civil, and criminalpenalties.

## ***Our inability tomaintain required government security clearances or the impact of foreignownership or control could result in a loss of potential future spacecraftground processing and other opportunities.***

In order to be a service and product provider for spacecraft groundprocessing and other related activities, we are required to maintain certaingovernment security clearances and we must comply with laws that limit foreignownership and control. We may be subject to regulatory action and possiblyother sanctions if we fail to comply with applicable laws and regulationsrelating to required security clearances and foreign ownership and control.This could harm our reputation, our prospects for future work and our operatingresults. Failure to comply could also result in the termination of currentoperations. A finding by the U.S. Government that we are not in compliance withsecurity clearance standards could materially and adversely affect us.Similarly, a finding by the U.S. Government that we are not in compliance withforeign ownership and control laws or other related legislative requirementscould materially and adversely affect us.

## ***Our facilitieslocated in Florida and California are particularly susceptible to damage causedby hurricanes, earthquakes, or other natural disasters.***

Our largest Astrotech spacecraft processing facility, which we own, andour leased Flight Services facility on the east coast of Florida areparticularly susceptible to damage caused by hurricanes or other naturaldisasters. In addition, our leased launch processing facilities at VandenbergAir Force Base and the facilities we operate at the Port of Long Beach aresubject to damage caused by earthquakes. The extent to which the buildingslocated at these facilities are designed to sustain natural disasters varies.Although we insure our properties and maintain business

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interruption insurance, there can be no assurance that such insurancewould be sufficient. If a severe hurricane, earthquake, or other naturaldisaster materially affected any of these facilities, our financial conditionand results of operations could be adversely affected.

## ***The loss of keymanagement and other employees could have a material adverse effect on ourbusiness.***

We are dependent on the personal efforts and abilities of our seniormanagement, and our success will also depend on our ability to attract andretain additional qualified employees. We do not maintain key man insurancewith any of these employees. Failure to attract personnel sufficientlyqualified to execute our strategy, or to retain existing key personnel, couldhave a material adverse effect on our business.

## ***A long andprotracted restructuring could cause us to lose key management and technicalemployees and otherwise adversely affect our business.***

If we fail to consummate the exchange offer on a timely basis, anyalternative we pursue, whether in or out of court, may take substantiallylonger to consummate than the exchange offer. A protracted financialrestructuring would further disrupt our business and would divert the attentionof our management from operation of our business and implementation of ourbusiness plan. It is likely that such a prolonged financial restructuring orbankruptcy proceeding would cause us to lose many of our key managementemployees, including the most senior members of management. It is also likely aprolonged financial restructuring or bankruptcy proceeding would cause us tolose customer contracts or be ineligible to obtain government contracts. Suchlosses or key management employees would likely make it difficult for us tocomplete a financial restructuring and may make it less likely that we will beable to continue as a viable business (see Item 7. Management’s Discussion andAnalysis of Financial Condition and Results of Operations —Liquidity andCapital Resources).

## ***There may be nomarket for our stock on an active trading market.***

The NASDAQ has notified us that we are in violation of their listingrequirements, since we have not maintained our share price for our common stockof $1.00 or more. If we do not meet the share price requirement by October 3,2007, our common stock may be delisted from NASDAQ. If we are delisted we haveno current plans to list on any securities exchange or other stock market. Itis possible that the market for our stock will be subject to disruptions. Youmay not be able to sell your stock when you want and, if you do sell, you maynot be able to receive the price you want.

## ***If we fail to complywith Section 404 of the Sarbanes-Oxley Act of 2002, our reputation, financialcondition, and the value of our notes and capital stock may be adverselyaffected.***

Beginning with our report for the fiscal year ending June 30, 2008,Section 404 of the Sarbanes-Oxley Act of 2002 will require us to include aninternal control report of management with our annual report on Form 10-K,which is to include management’s assessment of the effectiveness of ourinternal control over financial reporting as of the end of the fiscal year. Thereport will also be required to include a statement that our independentauditors have issued an attestation report on management’s assessment of ourinternal control over financial reporting.

In order to achieve compliance with Section 404 within the prescribedperiod, management is utilizing outside consultants to aid us in the adoptionof a detailed project work plan that assesses the adequacy of our internalcontrol over financial reporting, remediates any control weaknesses that may beidentified, validates through testing that controls are functioning asdocumented, and implements a continuous reporting and improvement process forinternal control over financial reporting. However, we may not be able tocomplete the work necessary for our management to issue its management reportin a timely manner, or any work that will be required for our management to beable to report that our internal control over financial reporting is effective.In addition, our independent auditors may not be able to issue an attestationreport on management’s assessment. Our failure to comply with Section 404,including issuing the management report and obtaining the attestation report,may materially adversely affect our reputation, our financial condition, andthe value of our securities, including our outstanding notes, exchange units,and common stock. Furthermore, our costs of compliance with Section 404,including the cost of remedying any identified weaknesses, could be materialand could adversely affect our financial condition and results of operations.

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## ***If we are unable toeffect the exchange offer, we may file for bankruptcy, which could have amaterial adverse effect on our business.***

If we are unable to complete the exchange offer for any reason, we mayrestructure through a bankruptcy proceeding. Our ability to restructure inbankruptcy is subject to numerous risks, including the following:

·                  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.

·                  Wemay be unable to arrange debtor-in-possession financing or otherwise financeour operations during bankruptcy.

Any alternative restructuring through a bankruptcy proceeding could beon terms less favorable than those set forth in this exchange offer. If abankruptcy proceeding were to occur, there is a risk that your ability torecover your investments would be substantially delayed and more impaired thanunder the proposed exchange offer. The expenses of any bankruptcy case couldreduce the assets available for payment or distribution to our creditors,including holders of the Junior Notes and Senior Notes. In addition, abankruptcy proceeding (either voluntary or involuntary) may not increase theamount of any payment or distribution that you, as a tendering holder, wouldreceive. In fact, a bankruptcy proceeding could reduce such amount and, in anyevent, would delay any payment or distribution.

## ***Even if the exchangeoffer is successfully consummated, we will still need substantial additionalcapital.***

Our capital requirements for continuing operations consist of ourgeneral working capital needs, scheduled principal and interest payments on ourdebt obligations, certain contractual commitments, and capital expenditures.This includes short-term capital to finance continuing operations at the end of2007, and long-term capital to finance our growth. Our capital resources whichare solely comprised of cash reserves and cash generated from operations, maynot be sufficient 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 that the exchangeoffer will be sufficient to alleviate our liquidity issues due to a lack ofcapital resources. In addition, with the conclusion of STS-118 in August 2007,we expect to have a material decrease in our revenue from our Flight Servicesbusiness, which has accounted for over 70% of our consolidated revenue duringthe first nine months of fiscal year 2007. Moreover, our revolving credit lineexpired on February 11, 2007. As a result, in order to continue to fund ourcurrent operations, we will need additional capital. No assurance can be giventhat we will be able to obtain a new source of capital on terms that areacceptable to us. If we are unable to obtain new capital, we may be forced tosubject ourselves to bankruptcy, reorganization, liquidation, dissolution orsimilar proceeding.

## ***Restructuring ourobligations under our outstanding notes has resulted in increased costs to us.***

We are incurring significant restructuring costs in connection with theexchange offer. The exchange offer has also resulted in significant costs to usas we pay professional fees related to evaluating our restructuringalternatives and pursuing the exchange offer. These increased costs may have amaterial adverse effect on our financial condition.

# **Item 1B.  Unresolved Staff Comments.**

Not applicable.

# **Item 2.  Properties.**

Our three business units, Flight Services, Astrotech, and GovernmentServices, currently occupy four locations. The corporate headquarters which hadbeen located at 300 D Street SW, Suite 814, Washington, D.C. 20024 wasre-designated to 12130 Highway 3, Webster, Texas 77598 in fiscal year 2002. Theterm of the present lease for the D Street space expires on December 16, 2007.As of June 30, 2002 we sublet the entire D Street space through the end of theterm of our lease. Our other Washington, D.C. office location was closed as ofDecember 31, 2003 and all executive and administrative functions wereconsolidated at our Webster, Texas office.

Our executive management, marketing and communications, humanresources, finance, and operations support personnel, along with one GovernmentServices employee and approximately two-thirds of the Flight Services employeesare located at 12130 Highway 3, Building 1, Webster, Texas 77598. The facilityconsists of 90,867 square feet of office, warehouse, and fabrication spacelocated near the Johnson Space Center. On May 26, 2005 we purchased thisfacility, including the building and the adjacent three acres of land for thevalue of $2.0 million. We then sold the building, excluding the three acres ofadjacent undeveloped land, for $3.25 million. We are leasing

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back 100% of the facility for an initial period of ten years, with twofive-year options. We will retain the adjacent 3.0 acres parcel for futuredevelopment or sale.

Our Flight Services payload processing facility, housing a 19-personoperations team, is located near the Kennedy Space Center in Cape Canaveral,Florida. The facility is contained in an approximately 58,000 square footplant. The payload processing facility has a clean room work area ofapproximately 24,000 square feet. This work area is designed to accommodate oursingle and double modules, as well as the Integrated Cargo Carriers (“ICCs”)and vertical cargo carrier. This area includes eleven secure experiment/payloadintegration and work areas ranging in size from 300 square feet to 1,000 squarefeet each. In addition, the facility provides office space, stock rooms,storage areas, a machine shop, an electrical shop, conference rooms, and othermiscellaneous accommodations. We negotiated an agreement with the CanaveralPort Authority for the lease of the land for a forty-three year period whichcommenced on August 28, 1997. Upon expiration of the land lease, allimprovements on the property revert at no cost to the lessor. On May 2, 2005 wesold the 58,000 square-foot processing facility in Cape Canaveral, Florida for$4.8 million. We now lease back 100% of the facility for an initial period offive years, with an option period of an additional five years.

Astrotech occupies two company-owned locations. Astrotech’sheadquarters and Florida operations team, consisting of 22 personnel, arelocated in a nine-building complex located on a 62-acre space technology campusat 1515 Chaffee Drive, Titusville, Florida 32780. This campus encompasses140,000 square feet of facility space supporting non-hazardous and hazardousflight hardware processing, payload storage, and customer offices. Theconstruction of an additional 50,000 square foot spacecraft processing facilitywas completed in March 2002. These buildings presently occupy one-third of the62-acre property owned by Astrotech, with one-third available for expansion andthe remaining one-third reserved for hazardous facility safety clearances.

Astrotech has a four-person technical staff located on Vandenberg AirForce Base in Santa Barbara County, California. Astrotech presently leases a60-acre site on the base and owns four buildings comprising 18,800 square feet,dedicated to the same functions provided at the Florida facility. The term ofthe present land lease expires on July 13, 2013, with provisions to extend thelease at the request of the lessee and the concurrence of the lessor. Uponfinal expiration of the land lease, all improvements on the property revert, atthe lessor’s option, to the lessor at no cost. During fiscal year 2007, webegan an expansion of this facility that will be completed during 2009 thatwill enhance our capabilities to process five meter satellite payloads.

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

Government Services has 45 employees who are housed in two governmentfacilities within the Houston area.

We believe that our current facilities and equipment are generally wellmaintained and in good condition, and are adequate for our present andforeseeable needs.

# **Item 3.  Legal Proceedings.**

In January 2004 the Company initiated a formal proceeding against NASAin which the Company was seeking damages in the amount of $87.7 million for theloss of its Research Double Module (“RDM”) as a result of the Columbiaaccident. In October 2004, NASA responded to this claim with the determinationthat its liability was $8.2 million, including interest, and paid SPACEHAB thisamount. SPACEHAB subsequently filed an appeal with the Armed Services Board ofContract Appeals and over the past two years, the two parties have proceeded withpreparations for a court hearing planned for July 2008. The Company also fileda tort claim 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 NASA in the amount of $8.2million which included $0.2 million of interest. NASA’s claims were that theirliability was limited to $8.0 million under the Research and Logistics MissionSupport contract (NAS9-97199), as specifically identified in clause H.11 –titled “Contingent Property Liability.”

This $8.2 million indemnification payment and interest payment wasaccordingly recorded as a “Recovery of nonrecurring charge” in the September30, 2004 financials, resulting in a change in cash flows from operatingactivities.

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On February 21, 2007, the Company dismissed with prejudice alllitigation against NASA relating to losses incurred by the Company as a resultof the February 2003 Space Shuttle Columbia accident.

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

Except as above, the Company is not a party to any pending orthreatened proceedings, which in management’s opinion, would have a materialadverse effect on our business, financial condition, or results of operation.

# **Item 4.  Submission of Matters to a Vote of SecurityHolders.**

No matters were submitted to a vote of stockholders during the fourthquarter of the year ended June 30, 2007.

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**PARTII**

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

Our Common Stock previously traded on the NASDAQ National Market Systemunder the symbol “SPAB” up until March 21, 2006 at which point our common stockcommenced trading on the NASDAQ Capital Market. The following table sets forththe quarterly high and low intra-day bid prices for the periods indicated.
| Fiscal 2007 | ** ** | **High** | ** ** | **Low** | ** ** |
|------------------|------------|----------|------------|---------|------------|
|             |       |     |       |    |       |
| First Quarter    |       | $        | 1.35       |    | $          | 0.67 |   |
| Second Quarter   |       | $        | 0.78       |    | $          | 0.60 |   |
| Third Quarter    |       | $        | 1.23       |    | $          | 0.57 |   |
| Fourth Quarter   |       | $        | 0.71       |    | $          | 0.46 |   |

 
| Fiscal 2006    | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
|           |       |     |       |    |       |
| First Quarter  |       | $        | 2.04       |    | $          | 1.07 |   |
| Second Quarter |       | $        | 1.25       |    | $          | 0.68 |   |
| Third Quarter  |       | $        | 1.15       |    | $          | 0.68 |   |
| Fourth Quarter |       | $        | 1.41       |    | $          | 0.85 |   |

 

We have never paid cash dividends. It is our present policy to retainearnings to finance the growth and development of our business and, therefore,we do not anticipate paying cash dividends on our Common Stock in theforeseeable future.

We have 70,000,000 shares of Common Stock authorized for issuance. Asof September 19, 2007 we had 13,027,196 shares of Common Stock outstanding. Wehad approximately 221 shareholders of record of our Common Stock on September19, 2007.

The NASDAQ has notified us that we are in violation of their listingrequirements, since we have not maintained a share price of our Common Stock of$1.00 or more. If we do not meet the share price requirement by October 3,2007, our Common Stock may be delisted from the NASDAQ. 
| **Plan Category**                                      | ** ** | **Number of securities to be  issued upon exercise of  outstanding options,  warrants, and rights** | ** ** | **Weighted average exercise  price of outstanding options,  warrants, and rights** | ** ** | **Number of securitie   remaining available  for future issuance** | ** ** |
|-------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------|------------|
| ** **                                                  | ** ** | **(a)**                                                                                                                                               | ** ** | **(b)**                                                                                                               | ** ** | **(c)**                                                                                          | ** ** |
| Equity compensation  plans approved by security holders     |       | 1,076,935                                                                                                                                             |       | $                                                                                                                     | 2.606      |                                                                                             | 3,185,774  |   |
| Equity compensation  plans not approved by security holders |       | —                                                                                                                                                |       | —                                                                                                                |       | —                                                                                           |       |
| Total                                                       |       | 1,076,935                                                                                                                                             |       | $                                                                                                                     | 2.606      |                                                                                             | 3,185,774  |   |

 

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# **SPACEHAB Stock Performance Graph**

*The following performance graph and table do notconstitute soliciting material and the performance graph and table should notbe deemed filed or incorporated by reference into any other previous or futurefilings by us under the Securities Act of 1933, as amended, or the SecuritiesExchange Act of 1934, as amended, except to the extent that we specificallyincorporate the performance graph and table by reference therein.*

The performance graph and table below compare the five-year cumulativetotal return of our common stock with the comparable five-year cumulative totalreturns of the Standard & Poor’s Aerospace & Defense Stock Index (“S&PAerospace & Defense”) and the NASDAQ Composite Stock Index (“NASDAQComposite”). The figures assume an initial investment of $100 at the close ofbusiness on June 30, 2002 in SPACEHAB, S&P, and NASDAQ, and thereinvestment of all dividends.

**COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN***

Among SPACEHAB, Incorporated, The NASDAQ Composite Index

And The S&P Aerospace & Defense Index

 
| **SPACEHAB FISCAL YEAR END**    | ** ** | **6/02** | ** ** | **6/03** | ** ** | **6/04** | ** ** | **6/05** | ** ** | **6/06** | ** ** | **6/07** |
|---------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|
|                            |       |     |       |     |       |     |       |     |       |     |       |     |
| SPACEHAB, Incorporated          |       | 100.00   |       | 74.80    |       | 289.76   |       | 140.94   |       | 92.91    |       | 51.18    |
| NASDAQ Composite                |       | 100.00   |       | 109.91   |       | 139.04   |       | 141.74   |       | 155.82   |       | 191.32   |
| S&P Aerospace & Defense |       | 100.00   |       | 80.03    |       | 105.93   |       | 123.79   |       | 147.46   |       | 183.11   |

 

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# **Issuer Purchases of EquitySecurities**

On March 25, 2003 our Board of Directors authorized us to repurchase upto $1.0 million of our outstanding stock at market prices. As of June 30, 2007we had repurchased 116,100 shares at a cost of $117,320.

On July 13, 2005 we entered into an amendment to the Amended andRestated Rights Agreement, dated as of February 23, 2004, between us andAmerican Stock Transfer & Trust Company, as rights agents, which had theeffect of terminating our Rights Agreement effective July 13, 2005.

# **Sales of Unregistered Securities**

During fiscal year 2007 we did not issue any unregistered securities.

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

The following table sets forth our selected consolidated financial dataas of and for the years ended June 30, 2003, 2004, 2005, 2006, and 2007.Such data has been derived from our consolidated financial statements auditedby Ernst & Young LLP for the fiscal year ended June 30, 2003, by GrantThornton LLP for the fiscal years ended June 30, 2004, 2005, and 2006, and byPMB Helin Donovan, LLP for fiscal year ended June 30, 2007. The data set forthbelow should be read in conjunction with “Management’s Discussion and Analysisof Financial Condition and Results of Operations,” “Risk Factors” and ourConsolidated Financial Statements and Notes thereto included in this annualreport. All amounts, except per share amounts, are in thousands.
| ** **                                                                  | ** ** | **Years Ended June 30,** | ** ** |
|-----------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                  | ** ** | **2003**                                | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** |
| **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) | $ | 12,310 | (10) |
| Cash provided by (used  in) investing activities                            |       | 3,037                                   | (2)        | 5,019 |   | 17,683 | (6) | (1,141 | ) | (7,359 | )(11) |
| ** **                                                                  |       |                                    |       |   |   |   |   |   |   |   |   |
| **Balance Sheet Data (at period  end):**                                    |       |                                    |       |   |   |   |   |   |   |   |   |
|                                                                        |       |                                    |       |   |   |   |   |   |   |   |   |
| Working capital (deficit)  surplus                                          |       | $                                       | (4,750     | ) | $ | (6,351 | ) | $ | 5,435 |   | $ | 2,753 |   | $ | (5,545 | ) |
| 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)  | Includes approximately $78.3 million of non-cash  write downs related to the loss of our research double module, goodwill  impairment at our Government Services business unit, and asset impairment.                                                                                         |
|------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)  | Includes approximately $17.7 million of insurance  proceeds related to the loss of our research double module.                                                                                                                                                                                |
| (3)  | Includes approximately $17.5 million due to Boeing’s  termination of its spacecraft processing contract with us.                                                                                                                                                                         |
| (4)  | Includes approximately $0.3 million of non-cash  expenses related to subleasing of excess facilities, $8.3 million of goodwill  impairment at our Government Services and Astrotech Space Operations business  units, and a $1.8 million non-cash write-down of an investment in Guignè. |
| (5)  | Includes $7.7 million of net recovery from  non-recurring transactions related to the loss of our research double module.                                                                                                                                                                     |
| (6)  | Includes approximately $8.2 million from ReALMS  contract indemnification clause related to the loss of our research double  module.                                                                                                                                                          |
| (7)  | Includes approximately $6.3 million of non-cash  write downs related to our flight unit 3 and the shuttle based flight assets.                                                                                                                                                                |
| (8)  | Includes approximately $0.6 million of non-cash  charges related to the acceleration of debt placement fees related to the  convertible subordinated notes.                                                                                                                                   |
| (9)  | Includes approximately $12.5 million of non-cash  write downs related to our flight unit 2 and the shuttle based flight assets  and a $0.1 million non-cash write down of an investment in Applied  Astronautical Corporation.                                                                |
| (10) | Includes $5.7 million advance for construction of a  payload processing facility. Also includes $3.1 million advance from customer  for in-flight insurance for STS-118 that was paid in July 2007 to the  insurance carrier.                                                                 |
| (11) | Includes approximately $6.3 million of restricted  cash for the construction of a payload processing facility.                                                                                                                                                                                |

 

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

The following discussionshould be read in conjunction with, and is qualified in its entirety byreference to, our audited consolidated financial statements and notes theretoincluded elsewhere in this report.

Historically, we haveoperated in three main areas generally related to space flight activitieswithin the aerospace industry: space assets and mission support services formanned and unmanned space exploration and research missions; commercial andexploratory satellite pre-launch services; and engineering services in supportof government and commercial space operations. Because of the diversity amongthe operations of our activities, we report the results of each business as aseparate segment in our consolidated financial statements. Our consolidatedfinancial results also reflect corporate-level expenses such as general andadministrative, interest, and depreciation and amortization, but because oftheir nature, these items are not reported as a separate segment.

**Overview**

We provide a range ofproducts and services that focus on the needs of industry, governments andacademia requiring access to, and utilization of the unique environment ofspace. We employ a staff of engineers and technicians who have supportedapproximately 250 manned and unmanned missions to space from multiple locationsworldwide, including 23 space shuttle missions. We offer products and servicesin the following areas:

·                  Expertise in qualifyinghardware for spaceflight and the habitability and occupational challenges ofspace;

·                  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, and fabrication.

**Our Business Units**

Our company is currentlycomprised of three primary business segments which provide the followingproducts and services to the government and commercial markets. Our businessunits include:

*SPACEHAB Flight Services*.The primary goal of our Flight Services business unit is to enable governmentand commercial 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 factorsimpacting our Flight Services business unit earnings and cash flows are thenumber of space shuttle missions flown, the requirements for use of our spaceshuttle hardware and the configuration of the cargo handling and researchlogistics required for each mission. Other factors that have impacted, and are expectedto continue to impact 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 shuttlemission requirements for the manufacture of specialized cargo handlingequipment.

*Astrotech Space Operations*.Our Astrotech business unit provides modern facilities and support for thepreparation of multi-million dollar satellites and payloads for launch onexpendable launch vehicles. Since 1985, our Astrotech business unit has beenproviding government and commercial customers with a commercial alternative tousing government-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 Astrotechbusiness unit is generated from various fixed-priced contracts with launchservice providers in both the commercial and government markets. The servicesand facilities we provide to our customers support the final assembly,checkout, and countdown functions associated with preparing a spacecraft forlaunch. The earnings and cash flows generated from our Astrotech operations arerelated to the number of commercial spacecraft launches, which reflects thegrowth in the satellite-based communications industries, and the requirement toreplace aging satellites. Other factors that have impacted, and are expected tocontinue 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 tocomplete customer specified facility modifications within budgeted costs andtime commitments

*SPACEHAB Government Services*.For nearly 30 years, our Government Services business unit has provided largescale program technical support and specialized engineering analysis, products,and services 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 year terms atthe election of our NASA customer. Under this contract, we facilitate theassurance that the tens of thousands of pieces of hardware and software partsand components meet approved design and configuration requirements for theInternational Space Station. During the first nine months of fiscal year 2007,our Government Services business unit accounted for 11% of our consolidatedrevenues.

Earnings from ourGovernment Services business unit are dependent on our ability to continue towin contracts with NASA or other government entities through the competitivebidding process and our performance under those contracts in achievingperformance bonuses. Other factors that have impacted, and are expected tocontinue to impact earnings and cash flows for this 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 tocontrol costs within our 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 which we currently only pay alternative minimum tax and minimalstate income taxes; income taxes will be impacted by limitations on our netoperating loss carry forward upon consummation of our Exchange Transaction, ifsuccessful (see Note 28)

**New Business Vision**

In anticipation of theplanned 2010 space shuttle retirement, we began developing new products andservices. We are now focusing our business on using our core capabilities forthe commercial exploitation of space. These new business initiatives includethe following:

·                  Processingproducts and services in microgravity;

·                  Commercializingproducts manufactured in microgravity;

·                  Commercializingproducts developed for use in the space industry;

·                  Acquiring otherU.S. space contractors; and

·                  Providingend-to-end services for commercial and government satellite operations.

Although we aredeveloping products and services in support of the new business visions, wecurrently do not have contracts or other arrangements to provide these productsand services. We cannot assure you that we will be able to successfully developthese new products and services in the future. We anticipate that we willrequire substantial 

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additional capital todevelop these new products and services, and that this additional financingwill likely substantially dilute current holders of our common stock.

**New Business Initiatives**

Many of our identifiednew business initiatives are focused on space-based life sciences andend-to-end space mission assurance services, which are natural extensions ofour 23 years of space industry experience and our core capabilities in thesefields. These new business initiatives will require large investments ofcapital and technical expertise.

*Microgravity*.In the early days of the space program, it was determined that the effects ofmicrogravity provide a unique environment that could potentially benefithumans. Since the inception of the Space Shuttle Program and extending throughthe International Space Station Program, NASA has spent billions of dollars onmicrogravity infrastructure and research. We have been logistically responsiblefor several hundred of these experiments on the space shuttle, the RussianProgress vehicle and the International Space Station.

Previous spaceflightresearch suggests that growing protein crystals in the microgravity environmentof space offers the possibility of significantly increasing the x-raydiffraction quality of protein crystals. We believe that because of the highquality of these protein crystal structures, they may be used to better definethe protein structures of diseases such as diabetes, cystic fibrosis, sicklecell anemia, Alzheimer’s, Parkinson’s disease, Lou Gehrig’s disease and certainforms of cancer, which in turn may lead to the development of drugs capable ofcombating these diseases. If we are successful in developing protein crystalsin microgravity, we expect to pre-sell these crystals to pharmaceuticalcompanies.

On August 14, 2007, NASAannounced that it was seeking private industry proposals for research andmanufacturing concepts and opportunities onboard the International SpaceStation. This announcement indicates NASA’s desire to open the InternationalSpace Station to commercial projects. Because of our experience withmicrogravity, we are responding to the solicitation and believe that we arewell positioned to transition protein crystal growth, and other identifiedcandidates, from a space research project to a fully commercializedmicrogravity processing operation.

*Advanced Research andConventional Technology Utilization Spacecraft (ARCTUS)*. Weare assembling a team of industry partners with a common goal of developing acommercial transportation system providing lower cost, lower risk spacetransportation services than conventional, government-developed transportationsystems. ARCTUS is designed to provide cargo transportation services to theInternational Space Station under the unfunded Space Act Agreement signed withNASA in June 2007.

*End-to-End Space MissionAssurance*. We believe that Astrotech is a recognized leaderin providing commercial spacecraft processing services. Astrotech intends toexpand its market by offering end-to-end assurance services to both commercialand government customers. These new end-to-end space mission assurance serviceswould extend Astrotech’s current relationships with customers’ spacecraft froma condensed few weeks of ground processing at an Astrotech facility to multipleyears of space mission assurance services throughout the satellite’s lifecycle.

*SPACETECH*. In2007, we formed a “technology incubator” called SPACETECH. The purpose ofSPACETECH is to cultivate technology developed for and from space intocommercial applications. The following are two examples of new initiativesalready underway within SPACETECH:

·                  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 FederalAviation Administration and Department of Transportation have enacted new regulationsfor air transportation of oxygen containers to enhance safety in the event of afire. Applying decades of experience in the development of specializedcontainers, we have been working with an industry partner to develop andcertify a container to meet these new requirements. If successful, this projectwill provide us an opportunity to enter a new market.

**Our Business Strategy**

Our strategic vision isto be a recognized market leader in providing services to support spaceoperations and utilization with consistent growth while increasing shareholdervalue. Our business strategies to 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 access tospace on alternative launch systems for proprietary space processing and forcommercial customers;

·                  Design solutionsthat encourage private commercial investment in space; and

·                  Continue todevelop space-related hardware.

**FINANCIALCONDITION, CAPITAL RESOURCES, AND LIQUIDITY**

***BalanceSheet***. Our total assets at June 30, 2007 were $72.5million compared to total assets of $85.5 million at the end of fiscal year2006. The following table sets forth the significant components of the balancesheet as of June 30, 2007, compared with 2006 (in thousands):
|                                             | ** ** | **2007** | ** ** | **2006** | ** ** | **Chg.** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Assets:                                     |       |     |       |     |       |     |       |
| Current assets                              |       | $        | 25,926     |     | $          | 20,675   |       | $ | 5,251 |   |
| Property and equipment (net)                |       | 43,884   |       | 61,637   |       | (17,753  | )          |
| Other assets (net)                          |       | 2,665    |       | 3,138    |       | (473     | )          |
| Total                                       |       | $        | 72,475     |     | $          | 85,450   |       |   |   |
| Liabilities and  stockholders’ equity: |       |     |       |     |       |     |       |
| Current liabilities                         |       | $        | 31,471     |     | $          | 17,922   |       | $ | 13,549 |   |
| Long-term debt-less current portion         |       | 52,944   |       | 63,250   |       | (10,306  | )          |
| Other long-term liabilities                 |       | 1,191    |       | 1,469    |       | (278     | )          |
| Stockholders’ equity                   |       | (13,131  | )          | 2,809    |       | (15,940  | )          |
| Total                                       |       | $        | 72,475     |     | $          | 85,450   |       |   |   |

 

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

·                  Increase in cashand restricted cash of $9.7 million which was partially offset by a decrease inaccounts receivable of $3.1 million and other assets of $1.3 million. Thesedifferences are attributed to:

·                  Increase in cashand restricted cash of $9.7 million is primarily attributable to a new contractto expand our payload processing facility in our Astrotech subsidiary whichgenerated $6.3 million in restricted cash during fiscal year 2007.

·                  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 $1.3 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.

·                  Increasein prepaid expenses of $0.3 million.

The decrease in netproperty and equipment of $17.8 million from June 30, 2007 to June 30, 2006resulted primarily from the write-down of our flight unit 2 module due to ouranalysis of the remaining shuttle flights and the potential need for our flightunit 2 module on these flights and depreciation.

The decrease in otherassets of $0.5 million from June 30, 2007 to June 30, 2006 resulted primarilyfrom a decrease in net deferred financing costs of approximately $0.5 millionas a result of amortization of the deferred financing costs. Additionally, wehad a non-cash valuation allowance of $0.1 million for our investment inApplied Astronautical Corporation offset by an increase in other assets of $0.1million.

Our current liabilitiesincreased by $13.5 million from June 30, 2006 to June 30, 2007. The followingsummarizes significant items:

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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 as we paidthe remaining payments on our mortgage loan at our Astrotech facility.Additionally, our short-term debt increased from June 30, 2006 to June 30, 2007by $10.3 million due to our 8% convertible subordinated notes maturing inOctober 2007.

·                  Our advances onconstruction contract 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.

·                  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 inAugust 2007. The payment to the insurance carrier was made subsequent to yearend.

·                  Our currentportion of deferred revenue decreased by $0.2 million for June 30, 2006 to June30, 2007 due to timing of receiving payments and recognizing revenue forshuttle related and satellite related programs.

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

Other long-termliabilities decreased by $0.3 million at year end 2007 compared to year end2006 primarily due to normal recognition of the long-term gain of the $1.6million that was recorded in the fourth quarter of fiscal year 2005 due to thesale of our Cape Canaveral and Houston Headquarters facilities that will berecognized over the term of the leases.

**Liquidity and Capital Resources**

As of June 30, 2007 wehad cash and restricted cash on hand of $16.0 million and our working capitalwas approximately ($5.5) million. Restricted cash, which consists of advancepayments on a government contract to modify certain spacecraft processingfacilities, totaled $6.3 million at June 30, 2007. For fiscal year 2007 wegenerated $12.3 million from operating activities. Our $5.0 million revolvingcredit facility expired as of February 11, 2007 and we elected not to renew thefacility.

Our $10.3 million ofoutstanding 8.0% convertible notes are due on October 15, 2007 and our $52.9million of 5.5% senior convertible notes are due in October 2010. A covenant inour 5.5% note indenture restricts us from using the proceeds from the sale ormortgage of our Astrotech Florida assets for purposes other than reducingoutstanding balances on our credit facility, repaying our now extinguishedmortgage loan, or redeeming outstanding 5.5% senior convertible notes. We donot have sufficient liquidity to repay the principal and interest on our 8.0%convertible notes and the interest on our 5.5% senior convertible notes whendue on October 15, 2007 unless our Exchange Offer (see Item 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations—Liquidityand Capital Resources) is successfully consummated.

***CashFlows From Operating Activities.*** Cash provided by (usedin) operations for the years ended June 30, 2007, 2006, and 2005 was $12.3million, $4.0 million, and ($7.2) million, respectively. The significant itemsaffecting the differences in cash flows from operating activities in fiscalyear 2007 as compared to fiscal year 2006, and fiscal year 2006 compared tofiscal year 2005 are discussed below:

Fiscal Year 2007 Comparedto Fiscal Year 2006. For the fiscal year 2007 compared tofiscal year 2006, the significant items affecting cash provided by operatingactivities 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.

·                  Depreciationand amortization for fiscal year 2007 was $0.3 million more compared to fiscalyear 2006, primarily due to increased depreciation expense for our flightassets resulting from the change of the 

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depreciable livesfrom 2016 to 2010. This change in depreciable lives is based on the mostcurrent information available from NASA on the retirement of the space shuttlefleet 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 in liabilitiesfor fiscal year 2007 provided cash from operations of $5.3 million. Thischange 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.

·                  Increaseof $3.1 million in customer deposits. Our short-term deposit account increasedby $3.1 million during the current fiscal year. This is a result of usreceiving $3.1 million from our customer prior to year end for the in-flightinsurance on our flight assets for STS-118 that flew in August 2007. Thepayment to the insurance carrier was made subsequent to year end.

Changes in liabilitiesfor fiscal year 2006 used cash from operations of $2.2 million. Thischange was due primarily to the decreases in accounts payable, accruedexpenses, and accrued subcontracting costs of $1.8 million and the decrease indeferred revenue of $0.4 million. The decreases in accounts payable, accruedexpenses, and accrued subcontracting costs is due to decreased mission activityfor shuttle related projects. The decrease in deferred revenue is primarily dueto the completion of the Japanese Experiment Thermal Incubator Service contractduring fiscal year 2006.

Fiscal Year 2006 Comparedto Fiscal Year 2005. For the fiscal year 2006 compared tofiscal year 2005, the significant items affecting cash provided by operatingactivities 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.

·                  Changesin assets for fiscal year 2006 provided cash from operations of $5.6 million.This change is primarily due to a decrease in accounts receivable of $5.5million and a decrease in prepaid expenses and other assets of $0.1 million.The decrease in accounts receivable is primarily due to a decrease inshuttle-related project work 

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and the timing ofpayments. The decrease in other assets is primarily due to a decrease indeferred mission costs for the Japanese Experiment Thermal Incubator Servicecontract due to the completion of the contract in fiscal year 2006. For fiscalyear 2005 change in assets used cash from operations of $7.9 million primarilyfrom an increase in accounts receivable of $9.0 million and an increase in prepaidexpenses of $0.2 million, which was partially offset by a decrease in otherassets of $1.3 million.

·                  Changes inliabilities for fiscal year 2006 used cash from operations of$2.2 million. This change is due primarily to the decreases in accountspayable, accrued expenses, and accrued subcontracting costs of $1.8 million andthe decrease in deferred revenue of $0.4 million. The decreases in accountspayable, accrued expenses, and accrued subcontracting costs is due to decreasedmission activity for shuttle related projects. The decrease in deferred revenueis primarily due to the completion of the Japanese Experiment Thermal IncubatorService contract during fiscal year 2006. For fiscal year 2005 changes inliabilities used cash in operations of $1.8 million. This change is dueprimarily to the decreases in accounts payable and accrued expenses of $1.5million which includes an increase due to the recording of $0.5 million relatedto the Lloyd’s settlement and the decrease in deferred revenue of $5.4 million.

***CashFlows From Investing Activities***. For the years ended June30, 2007, 2006, and 2005, cash flows provided by (used in) investing activitieswere ($7.4) 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 Year 2007 Comparedto Fiscal Year 2006. For the fiscal year 2007 compared tofiscal year 2006, the significant items affecting cash provided 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 2007cash flows from investing activities included an increase of $6.3 million inrestricted cash as compared to a decrease in restricted cash of $0.1 millionfor fiscal year 2006. This difference is a result of us receiving paymentsduring fiscal year 2007 for the design and construction of a payload processingfacility at our Vandenberg Air Force Base location.

Fiscal Year 2006 Comparedto Fiscal Year 2005. For the fiscal year 2006 compared tofiscal year 2005, the significant items affecting cash provided 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 2006cash flows from investing activities included a decrease of $1.0 million inrestricted cash as compared to an increase in restricted cash of $0.5 millionfor fiscal year 2005.

***CashFlows From Financing Activities***. For the years ended June30, 2007, 2006, and 2005, cash flows used in financing activities were $1.5million, $3.9 million, and $3.7 million, respectively. The significant itemsaffecting the differences in cash flows from financing activities in fiscalyear 2007 compared to fiscal year 2006 and fiscal year 2006 compared to fiscalyear 2005 are as follows:

Fiscal Year 2007 Comparedto Fiscal Year 2006. For the fiscal year 2007 compared tofiscal year 2006, the significant items affecting cash used in financingactivities were:

·                  Fiscalyear 2007 had a payment of $1.6 million for our mortgage loan as compared topayments of $2.1 million for fiscal year 2006. This decrease is due to thematurity of the term note in January 2007 and complete payment in December2006.

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·                  Fiscalyear 2006 had an increase of $1.9 million from the refinancing of oursubordinated convertible notes as compared to fiscal year 2007.

 Fiscal Year 2006 Compared to Fiscal Year2005. For the fiscal year 2006 compared to fiscal year 2005, thesignificant items affecting cash used in financing activities were:

·                  Fiscal year 2005had net repayments of $1.4 million in principal under our revolving creditfacility as 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.

·                  Fiscalyear 2006 had an increase of $1.5 million from the refinancing of oursubordinated convertible notes as compared to fiscal year 2005.

***Liquidity***.We continue to focus our efforts on improving overall liquidity through identifyingnew business opportunities within the areas of our core competencies, reducingoperating expenses, and limiting cash commitments for future capitalinvestments and new asset development. We have continued to restrict newcapital investment and new asset development, limiting projects to thoserequired to support current contracts and facility maintenance. Additionally,we continue to evaluate operating expenses in an effort to reduce or eliminatecosts not required for us to operate effectively.

On April 28, 2005 weconsummated the sale and simultaneous lease back of our Cape Canaveral, Floridapayload processing facility. The sale resulted in net cash of approximately$3.8 million. We leased back the facility for an initial period of five years,with an option period of an additional five years. The annual rental for thefirst five years of this lease is approximately $0.45 million. On May 26, 2005we consummated 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 restrictedcash on hand was approximately $16.0 million as of June 30, 2007. Included inthe $16.0 million is $3.1 million for in-flight insurance on STS-118 that waspaid in July 2007. Additionally, $6.3 million is restricted cash for aconstruction contract to expand one of our processing facilities. Our capitalrequirements for continuing operations consist of our general working capitalneeds, scheduled principal and interest payments on our debt obligations,certain contractual commitments, and capital expenditures. This includesshort-term capital to finance continuing operations at the end of 2007, andlong-term capital to finance our 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 that theexchange offer will be sufficient to alleviate our liquidity issues due to alack of capital resources. In addition, with the conclusion of STS-118 inAugust 2007, we expect to have a material decrease in our revenue from ourFlight Services business, which has accounted for over 65% of our consolidatedrevenue during fiscal year 2007. Moreover, our revolving credit line expired onFebruary 11, 2007. As a result, in order to continue to fund our currentoperations, we will need additional capital. No assurance can be given that wewill be able to obtain a new source of capital on terms that are acceptable tous. If we are unable to obtain new capital, we may be forced to subjectourselves to bankruptcy, reorganization, liquidation, dissolution or similarproceeding.

If we are unable tocomplete the Exchange Offer for any reason, we may restructure through abankruptcy proceeding. Our ability to restructure in bankruptcy is subject tonumerous risks, including the following:

·                  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 unableto arrange debtor-in-possession financing or otherwise finance our operationsduring bankruptcy

Our capital requirementsfor continuing operations consist of our general working capital needs, scheduledprincipal and interest payments on our debt obligations, certain contractualcommitments, and capital expenditures. This includes short-term capital tofinance continuing operations at the end of 2007, and long-term capital tofinance our 

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growth. Our capitalresources which are solely comprised of cash reserves and cash generated fromoperations, may not be sufficient to meet these capital requirements. While webelieve that the exchange offer would help address our foreseeable refinancingrisk related to the Junior Notes that mature in October 2007, there is noassurance that the exchange offer will be sufficient to alleviate our liquidityissues due to a lack of capital resources.

Our contractualobligations as of June 30, 2007 are 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 2008and 2009 we expect to receive net payments of approximately $0.4 million and$0.1 million, respectively, for subleases. Additionally, we agreed to terminateout ICC and VCC leases (see Note 28) in FY2008.

**Critical Accounting Policies**

*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 Revenue Recognition 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 Specific

 

 

Firm Fixed Price – Guaranteed Number of Missions |       | Ratably, over the occupancy period of a satellite  within the facility from arrival through launch

 

For multi-year contract payments recognized ratably  over the contract period |
|                |       |                                                                             |       |                                                                                                            |       |                                                                                                                                                                                      |
| 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, “Accounting for theImpairment or Disposal of Long-Lived Assets.” This Statement requires thatcertain 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 amountby which the carrying amount of the asset exceeds the fair value of the asset.Assets to be disposed of are reported at the lower of the carrying amount orfair value less costs to sell.

**RESULTSOF OPERATIONS**

**Results of Operations for the Years Ended June30, 2007, 2006, and 2005**

*Overview*. Inthis section we discuss our results of operations, both on a consolidated basisand, where appropriate, 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, wehave done so on a “diluted earnings per share” basis. The weighted averagenumber of common shares applicable to diluted earnings for 2007, 2006, and 2005were 12,919,506, 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 forour 2007 fiscal year compared to ($12,397,000) or ($0.97) per diluted share onrevenues of $50,746,000 for 2006 and $5,249,000 or $0.37 per diluted share onrevenues of $59,401,000 for 2005.

*Revenue*. Ourrevenue for the twelve months ended June 30, 2007, 2006, and 2005 was generatedprimarily from the Lockheed Martin Cargo Mission Contract and contracts withrelated commercial 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 business unit supported NASA’s spaceflight activities onboth the STS-116 and 118 missions. Our Flight Services business unit prepared acargo carrier for shuttle mission STS-118, the External Stowage Platform 3 (“ESP3”)that was deployed and permanently mounted to the International Space Stationduring the August 2007 mission. For both STS-116 and 118 missions under theCargo Mission Contract, we provided our pressurized single module andunpressurized integrated cargo carrier for transport of critical cargo andorbital replacement units to and from the International Space Station.

During the three andtwelve months ended June 30, 2007, deferred revenue decreased by $0.2 millionand $0.2 million, respectively, as we recognized revenue on contracts wheremilestone payments had been received in prior periods. We expect furtherreduction of deferred revenue due to customer prepayments through the nexttwelve months which will result in revenue recognition on contracts for whichthe related cash was received in a prior period.

*Costs of Revenue*.We have several types of costs of revenue in our business segments. Costs ofrevenue for our Flight Services business unit include integration andoperations expenses associated with the performance of two types ofefforts, sustaining engineering in support of all missions under acontract and mission specific support. Costs associated with the performance ofthe contracts using the percentage-of-completion method of revenue recognitionare expensed as incurred. Costs associated with the cost-reimbursable award andfixed-fee contracts are expensed as incurred by our Government Servicesbusiness unit. Other costs of revenue include depreciation expense and costsassociated with the Astrotech payload processing facilities. Flight-relatedinsurance covering transportation of our modules from our payload processingfacility to the space shuttle and third-party liability insurance are alsoincluded in costs of revenue and are recorded as incurred. Selling, general andadministrative and interest and other expenses are recognized when incurred.

*Non-GAAP Financial Measures*.We use 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 tablesprovide summary financial data regarding our consolidated and segmented resultsof operations for our 2007, 2006, and 2005 fiscal years, respectively (inmillions):

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**FiscalYear 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:

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## ***SPACEHAB Flight Services***

Operating income (loss)for our Flight Services business 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 million for the write down of our flight unit 2 module and other flightbased assets due to our analysis of the remaining space shuttle flights andNASA’s potential need for our module. Operating loss for 2006 included an assetimpairment charge of $6.3 million for the write down of our flight unit 3module due to our analysis of the remaining space shuttle flights and NASA’spotential need for our module. Operating income for fiscal year 2005 includesan $8.2 million payment 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 UnitResults of Operations for the Fiscal Year Ended June 30, 2007 as Compared tothe Fiscal Year Ended June 30, 2006*

The Flight Servicesbusiness unit’s operating income before charges increased by $0.2 million fromfiscal year 2006 to fiscal year 2007. The following summarizes significantchanges for our fiscal year ended June 30, 2007 as compared to our fiscal yearended June 30, 2006:

Revenue increases of $1.1million, consisting of the following

·                  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.

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

Cost of Revenue decreasesof $0.9 million, consisting of 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 July2006.

·                  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.

·                  Othercost of revenue decrease of $0.5 million mainly due to our contract withAstrium to provide a new ICC pallet to replace ESP2 that was permanentlyaffixed to the space station during the STS-114 mission in July 2005.

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Included in the revenuedecreases is the reduction in workforce for our Flight Services business unitin January 2007. This reduction resulted in a net decrease in personnel andrelated costs of $1.3 million for the last six months of fiscal year 2007.

Our Flight Servicesbusiness unit is currently supporting deintegration requirements for shuttlemission STS-118. The Flight Services business unit completed cargo services onthe STS-121 mission that launched during the first part of fiscal year 2007.For the space shuttle STS-121 mission, we provided our non-deployable ICC toNASA for transport of several critical International Space Station orbitalreplacement unit spares. For both shuttle missions STS-116 and 118, we providedour pressurized Logistics Single Module and our unpressurized ICC for transportof critical cargo and orbital replacement units to and from the ISS. Aspreviously described, the Research and Logistics Mission Support contractexpired January 31, 2004 and support for shuttle missions STS-116 and 118 wascontinued under a subcontract agreement to Lockheed Martin effective February1, 2004.

*Flight Services Business UnitResults of Operations for the Fiscal Year Ended June 30, 2006 as Compared tothe Fiscal Year Ended June 30, 2005*

The Flight Servicesbusiness unit’s operating income before charges decreased by $2.9 million fromfiscal year 2005 to fiscal year 2006. The following summarizes significantchanges for our fiscal year ended June 30, 2006 as compared to our fiscal yearended June 30, 2005:

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

·                  Decreasein revenue from the Lockheed Martin Cargo Mission Contract of $1.5 million.This decrease is a result of a(n):

·                  Decreasein revenue for STS-116 by $2.4 million due to the slip of the launch date fromApril 2006 to December 2006. During fiscal year 2005 we were performing thecontract with a projected launch date of April 2006. During the first quarterof fiscal year 2006, the launch date was slipped to November 2006 andeventually to December 2006. Therefore, for most of fiscal year 2006, we wereworking under the equitable adjustment clause of the contract.

·                  Decreasein revenue for STS-121 by $1.3 million due to the slip of the launch date fromSeptember 2005 to July 2006. During fiscal year 2005, we were performing thecontract with a projected launch date of September 2005. During the firstquarter of fiscal year 2006, the launch date was slipped to May 2006 andeventually slipped to July 2006. Therefore, for most of fiscal year 2006 wewere working under the equitable adjustment clause of the contract.

·                  Increasein revenue 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.

·                  Decreasein revenue 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.

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

·                  Decreasein revenue from the Japanese Experiment Thermal Incubator Service of $1.6million due to the completion of the contract in April 2006.

·                  Thevarious other contract revenue increased $0.6 million mainly due to ourcontract with Astrium to provide a new ICC pallet to replace the ESP2 that waspermanently affixed to the space station during the STS-114 mission in July2005.

Cost of Revenue decreaseof $6.2 million, consisting of the following:

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

·                  Increasein cost of revenue for STS-116 by $0.3 million due to the slip of the launchdate from April 2006 to December 2006. During fiscal year 2005 we wereperforming the contract with a projected launch date of April 2006. During thefirst quarter of fiscal year 2006, the launch date was slipped to November 2006and eventually 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 

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depreciable lives of our flight assets, directdepreciation increased by $1.1 million from fiscal year 2005 to fiscal year2006.

·                  Decreasein cost of revenue for STS-121 by $1.5 million due to the slip of the launchdate from September 2005 to July 2006. During fiscal year 2005 we wereperforming the contract with a projected launch date of September 2005. Duringthe first quarter of fiscal year 2006, the launch date was slipped to May 2006and eventually slipped to July 2006. Therefore, for most of fiscal year 2006 wewere working 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.

·                  Increasein cost of revenue for STS-118 by $0.4 million due to more 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.

·                  Decreasein cost of revenue of $4.1 million for ESP2 that launched on STS-114 in July2005.

·                  Decreasein CE&R cost of revenue of $0.9 million that was started in the firstquarter of fiscal year 2005 and completed in the first quarter of fiscal year2006.

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

·                  Othercost of revenue increase of $0.4 million mainly due to our contract withAstrium to provide a new ICC pallet to replace ESP2 that was permanentlyaffixed to the space station during the STS-114 mission in July 2005.

·                  Increasein rent expense of $0.3 million from fiscal year 2005 to fiscal year 2006 dueto the sale-leaseback of our payload processing facility in fourth quarterfiscal year 2005. This increase is offset by lower operating costs for thefacility during fiscal year 2006 as compared to fiscal year 2005.

## ***Astrotech Space Operations***

Operating income for ourAstrotech business unit was $2.0 million for fiscal year 2007, compared to $2.5million and $2.1 million for fiscal years 2006 and 2005, respectively.Operating income for 2007 included selling, general and administrative expenseof $0.3 million and depreciation and amortization expense of $2.1 million ascompared to selling, general and administrative expense of $0.3 million and$0.3 million and depreciation and amortization expense of $2.1 million and $2.1million for fiscal years 2006 and 2005, respectively. Please see “Results ofOperations for the Years Ended June 30, 2007, 2006 and 2005 — Other” for aconsolidated discussion of selling, general and administrative expense anddepreciation and amortization expense.

*Astrotech Business Unit OperatingResults for Fiscal Year ended June 30, 2007 as Compared to the Fiscal YearEnded June 30, 2006*

Our Astrotech businessunit’s operating income before charges decreased by $0.5 million from fiscalyear 2006 to fiscal year 2007. The following summarizes significant changes forour fiscal year ended June 30, 2007 as compared to our fiscal year ended June30, 2006:

Revenue increases of $1.1million, consisting of the following:

·                  Increasein revenue of $1.3 million from a new contract to design a satellite processingfacility.

·                  Increasein revenue 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.

·                  Increasein other revenue of $0.5 million mainly due to mission unique servicesrequested by 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 a launchfailure resulting in the loss of a satellite and damage to the floating launchplatform. A full inspection, evaluation, and repair operations of the damageincurred and preliminary reports indicate that Sea Launch will return tooperations in October 2007. We are paid under our contract with Sea Launch uponlaunch of each mission; therefore, anticipated revenues have been delayed untilthe resumption of normal operations.

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

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·                  Decreasein revenue of $0.3 million due to the reduction of revenue on our LockheedMartin guaranteed missions contract for two future missions that will beprocessed for Boeing on Atlas launch vehicles partially offset by one Atlasmission (STP-1) processed at the Titusville facility that was contracteddirectly with Boeing.

·                  Decreasein revenue from our Lockheed Martin guaranteed contract of $1.0 million due tothe guarantee being reduced this calendar year as compared to the same periodlast fiscal year.

Cost of revenue from ourAstrotech business unit increased for the fiscal year 2007 as compared tofiscal year ended 2006 by $1.6 million. The increase is mainly due to higherprofessional services of $0.4 million for the new contract to design asatellite processing facility. Additionally, mission specific expensesincreased by $1.0 million due to increased mission support services in Floridaand Vandenberg. Also, although Astrotech’s labor force did not changesignificantly, they had higher labor and related costs of $0.2 million infiscal year 2007 as compared to fiscal year 2006 due to cost of livingincreases.

*Astrotech Business Unit OperatingResults for Fiscal Year ended June 30, 2006 as Compared to the Fiscal YearEnded June 30, 2005*

Our Astrotech businessunit’s operating income before charges increased by $0.4 million from fiscalyear 2005 to fiscal year 2006. The following summarizes significant changes forour fiscal year ended June 30, 2006 as compared to our fiscal year ended June30, 2005:

Revenue from our ASObusiness unit increased from fiscal year 2005 to fiscal year 2006 by $0.7million. This increase is primarily attributable to ASO receiving revenue forone additional guaranteed mission for calendar year 2006 under our LockheedMartin satellite processing contract in the amount of $0.9 million. Thisincrease is partially offset by a decrease of $0.2 million of revenue due tosatellite launch schedules.

Cost of revenue from ourAstrotech business unit increased for the fiscal year 2006 as compared tofiscal year ended 2005 by $0.2 million. The increase is mainly due to higherutility costs due to the increase in fuel costs during fiscal year 2006 ascompared to fiscal year 2005. Also, although Astrotech’s labor force did not changesignificantly, they had higher labor and related costs in fiscal year 2006 dueto cost of living increases. Costs did not increase consistent with revenue dueto the $0.9 million guaranteed mission payments for which there was noincremental cost.

## ***SPACEHAB Government Services***

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

*Government Services Business UnitResults of Operations for Fiscal year ended June 30, 2007 as Compared to theFiscal Year Ended June 30, 2006*

Our Government Servicesbusiness unit’s operating income before charges increased by $0.4 million fromfiscal year 2006 to fiscal year 2007. The following summarizes significantchanges for our fiscal year ended June 30, 2007 as compared to our fiscal yearended June 30, 2006:

Revenue increases of $0.4million, consisting of the following:

·                  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 inother revenue of $0.2 million primarily due to the contract closeout of ourcontract with Shanghai Scienceland in fiscal year 2006.

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Cost of revenue increase of $0.0 million, consistingof 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 costof revenue from our subcontract with ARES on the PI&C contract of $0.3million. This decrease is due to a reduction in our statement of workassociated with the contract.

*Government Services Business UnitResults of Operations for Fiscal year ended June 30, 2006 as Compared to theFiscal Year Ended June 30, 2005*

Our Government Servicesbusiness unit’s operating income before charges decreased by $0.4 million fromfiscal year 2005 to fiscal year 2006. The following summarizes significantchanges for our fiscal year ended June 30, 2006 as compared to our fiscal yearended June 30, 2005:

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

The decrease in revenueat the Government Services business segment is primarily due to the delivery ofthe intravehicular activity (“IVA”) handrails in the third quarter of fiscalyear 2005. The following 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 inother revenue of $0.3 million.

The decrease in cost ofrevenue by $0.2 million is primarily due to the delivery of the IVA handrailsin the third quarter of fiscal year 2005, which was partially offset by thecosts of revenue associated with the closeout of the Shanghai Sciencelandproject for the period ending June 30, 2006.

## ***Other***

Other operating loss was($8.1) million for fiscal year 2007, compared to ($8.6) million and ($7.8)million for fiscal years 2006 and 2005, respectively. The $8.1 millionoperating loss for fiscal year 2007 relates to primarily selling, general andadministrative expenses and depreciation and amortization expenses which wereincurred at the corporate level and an impairment charge of $0.1 millionattributable to our non-cash write-down of our investment in AppliedAstronautics Corporation. The operating loss for fiscal 2006 and 2005 relatesprimarily to selling, general, and administrative expenses and depreciation andamortization expenses which were incurred at the corporate level. Also includedin other is the revenues and expenses associated with Space Media, Inc. whichincluded the operations of the Space Store, LLC which was sold during fiscalyear 2007.

Consolidated selling,general and administrative expenses, other than the asset impairment chargesfor our shuttle based assets and our investment in Applied AstronauticsCorporation, and research and development were $10.7 million in fiscal year2007, compared to $11.1 million and $9.5 million in 2006 and 2005,respectively. The $0.4 million decrease for fiscal year 2006 to 2007 isprincipally 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.

·                  Decreaseof $0.3 million in legal expenses primarily due to us dropping our claimsagainst NASA related to the loss of our RDM (see Item 3 Legal Proceedings).

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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 ourGovernment Services business segment labor and associated facilities costs of$0.1 million due to staff reduction during fiscal year 2007.

The $1.6 million increasefor fiscal year 2005 to 2006 is 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.

·                  Decreasein corporate depreciation expense of $0.2 million due to assets reaching theend of their useful lives during fiscal year 2006.

Consolidated depreciationand amortization expenses were $5.9 million in fiscal year 2007 compared to$5.6 million and $5.2 million in 2006 and 2005, respectively. The $0.3 millionincrease in fiscal year 2006 compared to 2007 is primarily due to an increasein depreciation expense of $0.6 million resulting from the change indepreciable lives during the second quarter of fiscal year 2006 of our flightassets based on NASA’s direction to retire the space shuttle fleet at the endof 2010. This increase is offset by a decrease in other depreciation expense of$0.3 million primarily due to a portion of fixed assets reaching the end oftheir useful lives.

The $0.4 million increasein fiscal year 2005 compared to 2006 is primarily due to an increase indepreciation expense of $0.6 million resulting from the change in depreciablelives of our flight assets based on NASA’s direction to retire the spaceshuttle fleet at the end of 2010. This increase is offset by a decrease inother depreciation expense of $0.4 million primarily due to a portion of fixedassets reaching the end of their useful lives and the sale leaseback of ourFlorida payload facility and corporate headquarters during the fourth quarterof fiscal year 2005.

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

·                  Decrease in interestexpense of $1.1 million due to the exchange of the 8% notes for the 5.5% notesduring fiscal year 2006 therefore, for all of fiscal year 2007, we had thereduced interest expense for the $52.9 million of 5.5% convertible notes.

·                  Decreaseof $0.1 million resulting from the mortgage loan on our Astrotech facilityreaching maturity in January 2007 with the final payment being made in December2006.

The $0.2 million decreasefor 2006 as compared to 2005 is 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.

·                  Decreaseof $0.1 million resulting from the refinancing of our Astrotech spacecraftprocessing facility 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 $38.3 millionof available net operating loss carryforwards expiring between 2020 and 2025 tooffset 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.

39

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# **Market Risk**

Our primary exposure tomarket risk relates to interest rates. We do not currently use any interestrate swaps or derivative financial instruments to manage our exposure tofluctuations in interest rates. A one percent change in variable interest rateswill not have a material impact on our financial condition.

# **Off Balance Sheet Arrangements**

We did not have anyoff-balance sheet arrangements as of June 30, 2007.

# **Item 7A. Quantitative and Qualitative Disclosures about Market Risk.**

Our primary exposure tomarket risk relates to interest rates. We do not currently use any interestrate swaps or derivative financial instruments to manage our exposure tofluctuations in interest rates. A one percent change in variable interest rateswill not have a material impact on our financial condition.

40

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

# **Report of Independent Registered Public AccountingFirm**

The Board of Directorsand Stockholders

SPACEHAB, Incorporatedand Subsidiaries:

We have audited theaccompanying consolidated balance sheet of SPACEHAB, Incorporated andsubsidiaries (the “Company”) as of June 30, 2007, and the related consolidatedstatements of operations, stockholders’ equity (deficit) and comprehensiveincome (loss) and cash flows for the year then ended. These consolidatedfinancial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these consolidated financialstatements based on our audit.

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. The Company is not required to have, nor were we engagedto perform an audit of its internal control over financial reporting. Our auditincluded 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 audit provides a reasonable basis for our opinion.

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of the Company as ofJune 30, 2007, and the results of their operations and their cash flows for theyear then ended, in conformity with accounting principles generally accepted inthe United States of America.

The accompanyingconsolidated financial statements have been prepared assuming the Company willcontinue as a going concern.  Asdiscussed in Note 1 to the consolidated financial statements, the Company hassustained recurring losses and negative cash flow from operations which raisessubstantial doubt about its ability to continue as a going concern.  Management’s plans in regard to these mattersare also described in Note 1.  Theconsolidated financial statements do not include any adjustment that mightresult from the outcome of this uncertainty.
| /s/PMB HELIN DONOVAN LLP |   |
|--------------------------|--------|
|                     |
| Houston, Texas           |
| September 5,  2007       |

 

41

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# **Report of Independent Registered Public AccountingFirm**

The Board of Directorsand Stockholders

SPACEHAB, Incorporatedand Subsidiaries:

We have audited theaccompanying consolidated balance sheet of SPACEHAB, Incorporated andsubsidiaries (the “Company”) as of June 30, 2006, and the related consolidatedstatements of operations, stockholders’ equity, and comprehensive income (loss)and cash flows for each of the two years in the period ended June 30, 2006.These consolidated financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits.

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement. The Company is not required to have, nor were weengaged to perform an audit of its internal control over financial reporting.Our audits included consideration of internal control over financial reportingas a basis for designing audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on theeffectiveness of the Company’s internal control over financial reporting.Accordingly, we express no such opinion. An audit also includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used, and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation. We believe that our audits provide a reasonable basis for ouropinion.

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of the Company as ofJune 30, 2006, and the results of their operations and their cash flows foreach of the two years in the period ended June 30, 2006 in conformity withaccounting principles generally accepted in the United States of America.
| /s/GRANT THORNTON LLP |   |
|-----------------------|--------|
|                  |   |
| Houston, Texas        |
| August 31, 2006       |

 

42

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**SPACEHAB,INCORPORATED AND SUBSIDIARIES**Consolidated BalanceSheets(In thousands, except share data)
| ** **                                                                                                                                              | ** ** | **June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|
| ** **                                                                                                                                              | ** ** | **2007**          | ** ** | **2006** | ** ** |
| **Assets**                                                                                                                                              | ** ** | ** **        | ** ** | ** ** | ** ** |
| Current  assets                                                                                                                                         |       |              |       |   |   |
| Cash and cash equivalents                                                                                                                               |       | $                 | 9,724      |   | $ | 6,317 |   |
| Restricted cash                                                                                                                                         |       | 6,282             |       | — |   |
| 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                                                                                                                                   |       | 25,926            |       | 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 |   |
| 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 |   |
| Advances on construction contract                                                                                                                       |       | 5,722             |       | — |   |
| Customer deposit                                                                                                                                        |       | 3,106             |       | — |   |
| Deferred revenue, current portion                                                                                                                       |       | 1,153             |       | 1,321 |   |
| Total  current liabilities                                                                                                                              |       | 31,471            |       | 17,922 |   |
| 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 financial statements.

43

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**SPACEHAB,INCORPORATED AND SUBSIDIARIES**

 

Audited ConsolidatedStatements 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.

44

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**SPACEHAB,INCORPORATED AND SUBSIDIARIES**

 

Consolidated Statementsof Stockholders’ Equity (Deficit) and Comprehensive Income (Loss)

(In thousands, except sharedata)

 
| ** **                                             | ** ** | **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 | ) |

 

Seeaccompanying notes to consolidated financial statements.

45

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**SPACEHAB, INCORPORATED ANDSUBSIDIARIES**

Consolidated Statements of Cash Flows

(In thousands)

 
| ** **                                                                                          | ** ** | **Twelve Months Ended June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                          | ** ** | **2007**                                             | ** ** | **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 | ) |
| 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                                                 |       | 12,310                                               |       | 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  restricted cash                                                             |       | (6,282                                               | )          | 970 |   | (540 | ) |
| Proceeds from contract  indemnification                                                             |       | —                                               |       | — |   | 8,244 |   |
| Payment for legal claim  settlement                                                                 |       | (500                                                 | )          | — |   | — |   |
| Net cash (used in) provided by investing activities                                                 |       | (7,359                                               | )          | (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.

 

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# **NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**(1)**                     Descriptionof the Company and Operating 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 space shuttlemissions with the development and provision of flight qualified hardwareassets, the Flight Services business unit is continuing to offer a range ofengineering, research, logistics, integration, operations, and ground supportservices. Our experience with the integration of complex science payloadsenables our entrance into the field of microgravity processing of high valuebioscience 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 projects inneed of comprehensive engineering solutions, and provides unique capabilitiessuch as specialty engineering, hardware design and development, andconfiguration and data management. Government Services also designs and fabricatesspace 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 years endedJune 30, 2007 and 2006. Historically, the Company has financed its capitalexpenditures, research and development and working capital requirements withprogress 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 restricted cash onhand of $16.0 million and our working capital was approximately ($5.5) million.Restricted cash, which consists of advance payments on a government contract tomodify certain spacecraft processing facilities, totaled $6.3 million at June30, 2007. For fiscal year 2007 we generated $12.3 million from operatingactivities. Our $5.0 million revolving credit facility expired as of February11, 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 bank 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.

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On August 31, 2007 we filed a Schedule TO pursuant toRule 13e-4 promulgated under the Securities Exchange Act of 1934, as amended,in connection with the Company’s offer to exchange (the “Exchange Offer”) 74shares of common stock and 1.2 shares of Series C Convertible Preferred Stockfor each $1,000 principal amount of outstanding 8% Convertible SubordinatedNotes due 2007 (the “Junior Notes”) up to $10,306,000 in aggregate principalamount of the Junior Notes and 667 shares of common stock and 1 share of SeriesC Convertible Preferred Stock for each $1,000 principal amount of outstanding5.5% Senior Convertible Notes due 2010 (the “Senior Notes”) up to $52,944,000in aggregate principal amount of the Senior Notes, upon the terms and subjectto the conditions set forth in the Company’s offering memorandum, dated August31, 2007 (the “Offering Memorandum”), and the related Exchange Offer materialswhich are filed as Exhibits (a)(1)(B) to (a)(1)(I) of the Schedule TO (whichOffering Memorandum and related Exchange Offer materials, as amended orsupplemented from time to time, collectively constitute the “Offer Materials”).

Additionally, on August 28, 2007, the Company andAstrium, GmbH mutually agreed to terminate the lease agreement dated as ofFebruary 28, 2001 in regards to the Company’s lease of the Integrated CargoCarriers (ICC) assets from Astrium, GmbH. Also, we mutually agreed to terminatethe lease agreement dated as of July 3, 2001 in regards to the Company’s leaseof the 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 August31, 2007 for the ICC assets and incur no financial obligations for either theICC or VCC after August 31, 2007.

We continue to focus our efforts on improving overallliquidity through identifying new business opportunities within the areas ofour 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 will besufficient 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 ofSignificant Accounting Policies

## ***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.

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## ***Accounts Receivable***

The carrying value of the Company’s receivable, net ofthe 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 $6.3million in our restricted cash balance. As of June 30, 2006 there was norestricted cash included in our cash balance.

## ***Inventories***

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

## ***Investments***

We account for investments in accordance withStatements of Financial Accounting Standards No. 115, “Accounting for CertainInvestments 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 securities approximatedcost. Maturities of the debt securities held by the Company ranged from April13, 2005 to September 29, 2006. In February 2005 we sold all of ouravailable-for-sale securities.

For the years ended June 30, 2007, 2006, and 2005,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 fromsixteen to forty years.

We have estimated the usefullives of our space flight assets, which is a component of property andequipment, through December 31, 2010, based on current available informationpublished by NASA.

Leasehold improvements areamortized over the shorter of the useful life of the building or the term ofthe lease. Repairs and maintenance are expensed when incurred.

From time to time, wepurchase equipment or enhance our facilities to meet specific customerrequirements. These enhancements or equipment purchases are compensated throughour contract with the customer. The difference between the amount reimbursedand the cost of the enhancements is recognized as revenue.

## ***Deferred Financing Costs***

Deferred financing costsrepresent loan origination fees paid to the lender and related professionalfees. These costs are amortized on a straight-line basis over the term of therespective loan agreements. 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 

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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 SFAS No.123R to account for share-based awards to employees. SFAS No. 123R requiresmeasurement of the cost of employee services received in exchange for an awardbased on the fair value of the award on the grant date. Prior to the adoption ofSFAS No. 123R, the Company applied the provisions of Accounting PrinciplesBoard (“APB”) Opinion No. 25, and related interpretations to account foroptions granted under our various stock option plans. Based on the provisionsof this plan, no compensation expense had been recognized for options issuedunder this plan. The fair value of the stock options is estimated usingexpected dividend yields of the Company’s stock, the expected volatility of thestock, the expected length of time the options remain outstanding and risk-freeinterest rates. Changes in one or more of these factors may significantlyaffect the estimated fair value of the stock options. Additionally, SFAS No.123R requires the Company to estimate the number of instruments for which the requiredservice is expected to be rendered. The Company estimates forfeitures usinghistorical forfeiture rates for 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 andcosts at completion can be reliably estimated at contract inception, isrecognized under the percentage-of-completion method based on costsincurred over the period of the contract. Revenue provided by GovernmentServices is primarily derived from cost-plus award fee contracts, wherebyrevenue is recognized to the extent of reimbursable costs incurred plus awardfee. Award fees which provide earnings based on our contract performance, asdetermined by NASA evaluations, are recorded when the amounts are probable andcan be reasonably estimated. Changes in estimated costs to complete andprovisions for contract losses and estimated amounts recognized as award feesare recognized in the period they become known. Revenue generated by Astrotech’spayload processing services is recognized ratably over the occupancy period ofthe satellite while in the Astrotech facilities. For the multi-year contractwith 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 and liabilitymethod. Deferred tax assets and liabilities are recognized for the future taxconsequences attributable to differences between the financial statementcarrying amounts of existing assets and liabilities and their respective taxbases and operating loss and tax 

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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 Standards Boardissued FASB Interpretation No. 48, “Accounting for Uncertainty in IncomeTaxes—an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 requirescompanies to determine whether it is more likely than not that a tax positionwill be sustained upon examination by the appropriate taxing authorities beforeany part of the benefit can be recorded in the financial statements. Thisinterpretation also provides guidance on derecognition, classification,accounting in interim periods, and expanded disclosure requirements. FIN 48will become effective for the Company beginning in fiscal year 2008. We arecurrently in the process of assessing the impact that FIN 48 will have on ourconsolidated financial statements.

** (3)**                  Statements ofCash Flows – Supplemental Information

(a)          Cash paid for interestcosts was approximately $3.8 million, $4.7 million, and $5.4 million for theyears ended 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)**                     AccountsReceivable

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 |   |

 

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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 to potentialadjustment upon audit by such agencies. In the opinion of management, anyadjustments likely to result from inquiries or audits of its contracts wouldnot have a material adverse impact on our financial condition or results ofoperations.

**(5)**                     Long-term Debt

## ***Revolving Loan Payable***

On February 11, 2005 we entered into a revolvingone-year credit facility with a bank providing for loans up to $5.0 millionsecured by the Company’s accounts receivable. In February 2006 the revolvingcredit facility was renewed and the term extended until February 11, 2007 withsubstantially the same terms as the original agreement. The interest rate forthe term loan was prime plus one percent (9.25% as of June 30, 2006). Theunused revolving credit facility balance was subject to interest charges of0.25% to 0.5%. Funds available under the revolving credit facility were limitedto 80% of eligible accounts receivable and we were subject to various financialand other covenants including a minimum tangible net worth covenant, a cashflow coverage covenant, and a secured debt coverage covenant. This creditfacility expired on February 11, 2007 and we elected not to renew.

## ***Mortgage Loan Payable***

On August 30, 2001 our Astrotech subsidiary completeda $20.0 million financing of its spacecraft processing facility expansionproject in Titusville, Florida with a financial institution. The proceeds ofthis financing were used to complete the construction of the facility andsupporting infrastructure. The loan was collateralized primarily by themulti-year payload processing contracts with Boeing and Lockheed Martin and bythe building.

The loan agreement was amended on January 29, 2004,whereby the maturity date was shortened to January 2007, the interest rate wasfixed at 5.5%, and the hedge requirement was eliminated. For the fiscal yearended June 30, 2007, the remaining $1.6 million of principal was repaid.

## ***ConvertibleSubordinated Notes Payable***

In October 1997 we completed a private placementoffering for $63.3 million of aggregate principal of unsecured 8.0% ConvertibleSubordinated Notes due October 2007. Interest is payable semi-annually. Thenotes are convertible into the Common Stock of the Company at a rate of $13.625per share. This offering provided us with net proceeds of approximately $59.9million that were used for capital expenditures associated with the developmentand construction of space related assets and for other general corporatepurposes.

On November 22, 2005 we exchanged $52,944,000 of 8.0%Convertible Subordinated Notes for a like amount of 5.5% Senior ConvertibleNotes due 2010 and convertible into shares of the Company’s Common Stock at aper share price of $1.50 which include a mandatory conversion feature once thestock price reaches $1.95 per share for twenty consecutive days. The 5.5%Senior Convertible Notes will accrue interest from the issue date at a rate of5.5% per year. We will pay interest on the exchange notes semi-annually on eachApril 15 and October 15. The Senior Convertible Notes are convertible into35,296,000 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, we wrote-off$0.6 million of debt placement fees associated with the original issuance ofthese notes. The Subordinated Convertible Notes accrue interest at 8% annually,paid semiannually, and mature in October 2007.

The Senior Convertible Notes were amended in November2005 to include a covenant providing a limitation on disposition of Astrotechassets and limitations on liens of Astrotech assets. Details of these covenantscan be obtained via the Company’s Prospectus Supplement to Schedule TO(Amendment 5), public filing on the SEC’s web site dated October 27, 2005. (SeeNote 27)

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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 amounts andestimated fair values of certain of the Company’s financial instruments as ofJune 30, 2007 and 2006 in accordance with SFAS No. 107, “Disclosures about Fair Value of FinancialInstruments” (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 new consolidated ISScontracts structure, we began providing services to NASA (similar to theservices provided under the Research and Logistics Mission Support contract)under subcontract to NASA’s Cargo Mission Contract contractor, Lockheed Martin.Flight Services is currently under contract with Lockheed Martin forunpressurized pallet and pressurized module services supporting STS-118 (moduleand 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 servicesare provided under contract to Lockheed Martin, the Cargo Mission Contractcontractor 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.

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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 June2007. 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 Directors adopted aStockholder Rights Plan designed to deter coercive takeover tactics and toprevent 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, 2005SPACEHAB entered into an amendment to the Amended and Restated RightsAgreement, dated as of February 23, 2004 between the Company and American StockTransfer & Trust Company, as rights agent, accelerating the expiration dateof the Rights Agreement from April 9, 2009 to July 13, 2005.

**(9)**                     Convertible Preferred Stock

On August 2, 1999 Astrium (formerly EADS), a relatedparty and shareholder, purchased an additional $12.0 million equity interest inSPACEHAB representing 1,333,334 shares of Series B Senior Convertible PreferredStock. Under the agreement, Astrium purchased all of SPACEHAB’s 975,000authorized and unissued shares of preferred stock. On October 14, 1999, theshareholders approved the proposal to increase the number of authorized sharesof preferred stock to 2,500,000, in order to complete the transaction withAstrium allowing them to purchase the additional 358,334 preferred shares. Thepreferred stock purchase increased Astrium’s voting interest in SPACEHAB toapproximately 11.5%. The Series B Senior Convertible Preferred Stock is:convertible at the holders’ option on the basis of one share of Preferred Stockfor one share of Common Stock, entitled to vote on an “as converted” basis theequivalent number of shares of Common Stock, and has preference in liquidation,dissolution, or winding up of $9.00 per preferred share. No dividends arepayable on the convertible preferred shares (see Note 27).

** (10)**           Common Stock Optionsand Stock Purchase Plans

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

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

Non-qualified options are granted at the solediscretion of the Board of Directors. Prior to the adoption of the 1994 StockIncentive Plan (the “1994 Plan”), stock options granted to the Company’s officersand employees were part of their employment contract or offer. The number andprice of 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 and priceof the options granted to employees is determined by the Board of Directors andsuch options vest, in most cases, incrementally over a period of four years andexpire no more than ten years after the date of grant. The total number ofoptions that are available under this plan is 3,950,000. As of June 30, 2007there 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 are 180,000available for grant.

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## ***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 purchased 1,482,645shares under the plan. Employees purchased an aggregate of 167,032 shares at anaverage price of $0.55 during the twelve-month period ended June 30, 2007. Theshares purchased under this plan are considered compensation for accounting andreporting purposes (see SFAS No. 123R below). During the fourth quarter offiscal year 2007, we discontinued the purchasing of Common Stock by theemployees from this plan.

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

During the year ended June 30, 2000,Space Media, Inc., a majority owned subsidiary of the Company, adopted anoption plan (SMI Plan) for employees, officers, directors and consultants ofSMI. Under the terms of the SMI Plan, 1,500,000 shares have been reserved forfuture grants for which the number and price of the options granted isdetermined by the Board of Directors and such options vest, in most cases,incrementally over a period of four years and expire no more than ten yearsafter the date of grant. At June 30, 2007 and June 30, 2006, there were 388,750options issued and outstanding under the SMI Plan at a weighted averageexercise price of $1.00. The options vest equally over a four-year period andhave a life of 10 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 aweighted-average remaining contractual life of four to five years,respectively.

55

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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                            |       | 368,000                       |       | 2.33                                                                                      |       | 4.513 |   | 386,000 |   | 4.513 |   |
| 11.750–11.750                          |       | 12,935                        |       | 0.00                                                                                      |       | 11.750 |   | 12,395 |   | 11.750 |   |
|                                        |       | 1,076,935                     |       | 4.94                                                                                      |       | $ | 2.606 |   | 756,935 |   | $ | 3.139 |   |

 

56

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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-average grant-date fair value of optionsgranted during fiscal year 2007 was $0.58 per share. The intrinsic value forstock options is defined as the difference between the current market value andthe grant price. As of June 30, 2007 there was $363,021 of unamortized expenserelated to our stock option plans.

## ***Statement of Financial Accounting StandardNo. 123R***

Effective July 1, 2005 we adopted SFAS No. 123(revised 2004), “Share-Based Payment,” (“SFAS No. 123R”) which was issued bythe FASB in December 2004. SFAS No. 123R revises SFAS No. 123, “Accounting forStock—Based Compensation,” and supersedes APB No. 25, “Accounting for StockIssued to Employees,” and its related interpretations. SFAS No. 123R requiresrecognition of the cost of employee services received in exchange for an awardof equity instruments in the financial statements over the period the employeeis required to perform the services in exchange for the award (presumptivelythe vesting period). SFAS No. 123R also requires measurement of the cost ofemployee services received in exchange for an award based on the grant-datefair value of the award. SFAS No. 123R also amends SFAS No. 95, “Statement ofCash Flows,” 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 forma disclosuresreflected the fair value of each option grant estimated on the date of grantusing 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 do not reflect any restatedamounts and we had no cumulative effect adjustment upon adoption of SFAS No.123R under the modified prospective method. Our policy is to recognizecompensation for awards with only service conditions and a graded vestingschedule on a straight line basis over the requisite service period for theentire award.

The fair value of each option award is estimated onthe date of grant using the Black Scholes option pricing model, whichdetermines inputs as shown in the following table. Because of differences inoption terms and historical exercise patterns among the plans, we havesegregated option awards into two homogenous groups for the purpose ofdetermining fair values for its options. Valuation assumptions are determinedseparately for the two groups which represent, respectively, the 1994 StockIncentive Plan and the Director’s Stock Option Plan. The assumptions are asfollows:

·                  We estimated volatility using our historical shareprice performance over the last ten years. Management considered the guidancein SFAS No. 123R and believes the historical estimated volatility is materiallyindicative of expectations about expected future volatility.

·                  We use the simplified method outlined in SEC StaffAccounting Bulletin No. 107 to estimate expected lives for options grantedduring fiscal year 2006.

57

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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 ofthe option.

·                  The expected dividend yield is based on our currentdividend yield and the best estimate of projected dividend yield for futureperiods within the expected life of the option.

**(11)**              Income Taxes

The Company accounts for taxes under SFAS No. 109, “Accountingfor Income Taxes.” Under SFAS 109, deferred tax liabilities and assets aredetermined based on the difference between the financial statement and taxbasis of assets and liabilities using enacted rates expected to be in effectduring the year in which the differences reverse.

The components of income tax expense (benefit) fromcontinuing 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 the reported income tax expense tothe amount that would result by applying the U.S. federal statutory rate to theincome (loss) before income taxes to the actual amount of income tax expense(benefit) recognized follows (in thousands):
|                                            | ** ** | **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 | ) |

 

58

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The Company’s deferred tax assets as of June 30, 2007and 2006 consist of the following (in thousands):
|                                                                         | ** ** | **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, the Company had accumulated netoperating loss carryforwards of approximately $38.3 million for Federal incometax purposes, which are available to offset future regular taxable income. Thesenet operating loss carryforwards expire between the years 2020 and 2025.Utilization of these net operating losses may be subject to limitations in theevent of significant changes in stock ownership of the Company.

Additionally, the Company has approximately $0.2million of research and experimentation tax credit carryforwards and $0.6million of alternative tax credit carryforwards, respectively, available tooffset future regular tax liabilities. The research and experimentation creditsexpire between the years 2008 and 2009.

In assessing the need for a valuation allowance,management considers whether it is more likely than not that some portion orall of the net deferred tax assets will be utilized. Management considers thescheduled reversal of deferred tax liabilities, projected future taxableincome, and tax planning strategies in making this assessment. As of June 30, 2007,the Company provided a full valuation allowance of approximately $15.5 millionagainst its net deferred tax assets.

** (12)**           Net Income (Loss) PerShare

The following are reconciliations of the denominatorsof the basic and diluted net income (loss) per share computations for the yearsended June 30, 2007, 2006, and 2005. There were no adjustments for thenumerators.
|                                                          | ** ** | **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.

59

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For fiscal years 2007 and 2006, $52,944,000 of SeniorConvertible Notes that are convertible into 35,296,000 shares of Common Stockwere excluded for the computations of diluted net income because the impact ofsuch notes are anti-dilutive.

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

For fiscal years 2007, 2006, and 2005, the $12,000,000of Preferred Stock (1,333,334 shares at $9.00 per share) were excluded for thecomputations of diluted net income because the impact of such stock would beanti-dilutive.

**(13)**              Employee Benefit Plan

We have a defined contribution retirement plan, whichcovers 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

## ***ConstructionContract 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 September30, 2009. The modification contains penalties if we do not meet the contractedcompletion date. As a result we have a contingency of up to $3.0 million inpenalties.

## ***Leases***

The Company is obligatedunder noncancelable operating leases for equipment, office space, storagespace, and the land for a payload processing facility, and certain flightassets. Future minimum payments under these noncancelable operating leases areas 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, weoperate in three business segments: Flight Services, Astrotech, and GovernmentServices. Flight Services was founded to commercially develop space habitatmodules to operate in the cargo bay of the space shuttles. Flight Servicesprovides access to the modules and integration and operations support servicesfor both NASA and commercial customers. Astrotech provides payload processingfacilities and services to serve the satellite manufacturing and launchservices industry. 

60

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Government Services is primarilyengaged in providing engineering services and products to the Federalgovernment including NASA.

The Company’s chief operatingdecision maker utilizes both revenue and income (loss) before income taxes, inassessing performance and making overall operating decisions and resourceallocations. The Other segment represents corporate selling, general andadministrative expenses and interest expense for the Company, as well as theresults of operations for SMI, Inc.

Theaccounting policies of the segments are the same as those described in the summaryof significant accounting policies (Note 2). Information about the Company’ssegments 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 revenuefor the years ended June 30, 2007, 2006, and 2005 was approximately $52.8million, $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 and integrationefforts to SPACEHAB on a fixed price basis in addition to providing engineeringservices as required. For the years ended June 30, 2007, 2006, and 2005,Astrium’s payload and integration services included in cost of revenue wasapproximately $13.8 million, $11.4 million, and $15.3 million, respectively.

 

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## ***Executive CreditCards***

Certain named executiveofficers of the Company have company paid credit cards for ordinary businessexpenses. Although the Company pays the amounts on the credit cards, theexecutive officer is obligated to substantiate the charges and reimburse theCompany for any non-business related charges. As of June 30, 2007 the Companyhas a receivable due from an executive officer for $12,354.

**(17)**              Summary of SelectedQuarterly Financial Data (Unaudited)

The following is asummary of selected quarterly financial data (in thousands, except per sharedata):
| ** **                        | ** ** | **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-backTransactions

On May 26, 2005 SPACEHABpurchased and entered into a sale lease-back of the Company’s 90,000square-foot administrative facility in Webster, Texas. We purchased thebuilding and the adjacent three acres of land from American National InsuranceCorporation for the value of $2.0 million. We then sold the building excludingthe three acres of adjacent undeveloped land to R&H Investments and IrvingLevine Investments for $3.25 million. The sale resulted in net cash to us ofapproximately $0.9 million. We have leased back 100% of the facility for aninitial period of ten years, with two five-year options. The annual rent forthe first year of this lease is $0.3 million and gradually increases throughthe tenth year of the lease to approximately $0.4 million. We retained theadjacent 3.0 acres parcel for future development or sale.

On May 2, 2005 SPACEHABentered into a sale lease-back of the Company’s 58,000 square-foot processingfacility in Cape Canaveral, Florida in a transaction with Tamir Silvers LLCvalued at $4.8 million. The sale resulted in net cash to us of approximately$3.8 million. We have leased back 100% of the facility for an initial period offive years, with an option period of an additional five years. The annual rentfor the first five years of this lease is approximately $0.45 million.

These two salelease-backs were recorded according to SFAS No. 13, “Accounting for Leases.”This statement requires gains recognized on sale lease-backs to be recordedover the term of the leases. Therefore, the gain of $0.5 million on the salelease-back of the Florida facility is recognized over the five year lease term.The gain of $1.4 million on the sale lease-back of the Headquarters building inWebster, Texas is recognized over the ten year lease term.

**(19)**              Bond Exchange –Senior Convertible Notes

On November 22, 2005 weexchanged $52,944,000 of 8.0% Convertible Subordinated Notes for a like amountof 5.5% Senior Convertible Notes due 2010 and convertible into shares of theCompany’s Common

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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. The SeniorConvertible Notes are convertible into 35,296,000 shares of Common Stock.

The remaining ConvertibleSubordinated Notes payable of $10,306,000 are convertible into 756,404 sharesof Common Stock at $13.625 per share. As a result of converting these notes inNovember 2005, we wrote-off $0.6 million of debt placement fees associated withthe original issuance of these notes. The Subordinated Convertible Notes accrueinterest at 8% annually, paid semiannually, and mature in October 2007 (seeNote 27).

**(20)**              Asset Write Down

During the quarter endedDecember 31, 2005 NASA revised the flight manifest for the International SpaceStation build out for which funding was approved and signed into law onDecember 30, 2005. As a result, we have written down the Flight Services flightunit 3 module asset as it has been determined that the asset is unlikely togenerate significant future cash flows and revenue. We believed it was morelikely for NASA to simply utilize the flight unit 2 module for future missionsunder the revised manifest and related funding approved by Congress in December2005. 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 revenue forthe Flight Services segment because costs associated with the use of thisasset, including depreciation expense, have historically been recorded here.

During the quarter endedJune 30, 2007, we performed a SFAS No. 144 analysis of our remaining shuttlebased assets due to STS-118 being our last contracted shuttle mission. As aresult, we have written down the Flight Services flight unit 2 module asset andother shuttle based assets as it has been determined that the asset is unlikelyto generate significant future cash flows and revenue. Therefore, we wrote-downour flight unit 2 module to a salvage value of $0.1 million, excludingdepreciation expense for July and August 2007. This non-cash write-downresulted in a cost of revenue expense of $10.4 million for the quarter endedJune 30, 2007. The $10.4 million is included in cost of revenue for the FlightServices segment because costs associated with the use of this asset, includingdepreciation expense, have historically been recorded here.

Additionally, wewrote-down other assets and work in progress related to the modules and theunpressurized carriers for $3.8 million. This amount is included in operatingexpenses. Included in this $3.8 million write-down is $1.6 million write-downof inventory that was being held for future use. The write-down is based oncurrent market conditions.

**(21)**              Accounting Change inEstimate – Depreciation

Effective October 1, 2005we have changed our depreciable lives used to depreciate our Flight Servicesflight assets from being fully depreciated by June 2016 to being fullydepreciated by December 2010. We have reviewed the latest NASA planningmanifest schedule for the shuttles and the manifest carries the scheduledshuttle flights out to 2009 with an additional one year period for missiondelays. Our analysis has taken into consideration the association of our assetsto the shuttle fleet based on the fact that our assets have been designed tofly on the shuttles, and the revenue generated from the assets is directly relatedto the NASA shuttle missions. The shuttle retirement could occur at an earlieror later date which would change future depreciation recognized upon revisionof the useful life.

Effective July 1, 2007,we have changed our depreciable lives to depreciate our Flight Services flightassets from being fully depreciated by December 2010 to being fully depreciatedAugust 31, 2007. This is due to our last contracted mission, STS-118, beingcompleted in August 2007.

**(22)**              Gain on Sale of TheSpace Store LLC

On October 13, 2006 theCompany consummated a transaction in which Space Media, Inc., a majority-ownedsubsidiary of SPACEHAB, Inc., sold the assets of The Space Store LLC,consisting of retail and internet identity, inventory, furniture, fixtures, andother items. Due to the immaterial amount and insignificant impact thistransaction will have on our financial statements, we elected to not presentthis discontinued operation as a separate component in our consolidatedstatements of operations for the three months ended December 31, 2006. The gainon the sale is reflected in the interest and other income section on ourfinancial statements.

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**(23)**              Legal Proceedings

In January 2004 theCompany initiated a formal proceeding against NASA in which the Company was seekingdamages in the amount of $87.7 million for the loss of its Research DoubleModule (“RDM”) as a result of the Columbia accident. In October 2004, NASAresponded 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 tort claimin November 2004, seeking damages of $79.7 million for the loss of the RDM, towhich the court granted a motion in June 2006 to stay the case until resolutionof the Company’s contract claim appeal.

In October 2004 wereceived payment from NASA in the amount of $8.2 million which included $0.2million of interest. NASA’s claims were that their liability was limited to$8.0 million under the Research and Logistics Mission Support contract(NAS9-97199), as specifically identified in clause H.11 — titled “ContingentProperty Liability.”

This $8.2 millionindemnification payment and interest payment was accordingly recorded as a “Recoveryof nonrecurring charge” in the September 30, 2004 financials, resulting in achange in cash flows from operating activities.

On February 21, 2007, theCompany dismissed with prejudice all litigation against NASA relating to lossesincurred by the Company as a result of the February 2003 Space Shuttle *Columbia* accident.

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

Except as above, theCompany is not a party to any pending or threatened proceedings, which inmanagement’s opinion, would have a material adverse effect on our business,financial condition, or results of operation.

**(24)**              Restricted Cash andAdvances on Construction Contract

In December 2006 ourAstrotech subsidiary was awarded a contract with a governmental agency tomodify one of our payload processing facilities to specific requirements of aprogrammed mission. Under the terms of this $20.0 million fixed price contract,we will own the improvements after completion of the contract obligations. Wehave entered into a firm fixed price construction subcontract with J. P.Donovan Construction, Inc. to provide a significant portion of the design andconstruction work that will be required under our contract. In accordance withour contracts, payments will be received from our customer on a milestoneschedule that generally provides receipt of cash before payments are requiredto the contractor under their milestone schedule. Receipts in advance ofdisbursements will be retained in a restricted cash account within oursubsidiary company and used exclusively for purposes of the contractobligations. As of June 30, 2007, net cash receipts of $6.3 million have beendesignated as restricted cash and $5.7 million has been designated as aliability.

**(25)**              Adverse Event

On January 30, 2007 SeaLaunch experienced a launch failure resulting in the loss of a satellite anddamage to the floating launch platform. A full inspection, evaluation, andrepair operations of the damage incurred and preliminary reports indicate thatSea Launch will return to operations in October 2007. We are paid under ourcontract with Sea Launch upon launch of each mission; therefore, anticipatedrevenues have been delayed until the resumption of normal operations.

**(26)**              Customer Deposits

During the quarter endedMarch 31, 2007 we billed to our customer $3.1 million for in-flight insuranceon our pressurized module for use on STS-118. STS-118 launched mid-August 2007.This amount is included in cash and in customer deposits as of June 30, 2007.The insurance payment was paid to the insurance carrier in July 2007.

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**(27)**              Subsequent Events

## ***Tender Offer***

On August 31, 2007 wefiled a Schedule TO pursuant to Rule 13e-4 promulgated under the SecuritiesExchange Act of 1934, as amended, in connection with the Company’s offer to exchange(the “Exchange Offer”) 74 shares of common stock and 1.2 shares of Series CConvertible Preferred Stock for each $1,000 principal amount of outstanding 8%Convertible Subordinated Notes due 2007 (the “Junior Notes”) up to $10,306,000in aggregate principal amount of the Junior Notes and 667 shares of commonstock and 1 share of Series C Convertible Preferred Stock for each $1,000principal amount of outstanding 5.5% Senior Convertible Notes due 2010 (the “SeniorNotes”) up to $52,944,000 in aggregate principal amount of the Senior Notes,upon the terms and subject to the conditions set forth in the Company’soffering memorandum, 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 related ExchangeOffer materials, as amended or supplemented from time to time, collectivelyconstitute the “Offer Materials”).

The Junior Notes wereissued pursuant to an Indenture, dated as of October 15, 1997, as amended by aFirst Supplemental 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 Offerexpires on October 1, 2007, which we refer to as the expiration date, unlessextended.

## ***Agreement to Terminationof ICC and VCC Leases***

On August 28, 2007, theCompany and Astrium, GmbH mutually agreed to terminate the lease agreementdated as of February 28, 2001 in regards to the Company’s lease of theIntegrated Cargo Carriers (ICC) assets from Astrium, GmbH. Also, we mutuallyagreed to terminate the lease agreement dated as of July 3, 2001 in regards tothe Company’s lease of the Vertical Cargo Carrier (VCC) assets from Astrium,GmbH. In order to terminate these two leases, we have mutually agreed that theCompany will reimburse Astrium, GmbH $1,389,000 for the period March 1, 2007through August 31, 2007 for the ICC assets and incur no financial obligationsfor either the ICC or VCC after August 31, 2007.

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

In January 2007, wedischarged Grant Thornton LLP as our independent auditors and engaged PMB HelinDonovan LLP as our independent auditors. We had no disagreements as toaccounting policy or disclosure with Grant Thornton LLP at the time.

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

Under the supervision andwith the participation of our management, including our principal executiveofficer and principal financial officer, we have evaluated the effectiveness ofour design and operation of our disclosure controls and procedures as of theend of the period covered by this annual report, and, based on the evaluation,our principal executive officer and principal financial officer have concludedthat these controls and procedures are effective. There have been no changes inour internal control over financial reporting that occurred during our lastfiscal quarter that have materially affected, or are reasonably likely tomaterially effect, our internal control over financial reporting.

Disclosure controls andprocedures are our controls and other procedures that are designed to ensurethat information required to be disclosed by us in the reports that we file orsubmit under the Exchange Act is recorded, processed, summarized, and reported,within the time periods specified in the Securities and Exchange Commission’srules and forms. Disclosure controls and procedures include, withoutlimitation, controls and procedures designed to ensure that informationrequired to be disclosed by us in the reports that we file under the ExchangeAct is accumulated and communicated to our management, including our principalexecutive officer and principal financial officer, as appropriate to allowtimely decisions regarding required disclosure.

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

None to report for theperiod ended June 30, 2007.

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**PART III**

# **Item 10.  Directors and Executive Officers of theRegistrant.**

The information requiredby this item will be contained in our definitive Proxy Statement for our 2007 AnnualMeeting of Stockholders and is hereby incorporated by reference thereto.

# **Item 11.  Executive Compensation.**

The information requiredby this item will be contained in our definitive Proxy Statement for our 2007Annual Meeting of Stockholders and is hereby incorporated by reference thereto.

# **Item 12.  Security Ownership of Certain BeneficialOwners and Management and Related Stockholder Matters.**

The information requiredby this item will be contained in our definitive Proxy Statement for our 2007Annual Meeting of Stockholders and is hereby incorporated by reference thereto.

# **Item 13.  Certain Relationships and RelatedTransactions and Director Independence.**

The information requiredby this item will be contained in our definitive Proxy Statement for our 2007Annual Meeting of Stockholders and is hereby incorporated by reference thereto.

# **Item 14.  Principal Accounting Fees and Services.**

The information requiredby this item will be contained in our definitive Proxy Statement for our 2007Annual Meeting of Stockholders and is hereby incorporated by reference thereto.

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**PART IV**

# **Item 15.  Exhibits, Financial Statement Schedules.**

| (a)    | The following documents are filed as part of the  report:                                                                                                                                    |       |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|   |                                                                                                                                                                                         |       |
| 1.     | 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. |       |
|   |                                                                                                                                                                                         | ** ** |
|   | Report of PMB Helin Donovan LLP, Independent  Registered Public Accounting Firm                                                                                                              |       |
|   | Report of Grant Thornton LLP, Independent Registered  Public Accounting Firm                                                                                                                 |       |
|   | Consolidated Balance Sheets                                                                                                                                                                  |       |
|   | Consolidated Statements of Operations                                                                                                                                                        |       |
|   | Consolidated Statements of Stockholders’ Equity and  Comprehensive Income (Loss)                                                                                                        |       |
|   | Consolidated Statements of Cash Flows                                                                                                                                                        |       |
|   | Notes to Consolidated Financial Statements                                                                                                                                                   |       |
|   |                                                                                                                                                                                         |       |
| 2.     | Financial Statement Schedules.                                                                                                                                                               |       |
|   |                                                                                                                                                                                         |       |
| 3.     | Exhibits.                                                                                                                                                                                    |       |

 

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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)                                                                                      |
|             |            |                                                                                                                                                                                                                                                                                                                                                                                                    |  |

 

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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)                                             |

 

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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)                                                                                                          |

 

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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 filed  herewith                                                                                                                                                                                                                                                                                   |
| ** ** |   |                                                                                                                                                                                                                                                                                                                                                                                                                          |
| **(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                                                                                                                                                                                                               |
| ** ** |   |                                                                                                                                                                                                                                                                                                                                                                                                                          |
| ** ** | 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                                                                                                                                                                                        |

 

72

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| **(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,  filed herewith                                                                                                                                                                  |

 

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**SIGNATURES**

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.
| SPACEHAB, Incorporated    |   |                                  |
|---------------------------|--------|---------------------------------------|
|                      |   |                                  |
|                      | By:    | /s/Thomas B. Pickens, III             |   |
|                      |   | Thomas B.  Pickens, III               |
|                      |   | Chief Executive  Officer and Director |
|                      |   |                                  |
| Date: September  20, 2007 |   |                                  |
|                      |   |                                  |
|                      | By:    | /s/Brian K. Harrington                |   |
|                      |   | Brian K. Harrington                   |
|                      |   | Senior Vice President and             |
|                      |   | Chief Financial Officer               |
|                      |   |                                  |
| Date: September  20, 2007 |   |                                  |

 

Pursuant to therequirements of the Securities and Exchange Act of 1934, this report has beensigned below by the following persons on behalf of this registrant in thecapacities and on the dates indicated.
| /s/Barry A. Williamson     |   | Chairman of the Board         |   | September 20, 2007 |
|----------------------------|--------|-------------------------------|--------|--------------------|
| Barry A.  Williamson       |   |                          |   |               |
|                       |   |                          |   |               |
| /s/Thomas B.  Pickens, III |   | Chief Executive Officer and   |   | September 20, 2007 |
| Thomas B.  Pickens, III    |   | Director                      |   |               |
|                       |   |                          |   |               |
| /s/Myron J.  Goins         |   | Director                      |   | September 20, 2007 |
| Mr. Myron J.  Goins        |   |                          |   |               |
|                       |   |                          |   |               |
| /s/Roscoe M.  Moore, III   |   | Director and Chief Strategic  |   | September 20, 2007 |
| Roscoe M. Moore,  III      |   | and Technology Officer        |   |               |
|                       |   |                          |   |               |
| /s/Mark Adams              |   | Director                      |   | September 20, 2007 |
| Mr. Mark Adams             |   |                          |   |               |
|                       |   |                          |   |               |
| /s/Brian K.  Harrington    |   | Senior Vice President and     |   | September 20, 2007 |
| Brian K.  Harrington       |   | Chief Financial Officer       |   |               |
|                       |   |                          |   |               |
| /s/Nicholas G.  Morgan     |   | Chief Accounting Officer      |   | September 20, 2007 |
| Nicholas G.  Morgan        |   | Vice President and Controller |   |               |

 

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