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**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

** **

**(Mark One)**

**x****   ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934**

** **

**For the fiscal year ended June 30, 2008**

 

**o****    TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

** **

**For the transition period from              to              **

 

**Commission File No. 0-27206**

** **

**SPACEHAB, Incorporated**

(Exact name of registrant asspecified in this charter)

 

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

** **

**907 Gemini**

**Houston, Texas 77058**

(Address of principal executiveoffices)  (Zip code)

** **

**(713) 558-5000**

(Registrant’s telephonenumber, including area code)

 

**SecuritiesRegistered pursuant to Section 12(b) of the Act:**

** **

| ** **               | * *   | **Name of  each exchange** |
|--------------------------|------------|----------------------------|
| **Title of  each class** | * *   | **on which  registered**   |
| **Common Stock**         | * *   | **NASDAQ Capital Market**  |
| (no par value)           | ** ** |                       |

** **

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

** **

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

 

Indicateby check mark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Act. YES o NO x

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.

YESx NO o

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K (229.405 of this chapter) is not contained herein, and will notbe contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K. o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a small reporting company. Seedefinition of “large accelerated filer,” “accelerated filer,” and “smallerreporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).

YESo NO x

 

Theaggregate market value of the registrants voting and non-voting common equityheld by non-affiliates of the registrant, based upon the closing price of suchstock on the NASDAQ Capital Market on such date of $1.56 was approximately$21,149,330 as of December 31, 2007.

 

Asof September 19, 2008, 16,404,378 shares of the registrant’s Common Stock,no par value, were outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE:

 

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

 

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**Table of Contents**

 
| **PART 1**   |                                                                                             | 1      |
|-------------------|--------------------------------------------------------------------------------------------------|--------|
| Item 1.           | Business                                                                                         | 2      |
| Item 1A.          | Risk Factors                                                                                     | 11     |
| Item 1B.          | Unresolved Staff Comments                                                                        | 18     |
| Item 2.           | Properties                                                                                       | 18     |
| Item 3.           | Legal Proceedings                                                                                | 19     |
| Item 4.           | Submission of Matters to a Vote of Security  Holders                                             | 19     |
|              |                                                                                             |   |
| **PART II**  |                                                                                             | 20     |
| Item 5.           | Market for Registrant’s Common Equity,  Related Stockholder Matters and Issuer Purchases of |   |
|              | Equity Securities                                                                                | 20     |
| Item 6.           | Selected Financial Data                                                                          | 23     |
| Item 7.           | Management’s Discussion and Analysis of  Financial Condition and Results of Operations      | 24     |
| Item 7A.          | Quantitative and Qualitative Disclosures  about Market Risk                                      | 34     |
| Item 8.           | Financial Statements and Supplementary Data                                                      | 35     |
| Item 9.           | Changes in and Disagreements with  Accountants on Accounting and Financial Disclosure            | 61     |
| Item 9A.          | Controls and Procedures                                                                          | 61     |
| Item 9B.          | Other Information                                                                                | 61     |
|              |                                                                                             |   |
| **PART III** |                                                                                             | 62     |
| Item 10.          | Directors and Executive Officers of the  Registrant                                              | 62     |
| Item 11.          | Executive Compensation                                                                           | 62     |
| Item 12.          | Security Ownership of Certain Beneficial  Owners and Management and Related Stockholder          |   |
|              | Matters                                                                                          | 62     |
| Item 13.          | Certain Relationships and Related  Transactions and Director Independence                        | 62     |
| Item 14.          | Principal Accounting Fees and Services                                                           | 62     |
|              |                                                                                             |   |
| **PART IV**  |                                                                                             | 63     |
| Item 15.          | Exhibits, Financial Statement Schedules                                                          | 63     |
|              |                                                                                             |   |
| SIGNATURES        |                                                                                             | 70     |

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**FORWARD-LOOKING STATEMENTS**

** **

This Form 10-K contains “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of1933 and Section 21E of the Securities Exchange Act of 1934. Allstatements other than statements of historical fact are “forward-lookingstatements” for purposes of federal and state securities laws. Forward-lookingstatements may include the words “may,” “will,” “plans,” “believes,” “estimates,”“expects,” “intends” and other similar expressions. Such statements are subjectto risks and uncertainties that could cause our actual results to differmaterially from those projected in the statements. Such risks and uncertaintiesinclude, but are not limited to:

 

·                  Our ability toraise sufficient capital to meet our long and short-term liquidityrequirements;

·                  Our ability tosuccessfully pursue our business plan;

·                  Uncertaintyabout our future liquidity;

·                  Whether we willfully realize the economic benefits under our NASA and other customercontracts;

·                  Completion ofthe International Space Station, and the continued availability and use of theU.S. Space Shuttle and the International Space Station;

·                  Technologicaldifficulties and potential legal claims arising from any technologicaldifficulties;

·                  Product demandand market acceptance risks, including our ability to develop and sell productsand services to be used by the manned and unmanned space programs that replacethe Space Shuttle Program;

·                  The effect of economicconditions in the U.S. or other space faring nations that could impact ourability to access space and support or gain customers;

·                  Uncertainty ingovernment funding and support for key space programs;

·                  The impact ofcompetition on our ability to win new contracts;

·                  Delays anduncertainties in future space shuttle and the International Space Stationprograms;

·                  Uncertainty insecuring reliable and consistent access to space;

·                  Delays in thetiming of performance of other contracts; and

·                  Risks describedin the “Risk Factors” section of this Form 10-K.

 

Although we believe that the assumptions underlyingour forward-looking statements are reasonable, any of the assumptions could beinaccurate, and, therefore, we cannot assure you that the forward-lookingstatements included in this Form 10-K will prove to be accurate. In lightof the significant uncertainties inherent in our forward-looking statements,the inclusion of such information should not be regarded as a representation byus or any other person that our objectives and plans will be achieved. Some ofthese and other risks and uncertainties that could cause actual results todiffer materially from such forward-looking statements are more fully describedunder the heading “Risk Factors” beginning on page ten of this Form 10-Kand elsewhere in this Form 10-K, or in the documents incorporated byreference herein. Except as may be required by applicable law, we undertake noobligation to publicly update or advise of any change in any forward-looking statement,whether as a result of new information, future events or otherwise. In makingthese statements, we disclaim any obligation to address or update each factorin future filings with the Securities and Exchange Commission (“SEC”) orcommunications regarding our business or results, and we do not undertake toaddress how any of these factors may have caused changes to discussions orinformation contained in previous filings or communications. In addition, anyof the matters discussed above may have affected our past results and mayaffect future results, so that our actual results may differ materially fromthose expressed in this Form 10-K and in prior or subsequentcommunications.

 

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**PART 1**

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# **DEFINITIONS**

 

As used in this Form 10-K, the abbreviations andacronyms contained herein have the meanings set forth below. Additionally, theterms “SPACEHAB”, “the Company”, “we”, “us” and “our” refer to SPACEHAB,Incorporated and its subsidiaries, unless the context clearly indicatesotherwise.

 
| 1994 Plan            |   | 1994 Stock Incentive Plan                      |
|----------------------|--------|------------------------------------------------|
| AAC                  |   | Applied Astronautics Corporation               |
| ARES                 |   | ARES Corporation                               |
| ASO                  |   | Astrotech Space Operations                     |
| Astrium              |   | Astrium GmbH                                   |
| Astrotech            |   | Astrotech Space Operations                     |
| ATV                  |   | Automated Transfer Vehicle                     |
| Boeing               |   | The Boeing Company                             |
| CCAFS                |   | Cape Canaveral Air Force Station               |
| Common Stock         |   | SPACEHAB Common Stock                          |
| COTS                 |   | Commercial Orbital Transportation Services     |
| CRADA                |   | Cooperative Research and Development Agreement |
| DOT                  |   | Department of Transportation                   |
| Engineering Services |   | Astrotech Engineering Services, Inc.      |
| FASB                 |   | Financial Accounting Standards Board           |
| Flight Services      |   | SPACEHAB Flight Services                       |
| GAAP                 |   | Generally Accepted Accounting Principles       |
| HTV                  |   | H-II Transfer Vehicle                          |
| ICC                  |   | Integrated Cargo Carrier                       |
| IDIQ                 |   | Indefinite Delivery, Indefinite Quantity       |
| IP                   |   | Intellectual Property                          |
| ISS                  |   | International Space Station                    |
| KSC                  |   | Kennedy Space Center                           |
| Lockheed Martin      |   | Lockheed Martin Corporation                    |
| NASA                 |   | National Aeronautics and Space Administration  |
| PI&C             |   | Program Integration and Control                |
| RDM                  |   | Research Double Module                         |
| ReALMS               |   | Research and Logistics Mission Support         |
| SAA                  |   | Space Act Agreement                            |
| SEC                  |   | Securities and Exchange Commission             |
| SFS                  |   | SPACEHAB Flight Services                       |
| SFAS                 |   | Statement of Financial Accounting Standards    |
| SMI                  |   | Space Media, Inc.                         |
| SMI Plan             |   | Space Media, Inc. Stock Option Plan       |
| SOX                  |   | Sarbanes-Oxley Act of 2002                     |
| SSI                  |   | Spaceport Systems International                |
| USAF                 |   | United States Air Force                        |
| VAFB                 |   | Vandenberg Air Force Base                      |
| VCC                  |   | Vertical Cargo Carrier                         |

 

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# **Item1.  Business.**

 

# **OurCompany**

 

SPACEHAB, Inc. was incorporated in the state ofWashington in 1984. We provide a range of products and services that focus onthe needs of industry, governments and academia requiring access to, andutilization of the unique environment of space. We own and operate spacecraftpre-launch facilities and provide supporting services at three U.S. launchsites. We employ a staff of engineers and technicians who have supportedhundreds of both manned and unmanned missions to space from multiple locationsworldwide. SPACEHAB is a commercial leader and entrepreneurial force in thespace industry providing a full spectrum of products and services in thefollowing areas:

 

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

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

·                  Product design,development, and fabrication of space equipment;

·                  Engineering,analysis, and space-bound payload operations services;

·                  Programintegration and control.

 

# **OurBusiness Units**

 

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

 

*Astrotech Space Operations, Inc.(ASO)* – ASO provides all support necessary for its governmentand commercial customers to successfully process complex communication, Earthobservation and deep space satellites in preparation for their launch on avariety of domestic and foreign launch vehicles. Processing activities includesatellite ground transportation; pre-launch hardware integration and testing;satellite encapsulation, fueling, launch pad delivery; and communication linkedlaunch control. Our ASO facilities can accommodate five meter class satelliteswith weights of 11,000 kilograms, encompassing the majority of U.S. basedsatellite preparation services.

* *

*BioSpace Technologies, Inc.*– A natural extension of SPACEHAB’s many years of experience preparing,launching and operating over 1,500 science payloads in space, the Company istransitioning from supporting government-sponsored basic research intoproducing commercial products from the microgravity discoveries. This newbusiness initiative involves the use of microgravity platforms, such as theSpace Shuttle and the ISS, for the development of space-made products that areto be sold on Earth. BioSpace Technologies has successfully processed vaccinesamples in space on Space Shuttle Flights, STS-118, STS-123, and STS-124, whichhave resulted in preliminary salmonella vaccine production data. Through June 30,2008, BioSpace Technologies has had no revenue.

* *

*SPACETECH, Inc.*– SPACETECH is an incubator envisioned to commercialize space-industrytechnologies into real-world applications to be sold to consumers and industry.The 1st Detect mini-mass spectrometer and the AirWard hazardouscargo containers, both developed by SPACEHAB engineers, are being positionedfor entry into the commercial marketplace. AirWard is a shipping containerdesigned to meet the specific requirements of the U.S. Department ofTransportation (“DOT”) for all commercial airlines in U.S. airspace to protectpressurized oxygen bottles from flame and heat during flight. The 1stDetect mini-mass spectrometer offers a low power, portable detection device. 1stDetect has been awarded a Developmental Testing and Evaluation designation fromthe U.S. Department of Homeland Security as a “promising anti-terrorismtechnology.”

* *

*Astrotech Engineering Services, Inc.(AES)* – Formerly SPACEHAB Government Services, AES provideslarge scale program technical support and specialized engineering analysis,products and services, and configuration and data management support to NASAand other government customers through the current fiscal year. AES derivedmost of its revenue from NASA’s Program Integration and Control (“PI&C”)contract for the International Space Station (“ISS”). The Company’s role in thePI&C contract was terminated in June of 2008.

* *

*SPACEHAB Orbital TransportationServices, Inc. (SOTS) –* Historically called SPACEHABFlight Services, offered a range of engineering, research, logistics,integration, operations, and ground support services supporting our spaceshuttle module and pallet assets. At this time, there are no more scheduledmissions to be performed under this business segment as the shuttle spacetransportation system nears retirement in 2010. During the fiscal year 2008, theCompany completed space shuttle mission STS-118, its last contracted modulemission, and recognized residual SOTS activity from previous missions. Wecontinue to retain our space shuttle module assets to be available for future opportunitiesshould they arise.

 

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# **Governance**

 

We maintain an Internet Web site at www.spacehab.com.Our reports on Form 10-K, Form 10-Q, as well as amendments to thosereports and press releases are available, free of charge, on our web site assoon as reasonably practical after filing with the SEC. Our Committee Chartersand Code of Conduct are also available on our web site.

 

Our Chief Executive Officer and Chief FinancialOfficer executed the required Sarbanes-Oxley Act of 2002 (“SOX”) Sections 302and 906 certifications relating to this Annual Report on Form 10-K, whichare filed with the SEC as Exhibits to the Annual Report on Form 10-K.

# ** **

# **CompetitiveStrengths**

 

The majority of the Company’s revenue derived from ourAstrotech subsidiary, which processes satellites for launch from U.S. launchfacilities. The only significant competition to Astrotech’s facilities is fromthe U.S. government, however, we believe that the majority of domesticsatellites, including most government satellites, are processed at Astrotechdue to the state-of-the-art, clean, professionally operated, full-serviceenvironment.

 

In anticipation of the planned 2007 SPACEHAB Moduleretirement, the Company has been refocusing its expertise, that includes its 23year history in microgravity, towards making products in space. Due to thecomplexities of working within the distinctive microgravity environment,SPACEHAB and its subsidiaries are uniquely qualified to pursue theseopportunities. In addition, clearing NASA’s safety and review procedurerequires years of expertise when working within NASA’s manned spaceenvironment. These are significant barriers to entry and competitive strengthsthe Company retains and is currently leveraging to produce products in space tobe sold on Earth.

 

Since 1984, SPACEHAB has earned the distinction as aninnovator in space products and services through our commercially developedhabitable research and cargo modules designed for and operated in the U.S.Space Shuttle Program. The Company continues to pursue progressive endeavors tomaintain this position and to further leverage the many identified and yet tobe discovered opportunities in the space industry. SPACEHAB is one of the fewentrepreneurial companies in the aerospace industry that has identified andacted upon valuable opportunities in space providing the Company with acompetitive advantage that we expect to promote growth and earnings in thecoming years. With this solid foundation, we expect to achieve our businessstrategy through our core business units:

*** ***

***ASTROTECH SPACE OPERATIONS***

 

Our ASO spacecraft and payload processing facilitiesare in three locations – one in Florida and two in California. As thecommercial gateway to space, ASO provides unparalleled Ground ProcessingServices for both foreign and domestic customers seeking the pre-launchpreparation of satellites and payloads. Since 1984, the Company has supportedthe processing of over 250 satellites without negatively impacting a customer’smission launch schedule or physical assets - a notable accomplishment in anindustry where changes to customer launch manifests and processing schedulesare commonplace.

 

·                  Products/Services – Between its three locations, withmore than 150,000 square feet of clean room, high bay, processing space, ASOhas provided facilities for pre-launch ground based operations for 24 years forboth commercial and government satellites and is the leader in this servicesector.

 

·                  Market/Customers – ASO servicesgovernment and commercial customers sending satellites to low-earth-orbit (LEO)or geosynchronous orbit (GEO). ASO services satellite payloads for flights onLockheed Martin’s Atlas, Boeing’s Delta, Orbital Sciences’ Taurus and Pegasusand Zenit 3SL launch vehicles. ASO has long-term contracts in place with NASA,other governmental agencies, United Launch Alliance, and Sea Launch, LLC.During fiscal year 2008, ASO accounted for 62% of our consolidated revenues.

 

As of June 30,2008 our contract backlog and projected revenue concentration rests primarilywith ASO. The ASO contract backlog consists of contracts for future services,contractually guaranteed minimum activity contracts, committed missions underIndefinite Delivery, Indefinite Quantity (“IDIQ”) contracts and othercontractual arrangements. As of June 30, 2008, our contractual backlog andscheduled but uncommitted missions represented the following revenues:

 

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| **Contract**                         | ** ** | **FY2009** | ** ** | **FY2010** | ** ** | **Total**  | ** ** |
|--------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Astrotech – Guaranteed Missions |       | 3,209,124  |       | 3,337,489  |       | 6,546,613  |       |
| Committed Missions                   |       | 12,395,371 |       | 6,386,325  |       | 18,781,696 |       |
| Facility Programs                    |       | 2,680,324  |       | 963,750    |       | 3,644,074  |       |
| Total Backlog                        |       | 18,248,819 |       | 10,687,564 |       | 28,972,383 |       |

 

For fiscal year2009, ASO’s secured backlog consists of nine satellite missions from variousgovernment and commercial entities requiring pre-launch processing services atits Titusville, Florida and Vandenberg Air Force Base facilities. ASO’s backlogrelated to launch processing services also includes a fixed-price contract withSea Launch that is scheduled to process their satellites during fiscal year2009, and a commercial contract that guarantees an annual fixed-price forprocessing up to four satellites at the Titusville facility. ASO has alsopositioned itself as a supplier of launch processing services for other typesof commercial spacecraft.

 

ASO’s fiscal year2009 revenue backlog for launch processing services is $15.6 million, and, whencombined with other ASO revenue backlog of $2.7 million, represents a 16%increase over fiscal year 2008 revenue of $15.8 million. The majority of thissubstantial increase will be realized as project margin, as these contracttypes have low variable cost.

 

Additionally, ASOhas continued its contracted operations to construct a launch processingfacility adjacent to its existing facility at VAFB. Construction commencedin March 2007 and is scheduled for completion in September 2009. ASOhas also expanded this effort to include design support for facility processingstructures. Revenues received are based upon completion of scheduledmilestones. To date, all milestones have been met within both budgeted andscheduled parameters. See “Risk Factors – Termination of our backlog orderscould negatively impact our revenues” for additional discussion of our backlog.

 

·                  Growth Strategy – As a leadingsatellite processing provider, Astrotech is expanding its service offeringsbeyond pre-launch services to offer a continuing commercial relationship witheach satellite following launch. This new expanded service offering has beennamed End-to-End-Mission-Assurance (EEMA) and includes rescuing strandedsatellites, extending the life of satellites by providing additional fuelcapacity and re-locating satellites from one on-orbit location to another. Thenew EEMA services are contemplated to extend ASO’s current relationships withcustomers’ spacecraft beyond our normal Ground Processing Services to the endof the satellite’s lifecycle. We believe that there are hundreds of commercialand government satellites currently on-orbit that could benefit from ASO’s newEEMA service offering.

 

·                  Competition*–*Dueto the logistical complications of transporting spacecraft internationally, ourASO business unit generally does not compete with launch services based inother countries. ASO has two primary competitors in the payload processingservices marketplace in the U.S.:

* *

*Commercial*

 

Spaceport SystemsInternational (SSI) – SSI operates and manages a commercial spaceport at VAFBand is a provider of payload processing and launch services for both commercialand government users. The SSI facility throughput capability is significantlyless than that of ASO VAFB and it is heavily influenced by governmentcustomers. The ASO VAFB contract award for the five-meter high bay constructionsignificantly improves the ASO competitive advantage at VAFB. SSI does notprovide payload processing services in support of the CCAFS / KSC launch site;and therefore, does not compete with ASO Florida.

* *

*Governmental*

 

NASA and the USAFown and operate payload processing facilities at both the CCAFS / KSC and VAFBlaunch sites. These facilities are used to process select government spacecraftonly. They are not used to process commercial spacecraft.

 

·                  ***NASA*** – Thecurrent NASA internal policy is to process all payloads in commerciallyprovided facilities with the exception of nuclear powered and biologicalspacecraft. These specific spacecraft constitute a small percentage of theoverall NASA missions. ASO is the only commercial provider in Florida andcompetes with SSI at VAFB for the NASA missions.

 

·                  ***USAF***– The USAF facilities are used to process many of the USAF and othergovernmental operated spacecraft. Due to lack of facility capacity and increasedfocus on commercialization of many USAF spacecraft, commercial facilities areemployed in addition to the USAF owned facilities. ASO Florida is the onlycommercial provider for these facilities and competes with SSI at VAFB. The newASO facility at

 

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VAFB will give the Company a competitive advantage inthat it is the only facility that will be able to provide a five-meter high bayat VAFB.

##  

## ***ASTROTECHENGINEERING SERVICES***

 

Astrotech Engineering Services (AES) consolidates ouryears of “cost plus” government contract experience from both ASO and SPACEHABinto a single business unit. AES is attempting to grow the cost plus businessby bidding on various projects announced by the government in need ofcomprehensive engineering solutions, and provides unique capabilities such asspecialty engineering, hardware design and development and configuration anddata management. We believe that Astrotech and SPACEHAB enjoy a reputation thatis highly respected in the industry largely due to the hundreds of successfulsatellite and shuttle launches completed and the Company’s configuration anddata management support that was provided to the ISS, which yielded consistentnear-perfect or perfect award fee scores during the evaluation periods.

 

·                  Products/Services –The core competencies of the AES division are in the areas of SystemsEngineering and Integration, Test and Verification, Requirements Management andAvionics/Software Test and Verification, which provides a solid platform onwhich to realize additional growth in our AES business unit.

 

·                  Market/Customers – Theaerospace industry includes the manufacture and maintenance of aircraft,missiles, launch vehicles systems, spacecraft, satellites and their associatedcomponents; various aspects of defense technology; the transportation of peopleand goods via air and space; and related research, technology and supportservices. The industry sector covers civil, military and commercialtransportation, research, and manufacturing. Our Engineering Services businessunit contributed 21% of our fiscal year 2008 revenue.

 

·                  Growth Strategy – Our targetgrowth for the AES business unit will be accomplished by the continued pursuitand successful acquisition of contracts with NASA, the Department of Defense,and other government entities and aerospace companies through the competitivebidding process. In addition, we will continue to seek opportunities forteaming arrangements and subcontractor opportunities where our corecompetencies could add value to the governmental customer. We have establishedrelationships with Boeing, Lockheed Martin, European Aeronautical Defense andSpace Company, Wyle Labs, United Launch Alliance, United Space Alliance, ARESEngineering Corporation, and Jacobs Engineering.

 

·                  Competition – This businessunit competes with companies that provide operations support, configurationmanagement, and engineering and fabrication services to NASA. These competitorsinclude aerospace contractors such as Boeing, Lockheed Martin, United SpaceAlliance, ARES Corporation, Barrios Technologies Inc., Bastion Technologies,Cimarron, and Oceaneering Space Systems.

##  

## ***SPACEHAB ORBITALTRANSPORTION SERVICES, INC.***

 

SPACEHAB Orbital Transportation Services Inc. (SOTS)has assumed the goodwill, expertise, technologies and trade secrets of theSPACEHAB Space Flight Services division. SOTS has completed more than 20 spaceshuttle missions for launch, and has been responsible for the logistics of over1,500 experiments flown to and in space. We are the only commercial companythat designed and flew habitable modules for use by the space shuttle crews asadditional living and working space. Further, the ability to integrate productsinto a variety of containers and ultimately vehicles, is a significant competitiveadvantage for SOTS.

 

·                  Products/Services– SOTS has provided integration services for its clients, whether delivering anexperiment to low-earth-orbit, critical supplies to the ISS, or integrating itsLogistics Module into the space shuttle payload bay. In the event additionalopportunities on the Space Shuttle develop (see: Growth Strategy). SOTS retainsits legacy technology and significant goodwill value as we continue to flymicrogravity processing missions on the Space Shuttles (see: BioSpaceTechnologies, Inc.) and work with NASA to prepare these sensitive payloadsfor flight. During fiscal year 2008, our Space Flight Services businesscontributed 17% of our revenue.

 

·                  Market/Customers– The aerospace industry is quickly evolving as NASA has recently awarded $500million to two commercial launch providers under the Commercial OrbitalTransport System (“COTS”) program. The COTS winners are to develop spacecraftto send cargo, and ultimately personnel, to the ISS after the Space Shuttle isretired at the end of 2010. As these commercial providers prove their launchsystems, we believe SOTS expertise will be required to prepare cargo for launchon these new spacecraft much as the Company provided during its 23 years ofintegration services for its proprietary modules.

 

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·                  Growth Strategy– The Company is currently planning and flying vaccine targets on Space Shuttlelaunches with our BioSpace subsidiary (see: BioSpace Technologies, Inc.).Additionally, while there are no missions scheduled at this time, our LogisticsModule remains available for a future role in the U.S. space program and couldfly again if the space shuttle program is extended beyond the planned Shuttleretirement date of 2010.

 

·                  Competition– SOTS does not have any direct commercial competitors. The Logistics Modulesand other assets that we own represent a sizable capital investment,representing a significant barrier to entry. In addition, the cost ofdeveloping the expertise, trust and trade secrets would represent anotherrestrictive barrier. Moreover, it is estimated that a new entrant would requiremany years of review and testing by NASA before any new space hardware andprocedures would be granted the approval to fly on the Space Shuttles. NASAdoes compete directly with the Logistics Module by flying their Multi PurposeLogistics Module. However, we believe our assets provide more utility insupporting powered experiments, as we are able to carry more weight and volumethan the other solutions available to NASA. COTS spacecraft, the European ATVand Japanese HTV will also provide alternative transportation systems and couldsend both pressurized and unpressurized cargo to Low Earth Orbit. Neither theATV or the HTV have return-to-earth capabilities and the COTS spacecraft thatcan return to earth are not expected to be flight ready until 2013.

*** ***

***BIOSPACE TECHNOLOGIES, INC.***

 

BioSpace Technologies, Inc. was created tocommercialize biotechnology products processed in extended microgravity(micro-g), which is a unique environment only found in space. We are currentlyutilizing our 23 year heritage of having sent over 1,500 science experimentsfor NASA to space, to develop both hardware and procedures needed for largescale production of micro-g products. Our operational SPACEHAB OrbitalProcessing Platform (SOPP) includes pre-flight sample preparation, flighthardware manufacturing, mission planning and operations, astronaut training,and certifying hardware and processes for use within the highly regulatedenvironment of manned space flight. Significant milestones include:

 

·                  Ourcomprehensive evaluation of the most promising micro-g experiments, has led usto the conclusion that commercializing a salmonella vaccine developed in spaceheld the lowest risk and highest return compared to other potential productsreviewed.

·                  In 2008,SPACEHAB entered into a formal Space Act Agreement with NASA allowing SPACEHABto produce and sell products produced in the Space Shuttle and on the ISS.

·                  A contractbetween SPACEHAB and the Durham Veterans Affairs Medical Center was signed on February 2008under a Cooperative Research and Development Agreement (“CRADA”). The CRADAsecured both the exclusive rights to the intellectual property of thesalmonella vaccines discovered in micro-g (not including active duty militarypersonnel), and the exclusive rights to utilize VA laboratories and scientistsfor pre-flight preparation and post-flight analysis.

·                  BioSpace securedthe rights from NASA to occupy a mid-deck locker on the Space Shuttle DiscoverySTS-118 on October 2007 in NASA’s new National Lab Pathfinder Missions forwhich SPACEHAB established another industry milestone by sending the firstcommercial Microgravity Processing (“MGP”) payload to space. This missionresulted in the successful completion of the first step of our proprietaryVaccine Processing Procedures (“VPP”).

·                  BioSpace securedthe rights to another mid-deck locker on STS-123 which again resulted in anindustry milestone by discovering the first commercial vaccine target producedin micro-g for Salmonella Typhimurium.

·                  BioSpace Securedthe rights to STS-124 which resulted in the loss of 80% of the samples due tocontamination. A full “lesson learned” analysis has been completed which hasresulted in significant improvements in the MGP Vaccine Processing Procedures.

·                  BioSpace has secured the rights tofly additional samples on the upcoming STS-125 scheduled for October 2008which will represent the final VPP flight for Salmonella Typhimurium.Preliminary samples of Staph will also be flown on this flight as we continue ourvaccine target pipeline.

 

Product/Service – BioSpace’sMicrogravity Processing (MGP) capabilities include preparing microgravitypayloads that can be flown on a variety of launch systems, including the SpaceShuttle, the Russian Soyuz, Progress and Photon, the European ATV, the JapaneseHTV and the SpaceX Dragon (still under development). Our Vaccine ProcessingProcedure (“VPP”) has been developed to grow microbes in space that, underideal conditions, can result in significant advantages over the traditionalearthbound vaccine discovery processes reducing the development time from yearsto only a few flights to space.

 

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Our Logistics TrainingModule, located at the SPACEHAB Payload Processing Facility (SPPF) in CapeCanaveral, Florida has been retrofitted as the Micro-g Training Module (MGTM)to train astronauts Microgravity Processing on-orbit procedures. Our flightready Logistics Module is being used to simulate on-orbit environmentalconditions in order to determine the effects of humidity, barometric pressure,temperature variations and vibrations on microgravity processes. Our AdvancedResearch and Conventional Technology Utilization Spacecraft (ARCTUS), designedfor COTS, were also configured to deliver and return Microgravity Processingpayloads and we believe could be privately funded should there be a strongdemand for our microgravity products.

 

We continue to developour MGP hardware, procedures and production techniques to continually improvesample densities and production yields. Our proprietary MGP procedures includepre-launch sample processing, proprietary flight hardware design, safetycertification, environmental controls, remote process controls, robotics,astronaut training and procedures, on-orbit data communications and post-flightsample analysis.

 

Our BioSpace businessunit has not yet generated revenues. Preparation, recovery, and testing ofvaccine samples in space require an on-going substantial investment. Theprocess of testing such samples and the development of marketable vaccineproducts will require significant additional capital investment, and unless theCompany can market its samples to drug development entities at an early stageof development will require substantial future investments before revenue wouldbe recognized.

 

Market/Customers – While there havebeen no MGP product sales to date, likely customers will be large internationalpharmaceutical companies and smaller biotechnology companies. BioSpacecontinues to monitor our proprietary *Biotechnology Investment,Acquisition and Joint Venture Study* which currently indicates thatthe biotechnology sector is very active in partnering with or acquiring smallbiotechnology companies like BioSpace once the discoveries enter into the FDAPhase trials. BioSpace is currently focused on starting the FDA Phase processwith the salmonella vaccine in order to validate our business model whileproviding guidance as to how to best commercialize our MGP VPP.

 

GrowthStrategy – OurBioSpace growth strategy is to first concentrate on commercializing thesalmonella vaccine, completing the samples remaining microgravity flight(s),and then progressing into initial FDA testing. Meanwhile, we will fly otherselected vaccine targets to micro-g in available spacecraft. There are nineadditional Space Shuttle flights until the scheduled retirement of the fleet in2010. While NASA may add more Space Shuttle flights, our business strategyassumes that there will be no further flights after 2010. BioSpace will focuson designing more efficient mass/volume MGP hardware while improving yields inorder to maximize the remaining Space Shuttle flight opportunities. Based onour ARCTUS design that was submitted to NASA for the COTS competition, we aredesigning our own “free flyer” spacecraft called the BioSpace ProcessingSatellite (BPS) that would provide an autonomous, on-orbit platform, tooptimize our own vaccine target discovery process while also selling micro-glab capacity and processes to third parties. The BPS is being designed to fly on anumber of smaller and less expensive rockets or as a secondary payload onlarger launch vehicles, thus providing the Company with maximum flexibility andassured access to space in the coming years. Advanced design and development ofthe BPs would require significant capital investment and would take severalyears to complete.

 

Competition – There are manyearthbound developers of vaccines, including most large pharmaceuticalcompanies and many smaller biotechnology firms. While there are no knowncompetitors developing vaccines in micro-gravity, with the recent delivery ofboth the European Space Agency (“ESA”) and the Japanese Space Agency (“JAXA”)nodes on the ISS, competition from foreign governments, academia and commercialcompanies, competition is anticipated.

 

***SPACETECH, INC.***

 

SPACEHAB has establisheda business incubator named SPACETECH that selects various qualifiedtechnologies that use space-related engineering and technology. SPACETECH iscurrently engaged with two initiatives.

 

**1stDetect:**

 

SPACETECH begandevelopment of a mini-mass spectrometer (MMS) for use on ISS under a Space ActAgreement (SAA) with NASA in 2005. The Company quickly realized the manycommercial applications of such a device and began parallel development of alighter weight, lower power unit named 1st Detect. We believe thatthis device represents a breakthrough in the mass spectrometer market, fillingan unfulfilled niche in the marketplace by being accurate, light weight,battery powered, durable, inexpensive and providing a rapid reading of theidentified substance.

 

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•                  Products/Services –A mass spectrometer is a universal chemical analyzer that measures the constituentchemicals in a sample by measuring the mass to charge ratio (m/z) of the atomsand/or molecules for which the sample is comprised. The resulting spectrum isthen compared to other known sample spectra to determine the identification ofeach chemical present. A unique “fingerprint” (spectra) exists for essentiallyevery known substance in the world. In fact, the National Institute ofStandards and Technology (NIST) has catalogued over 100,000 differentchemicals. 1st Detect uses a proprietary ion trap technology,allowing for the device’s portability, versatility, sensitivity, durability,efficiency and low cost.

 

Ion trap technology hasbeen used in spectrometry for years. In fact, most of the explosive detectorsfound in airports use the ion trap technology. However, these units are large,heavy and require 110 volt power and must be plugged into an electrical outletand can only detect one substance.. The 1st Detect ion trap designis approximately the size of a shoe box, weighs approximately 12 pounds andonly requires 12 volts (battery powered) while being able to detect manysubstances simultaneously. It is also very sensitive, which reduces the amountof false positive alarms compared to competing products in its price range..

 

1st Detect iscurrently a working prototype that requires further refinement and optimizationwith a finished prototype expected in eight to twelve months. 1stDetect unit pricing is expected to range from $50,000 to $80,000 depending onthe configuration and application.

 

•                  Market/Customers– Given 1st Detect’s very light weight, its ability to run onbatteries and its relatively low price point, 1st Detect will openmarkets that were not available to competing units. The following are possiblemarkets that 1st Detect can serve:

 
| ·  Military                                                |
|-----------------------------------------------------------------|
| ·  Federal Buildings, Airports & Border Crossings |
| ·  Police Departments                                      |
| ·  Fire Departments                                        |
| ·  Environmental Monitoring                                |
| ·  Food, Beverage and Drug Processing                      |
| ·  Hospitals and Doctors Offices                           |
| ·  Semiconductor Processing                                |
| ·  Petroleum & Chemical Refineries                |
| ·  University Research Labs                                |
| ·  Explosive Detection                                     |
| ·  Drug Detection                                          |
| ·  Portable Drug Breathalyzer & Meth Lab Detector |
| ·  Chemical Spill & Smoke Source Detector         |
| ·  Contamination & Hazardous Waste Detector       |
| ·  Manufacturing Contamination Detector                    |
| ·  Human Exhaled Gas Sample Analysis                       |
| ·  Process Control and Contamination Detection             |
| ·  Plastics & Rubber Manufacturing                |
| ·  Research                                                |

 

•                  GrowthStrategy – As we continuedevelopment of the 1st Detect product, we have undertaken a primarystrategy to seek to partner with existing spectrometer companies where ourproduct could benefit from established distribution channels.

 

•                  Competition– There are many portable mini mass spectrometer competitors. We believe the1st Detect product offers a combination of attributes that are currentlyunavailable in the marketplace on a single product.

 

**AirWard**:

 

On May11, 1996, ValuJetAirlines flight No. 596 crashed in the Florida Everglades resulting in 110fatalities. The National Transportation Safety Board (NTSB) found that chemicaloxygen generators initiated and then intensified a fire in a Class D cargocompartment which caused the crash. Shortly after the crash, NTSB recommendedthat the Department of Transportation (DOT), the Research and Special ProgramsAdministration (RSPA) and the Federal Aviation Administration (FAA) takeaction.

 

In response to the NTSBrecommendation, the DOT RSPA published a notice of proposed rulemaking (NPRM)in the Federal Register (61 FR 68955) proposing to amend the Hazardous MaterialsRegulations (HMR; 49 CFR Parts 171-180) to prohibit transporting oxidizers,including compressed oxygen, in passenger-carrying aircraft. This newregulation, which places much more stringent heat and flame resistancerequirements regarding the air transportation of hazardous materials such asoxygen cylinders, is to be effective October 2009.

 

SPACEHABapplied its over 20 years of space engineering expertise to this terrestrialproblem and has recently completed pre-production testing of the AirWard Containerto the new DOT requirements, 

 

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demonstratingthat the design meets and exceeds all requirements. The AirWard Containersfully meet, and exceeded, all of the applicable requirements of the HazardousMaterials Regulations (HMR; 49 CFR Parts 171-180) that are to become effectivein October 2009.

 

•                  Product/Services– The AirWard thermal resistant transportation containers serve the commercialdomestic airline industry by providing protective containers for transportationof hazardous materials. AirWard has met the DOT’s stringent requirements, whichwill apply to all domestic and U.S.-bound airlines, effective October 2009.The containment system can be scaled to support numerous common and customapplications, utilizing a stainless steel exterior, durable interior fabricsand proprietary combination of interior packing materials.

 

•                  Market/Customers– Since the successful completion of the rigorous certification requirementsestablished by DOT for hazardous containment, the Company has presented itsproduct to many of the domestic commercial airlines as well as regulatorybodies, receiving encouraging results. AirWard will be marketed directly tocommercial airlines through the Company’s sales staff. Primarily designed forthe aviation industry, AirWard also holds commercial applications acrossvarying industries including manufacturing, packaging/transportation, and themilitary.

 

•                  Growth/Strategy– Applying experience in the development of specialized containers fortransporting goods in space, we have developed and certified a containmentsystem to meet the DOT’s 2009 requirements. Attendance during industry conferencesand seminars, as well as rigorous sales initiatives has shown enthusiasm bypotential aviation customers. Our prototype unit is now undergoing evaluationby commercial airlines. Our internal sales initiative will continue to pursuesales as the DOT compliance deadline of September 2009 approaches.

 

•                  Competition– To date, we are unaware of any viable competitors or manufacturers of asimilar hazardous cargo containment product that meets the DOT’s 2009requirements. One potential competitor, Viking Packaging, began pursuing theopportunity; however, has since halted due to preliminary testing obstacles.

 

# **Dependence on a SingleCustomer or Limited Number of Customers**

# ** **

Approximately 45% of ourrevenue in fiscal year 2008 was generated by various NASA contracts orsubcontracts. Other contracts with commercial and governmental customersprovide revenue from varying sources. We cannot make any assurances that NASAwill require our services in the future; and therefore, we continue to work ondiversifying our customer base to include other government agencies, foreignspace agencies, aerospace partners, and private companies.

 

Commonto contracts within agencies of the U.S. Government, our contracts servicingNASA contained provisions pursuant to which NASA or the prime contractor mayterminate the agreement “for convenience.” On May 7, 2008, SPACEHABreceived a letter from ARES Corporation notifying of ARES’s intent to terminatethe Cost Plus Award Fee Subcontract No. SGS-0311403.00 with SPACEHABpursuant to section GP-07(7.2) of the General Provisions as set forth inAttachment J-7 to the Subcontract. The provision referred to in the AREScorrespondence cited termination for “convenience.” The Company hasconsistently received excellent reviews for its performance under theSubcontract and has earned near maximum award fees. Previously, 45 of ouremployees were engaged under the Subcontract, which resulted in revenues of$4.5 million for the current fiscal year. The Subcontract extended pursuant toits original term until September 30, 2008. The Company and ARES have notresolved certain issues relative to the early termination of the Subcontract,including, but not limited to, certain amounts receivable from ARES under thiscontract totaling $1.4 million. The Company is evaluating its contractualrights and other options with respect to ARES’s claimed termination of theSubcontract, including ARES’ obligations with respect to such claimedtermination.

 

We anticipate that aportion of our revenue for our next fiscal year will be derived from contractswith entities other than agencies of the U.S. Government that will not besubject to federal contract regulations such as termination “for convenience”or government funding restrictions.

 

Our ASO business unit serves the satellite launch industry, which isdominated 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 

 

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December 2006 and was extended through December 2007. InMarch, United Launch Alliance exercised the contract’s calendar year 2008option. We anticipate United Launch Alliance exercising the remaining threecalendar year options that will extend the contract through December 31,2011. Additionally, the fourth of four, fully-funded task orders under the $35million Vandenberg Air Force Base indefinite delivery, indefinite quantity(IDIQ) contract was awarded in June 2008 in which ASO has providedfacilities and payload processing services from its VAFB location.

 

We have other currentcontracts in place with NASA and Boeing for support of spacecraft processingactivities in both Florida and California. Our ASO business unit also managesthe Sea Launch facility under a long-term contract with Sea Launch Company,LLC, which expires in 2011.

 

# **Research and Development**

# ** **

We incurred $1.4 millionand $0.8 million in research and development expense during fiscal years 2008and 2007, respectively. Research and development in fiscal year 2008 has beendirected towards development of our 1st Detect, mini-massspectrometer product, and AirWard hazardous containment system. The AirWardprogram advanced from a concept to a product over the past year. We believethat the Department of Transportation plans to enforce new regulations (CFR49)regarding the safe transportation of oxygen cylinders aboard passenger aircrafteffective October 1, 2009. SPACEHAB has designed, developed and tested acontainer that meets all federal requirements. During fiscal year 2008, aprototype container was fabricated and subjected to rigorous testing. Through aseries of iterative design adjustments, a final design was developed that meetsall applicable requirements and standards. Our design team attended trade showsand met with government and airline representatives to advise potentialcustomers of our CFR49-compliant product. We are now actively marketing thisproduct for initial deliveries in January 2009. In parallel, we areevaluating the use of advanced materials for a “block 2” box that couldpotentially reduce weight, while still meeting all applicable requirements. The1st Detect chemical analyzer debuted at the American Society of MassSpectrometry Conference in June 2008, during which several companiesdemonstrated significant interest in the product. Currently, severaloperational units have been manufactured including a boxed unit and a bench-topdevelopment unit. In tandem, we are working on the development of an automaticMS/MS capability, which will increase accuracy; an RF signal refinement and RFand auto-tuning capability; reduction in size and cost; development of chemicalidentification software; and, intellectual property development.

 

# **Certain RegulatoryMatters**

# ** **

We are subject tofederal, state, and local laws and regulations designed to protect theenvironment and to regulate the discharge of materials into the environment, inorder to protect our domestic technology from unintended foreign exploitation,and to regulate certain business practices. We believe that our policies,practices, and procedures are properly designed to prevent unreasonable risk ofenvironmental damage and consequential financial liability to us. Compliancewith environmental laws and regulations and technology export requirements hasnot had in the past, and, we believe, will not have in the future, materialeffects on our capital expenditures, earnings, or competitive position. Ouroperations are subject to various regulations under federal laws relative tothe international transfer of technology, as well as to various federal andstate laws relative to business operations. In addition, we are subject tofederal contracting procedures, audit, and oversight under Federal AcquisitionRegulations.

 

Significant federalregulations impacting our operations include the following:

 

*Federal Regulation ofInternational Business*. We are subject to various federalregulations relative to the export of certain goods, services, and technology.These regulations, which include the Export Administration Act of 1979administered by the Commerce Department and the Arms Export Control Actadministered by the State Department, impose substantial restrictions on thesharing or transfer of technology to foreign entities. Our activities in thedevelopment of space technology, and in the processing of commercial satellitesdeal with technology of the type subject to these regulations. Our operationsare conducted pursuant to a comprehensive export compliance policy thatprovides close review and documentation of activities subject to these laws andregulations.

 

*Foreign Corrupt Practices Act*.The Foreign Corrupt Practices Act establishes rules for U.S. companiesdoing business internationally. Compliance with these rules is achievedthrough established and enforced corporate policies and documented proceduresin our internal procedures and financial controls.

 

*Iran Nonproliferation Act of 2000*.This act includes specific prohibitions on commercial activities with certainspecified Russian entities engaged in providing goods or services to theInternational Space Station. Our activities with Rocket SpaceCorporation-Energia of Russia are not subject to this act.

 

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*Federal Acquisition Regulations*.Goods and services provided by us to NASA and other U.S. Government agenciesare subject to Federal Acquisition Regulations. These regulations provide rules andprocedures for invoicing, documenting, and conducting business under contractwith such entities. The Federal Acquisition Regulations also subject us toaudit by federal auditors to confirm such compliance.

 

*Truth in Negotiations Act*.The Truth in Negotiations Act was enacted for the purpose of providing for fulland fair disclosure by contractors in the conduct of negotiations with the U.S.Government. The most significant provision included in the Truth inNegotiations Act is the requirement that contractors submit certified cost andpricing data for negotiated procurements above a defined threshold.

 

*Defense Security Service*.**From time to time we are requested to process governmentspacecraft payloads that must be handled under federal security clearances. Toaccommodate these requirements, we maintain facility security clearances withincertain subsidiaries of the Company and have persons engaged by the Companywith necessary active security clearances to support these requirements.Maintenance of an active facility clearance requires dedicated trainedpersonnel, specified facility standards and recordkeeping.

 

# **Regulatory Complianceand Risk Management**

# ** **

We maintain compliancewith regulatory requirements and manage our risks through a program ofcompliance, awareness, and insurance, which includes the following:

 

*Safety*. Weplace a continual emphasis on safety throughout our organization. At thecorporate level, safety programs and training are monitored by a corporatesafety manager. Senior safety professionals within our Flight Services businessunit provides safety as a component of our space flight operations and augmentsthe safety awareness and oversight available at the corporate level.

 

*Export Control Compliance*.We have a designated senior officer responsible for export control issues andthe procedures detailed in our export control policy. This officer and thedesignated export compliance administrator monitor training and compliance withregulations relative to foreign business activities. Employees are providedcomprehensive training in compliance with regulations relative to export andforeign activities through our interactive training program and are certifiedas proficient in such regulations as are relative to their jobresponsibilities.

 

*Insurance*. Ouroperations are subject to the hazards associated with operating assets in thesevere environment of space. These hazards include the risk of loss or damageto the assets during storage, preparation for launch, in transit to the launchsite, and during the space mission itself. We maintain insurance coverageagainst these hazards with reputable insurance underwriters. Although we didnot fully insure our flight assets in the past, we now insure our flight assetsat replacement value for risk of loss during future space flight missions.

 

# **Employees Update**

# ** **

As of June 30, 2008we employed 66 regular full-time employees. The breakdown by area is asfollows: SPACEHAB corporate and executive management is 22; one is employed byFlight Services; and, seven are employed by SPACETECH. Engineering Servicestotal one; and, 35 are employed by ASO. During the fourth quarter of fiscalyear 2008 the ASO business unit appointed retired Gen. Lance W. Lord to theposition of chief executive officer responsible for expanding ASO’s currentcore services from spacecraft processing support to a comprehensive line ofEnd-to-End Mission Assurance offerings. Of these employees, approximately 15.2%hold advanced degrees beyond a bachelor’s degree. Additionally, a significantnumber of our employees have experience in both the space industry and/orgovernmental space agencies, with a special expertise in commercial space andhuman space flight. None of our employees are covered by collective bargainingagreements.

 

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

# ** **

The risks anduncertainties outlined below include, but are not limited to space shuttleoperations, changes in technology and customer’s needs, termination of backlogorders, and changes in government requirements and laws. Other unknown risksthat may adversely affect our financial condition include those which may notbe considered threatening based on present information. If any of the followingrisks or uncertainties actually occurs, our business, financial condition, andresults of operations could be materially adversely affected.

 

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# **Risks Related to OurBusiness**

# ** **

## ***Since August 2007, our cash flows fromoperations associated with space shuttle missions have been eliminated.***

##  

During fiscal year 2007,our Flight Services business unit derived over 98% of its revenues, whichrepresented approximately 64% of consolidated revenues for fiscal year 2007,from the use of our modules and integrated cargo carriers by the space shuttlefleet. We have had no contracted missions since August 2007 for ourmodules; and, we have terminated our leases for the integrated cargo carriers,and no longer have the use of these assets. Our inability to generate newcontracts on a timely basis could have a material adverse effect on ourbusiness, financial condition, and results of operations.

 

## ***If we are unable to anticipate technologicaladvances and customer requirements, including NASA’s requirements for productsand services, our business and financial condition will be adversely affected.***

##  

Our growth and futurefinancial performance depend upon our ability to anticipate technologicaladvances and customer requirements. There can be no assurance that we will beable to achieve the necessary technological advances for us to remaincompetitive. In 2008, we continued new business initiatives for the commercialexploitation of space. These new business initiatives will require substantialinvestments of capital and technical expertise. We may not be able to developproducts and services in connection with these new business initiatives. Ourfailure to anticipate or respond adequately to changes in technology and NASArequirements, or delays in additional product development or introduction,could have a material adverse effect on our business and financial performance.

 

## ***We plan to develop new products and servicesfor the space industry. No assurances can be given that we will be able tosuccessfully develop these products and services.***

##  

Our business strategyoutlines the use of decades of experience we have accumulated to expand theservices and products we offer to both government and commercial industries.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 to develop new technologies andbusiness models to commercially exploit space-derived expertise will requiresubstantial additional capital, which may not be available to us, and ifavailable, may substantially dilute equity owners.***

##  

Our future businessoperations will be focused on developing new technologies and business modelsfor the commercial exploitation of space. We expect that some of thesetechnologies and models will require substantial additional capital. Noassurances can be given that capital will be available to us. The cost offuture capital, if available, is likely to be costly; and therefore, likely tosubstantially dilute holders of equity.

 

## ***We incur fixed lease obligations for ourmodule and space shuttle operations payload processing facilities, whichcurrently have no contracts for such future business.***

##  

A substantial portion ofour operating costs is derived from a fixed lease obligation for our Cape Canaveralpayload processing facility, which is used to support our module and spaceshuttle operations. The balance of this lease extends over a period of threeadditional years. We currently have no revenue-generating contracts for futurebusiness that would support our module and space shuttle operations. We mustobtain 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. Additionally, 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 of our space shuttle modulemission in August 2007 resulted in the redeployment or reduction oftechnical and operations personnel.***

##  

Due to the completion ofour space shuttle module mission in August 2007, we have redeployedtechnical and operational personnel to other contracts, and reduced theworkforce, in order to lower our cost structure as part of a reorganization ofoperations. Any future reduction in workforce would be accompanied by thepayment of severance obligations, which could have a material adverse effect onour financial condition. In addition, a future reduction in workforce would beaccompanied by a risk of litigation, which if initiated or successful, couldharm our business and financial position.

 

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## ***As a result of NASA selecting anothersuccessor to the Space Shuttle Program, our financial condition and results ofoperations were materially adversely affected.***

##  

Approximately 85% of ourrevenue for fiscal year 2007 was generated from contracts supporting NASA. Infiscal year 2008, NASA contributed 45% of our revenue. In the past, we havedeveloped products without any firm commitments from NASA. We currently have nocontracted NASA-related projects relative to NASA’s proposed successor for theSpace Shuttle Program.

 

## ***Termination of our backlog of orders couldnegatively impact our revenues.***

##  

As of June 30, 2008,we had a firm backlog of approximately $30.2 million. Backlog consists ofaggregate contract values, excluding the portion previously recognized asrevenues, in work change orders on existing contracts, and our estimate ofpotential award fees. Backlog as of June 30, 2008 does not give effect tonew orders received or any terminations or cancellations since that date.Approximately 51% of our firm contract backlog as of June 30, 2008 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.

 

## ***As a U.S. Government contractor, we aresubject to a number of rules and regulations, the violation of which couldresult in us being barred from future U.S. Government contracts.***

##  

We must comply with, andare affected by laws and regulations relating to the award, administration, andperformance of U.S. Government contracts. These laws and regulations, amongother 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 specificlaws and regulations could result in the imposition of fines and penalties, thetermination of our contracts, or debarment from bidding on U.S. Governmentcontracts. Additionally, U.S. Government contracts generally contain provisionsthat allow the Government to unilaterally suspend us from receiving newcontracts pending resolution of alleged violations of certain federal laws orregulations, reduce the value of existing contracts, issue modifications to acontract, and control and potentially prohibit the export of our services andassociated materials. Prohibition against bidding on future U.S. Governmentcontracts would have a material adverse affect on our financial condition andresults of operations.

 

## ***Our business could be adversely affected by anegative audit by the U.S. Government.***

##  

U.S. Government agencies,including NASA, routinely audit and investigate government contractors. Theseagencies review a contractor’s performance under its contracts, cost structure,and compliance with applicable laws, regulations, and standards. The U.S.Government also may review the adequacy of, and a contractor’s compliance with,its internal control systems and policies, including the contractor’spurchasing, property, estimating, compensation, and management informationsystems. Any costs found to be improperly allocated to a specific contract willnot be reimbursed, while such costs already reimbursed must be refunded. If anaudit uncovers improper or illegal activities, we may be subject to civil andcriminal penalties and administrative sanctions, including termination ofcontracts, forfeiture of profits, suspension of payments, fines, and suspensionor prohibition from doing business with the U.S. Government. In addition, wecould suffer serious reputational harm that affects our non-governmentalbusiness if allegations of impropriety were made against us.

 

## ***Our financial margins as compared to that ofour competitors.***

##  

The U.S. Government, thegovernments of other countries and private companies participate in the highlycompetitive space industry often as both suppliers and end-users of spaceservices. Our long-term strategy growth is to commercially exploit space-basedtechnologies. These strategies could require us to compete with commercialcompanies such as The Boeing Company, Lockheed Martin Corporation and otherlarge aerospace companies, many of which have existing NASA support contracts,substantially greater financial resources and manufacturing capabilities, moreestablished and larger marketing and sales organizations, and larger technicalstaffs than we have.

 

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United Space Alliance,which is equally owned by The Boeing Company and Lockheed Martin Corporation isthe primary contractor for NASA’s Space Shuttle Program. United Space Allianceis responsible for the day-to-day operation and management of the U.S. SpaceShuttle fleet. United Space Alliance is currently the primary contractor in themarket for civil ground operations and payload processing services. We believethat the privatization of space station operations and successor programs willcontinue to result in intense competitive pressure among contractors to retaintheir current contracts and/or capture new payload processing work from othercontractors. To the extent that these contractors are able to retain or enlargetheir roles in payload processing operations, our ability to successfullycompete for a share in this market could be impeded, which could have amaterial adverse effect on our future financial performance.

 

At present, competitionin the United States for our Astrotech spacecraft launch processing services islimited to the California (Vandenberg) launch site, where a competing companycalled California Commercial Spaceport Systems International is located.California Commercial Spaceport Systems International does not have payload processingfacilities in Florida, which is where the majority of U.S. commercial satellitelaunches 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.

 

## ***A branch of the U.S. Government couldconstruct spacecraft ground processing facilities at one or more of thedomestic launch sites served by Astrotech, which could significantly reduce thenumber of missions using Astrotech’s facilities.***

##  

Astrotech currentlyprovides services for domestic launch sites. In the event that the U.S.Government constructs spacecraft ground processing facilities that would competewith the launch sites currently serviced by Astrotech, there would be a reducedneed for use of Astrotech’s facilities. This would result in the U.S.Government competing directly with us for our existing customers in connectionto servicing domestic launch sites, which in the aggregate could significantlyreduce our revenues. The U.S. Government, as a competitor to Astrotech, mayhave more extensive or more specialized engineering, manufacturing andmarketing capabilities than we do in this area of spacecraft ground processingfacilities. There can be no assurance that we will be able to competesuccessfully against the U.S. Government as a potential competitor in this areaor that these competitive pressures we may face will not result in reduced revenuesand market share for us.

 

## ***Our earnings and margins may vary becausemany of our contracts are fixed-price contracts.***

##  

Our business mix includescost-reimbursable and fixed-price contracts. Cost-reimbursable contractsgenerally have lower profit margins than fixed-price contracts. Our FlightServices and Astrotech spacecraft processing business units’ contracts aremainly fixed-price contracts.

 

Under fixed-pricecontracts, we receive a fixed price irrespective of the actual costs we incurand, consequently, any costs in excess of the fixed price are absorbed by us.Cost overruns also may adversely affect our ability to sustain existingprograms and obtain future contract awards. Under a fixed-price contract, if weare unable to control costs we incur in performing under the contract, ourfinancial condition and operating results could be materially adverselyaffected.

 

## ***We are under a fixed-price contract toconstruct building improvements for a government client at Astrotech’sfacilities and could incur losses or performance penalties in completing thework.***

##  

We currently have acontract to construct building improvements for the U.S. Government atAstrotech’s facilities on a fixed-price basis. While a fixed-price contractallows us to benefit from cost savings, it also exposes us to the risk of costoverruns. If the initial estimates we used to calculate the contract price andthe cost to perform the work prove to be incorrect, we could incur losses. Inaddition, this contract has specific provisions relating to cost, schedule, andperformance. If we fail to meet the terms specified in such contract, then ourcost to perform the work could increase or our price could be reduced, whichwould adversely affect our financial condition. Moreover, successful performanceof this contract depends on our ability to meet production specifications anddelivery rates. If we are unable to perform and deliver under contractrequirements, our contract price could be reduced through the incorporation ofperformance penalties, such as liquidated damages, termination of the contractfor default, or other financially significant exposure. Thus, this fixed-pricecontract has a substantial risk for potential losses if our estimated costsexceed our estimated price, or if we cannot perform in accordance with theterms of the contract.

 

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## ***Most of the costs for our Astrotech businessunit are fixed regardless of the number of spacecraft that are processed at ourfacility.***

##  

The primary costs relatedto our Astrotech business unit are associated with operating and running ourthree spacecraft launch processing facilities. These costs remain relativelyunchanged regardless of whether or not customers are using the facilities. As aresult, if we do not properly estimate the number of satellites that will beprocessed when calculating our price structure for our spacecraft processingservices, our financial results could be adversely affected.

 

## ***Our financial results could be adverselyaffected if the estimates that we use in accounting for contracts are incorrectand need to be changed.***

##  

Contract accountingrequires judgment relative to assessing risks, estimating contract revenues andcosts, and making assumptions for schedule and technical issues. The estimationof total revenues and cost at completion for many of our contracts iscomplicated and subject to many variables. Assumptions have to be maderegarding the length of time to complete the contract because costs alsoinclude expected increases in wages and prices for materials. Incentives orpenalties related to performance on contracts are considered in estimatingrevenue and profit rates, and are recorded when there is sufficient informationfor us to assess anticipated performance. Estimates of award and incentive feesare also used in billing customers and estimating revenue and profit ratesbased on actual and anticipated awards. If our performance under a costreimbursable 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 thesignificance of the judgments and estimation processes described above, it islikely that materially different amounts could be recorded if we used differentassumptions or if the underlying circumstances were to change. Changes inunderlying assumptions, circumstances, or estimates may adversely affect futureperiod financial performance.

 

## ***If we are unable to find users of futureproducts we develop without a contract for such product, we will have towrite-off the value of such assets.***

##  

We have been funding thedevelopment 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 for theuse of our modules, we have been 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 spacecraft payload processing facilitiesare specifically designed to process satellites and other payloads and we wouldlose a substantial portion of their value if we no longer provided theseservices.***

##  

Our Astrotech spacecraftprocessing facilities and the payload processing facilities for our FlightServices business unit were built, specifically, to process satellites, ourmodules, and integrated cargo carriers. Currently, our Astrotech facilities inTitusville, Florida are depreciated using the straight-line method over theirestimated useful lives, which range from 16 to 40 years. If we were required toterminate the processing businesses, the value of these facilities would besignificantly impaired. In addition to having to take a substantial write-downof the value of our Titusville, Florida facility, if we attempted to sell thisfacility, it is unlikely that we would be able to recover the amounts we haveinvested. If we were able to sublease our leased facilities, we doubt suchsubleases would be sufficient to cover our current rental payments. Due to oursubstantial capital expenditures for our spacecraft processing facilities andthe 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.

 

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## ***We incur substantial costs in preparingproposals to bid on contracts that we may not be awarded.***

##  

Preparing a proposal tobid on a contract is generally a three to six month process. This process islabor-intensive and results in the incurrence of substantial costs that aregenerally not retrievable. Additionally, although we may be awarded a contract,work performance does not commence for several months following completion ofthe bidding process. If funding problems by the party awarding the contract orother matters further delay our commencement of work, these delays may lowerthe value of the contract, or possibly render it unprofitable.

 

## ***Becauseour operating results are highly dependent on the timing of space shuttlemissions and spacecraft launches, they may fluctuate significantly from quarterto quarter.***

##  

Our microgravity productprocessing strategy relies on sending payload samples to and from space. Thisverity requires the reliance of access to space on-board either the SpaceShuttle, *Progress*, *Soyuz*, ATV, *Falcon*, HTV, or other vehicles. The timing and availability ofspace shuttles or spacecraft missions that could carry our samples, theavailability of third party launch vehicles, the number and types of missionsflown, the number and timing of satellite launches that use our Astrotechspacecraft processing facilities, and other factors can cause our results ofoperations to fluctuate significantly from quarter to quarter.

 

Most obligations underour contracts, including contract-related engineering, research anddevelopment, and selling, general and administrative expenses, are recorded inthe periods in which they are incurred. Accordingly, we may report routineoperating losses in quarters in which no space missions are in process.

 

Additionally, we haveincurred significant losses in the past and, as such, we believe thatperiod-to-period comparisons of our results of operations are not necessarilymeaningful and should not be relied upon as indications of future performance.

 

## ***Compliance with environmental and othergovernment regulations could be costly and could negatively affect ourfinancial condition.***

##  

Our business,particularly our Astrotech spacecraft processing business unit is subject tonumerous laws and regulations governing the operation and maintenance of ourfacilities, and the release or discharge of hazardous or toxic substances,including spacecraft fuels and oxidizers into the environment. Under these lawsand regulations, we could be liable for personal injury and cleaning 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 ofa hazardous substances at or from our facilities, could have a material adverseeffect on our business, financial condition, and results of operations.

 

## ***Our failure to comply with U.S. exportcontrol laws and regulations could adversely affect our business.***

##  

We are obligated by lawand under NASA contracts to comply, and to ensure that our subcontractorscomply with all U.S. export control laws and regulations, including theInternational Traffic in Arms Regulations and the Export AdministrationRegulations. We are responsible for obtaining all necessary licenses or otherapprovals, if required, for exports of hardware, technical data, and software,or for the provision of technical assistance. We are also required to obtainexport licenses, if required, before utilizing foreign persons in theperformance of our NASA contracts if the foreign person will have access toexport-controlled technical data or software. The violation of any of theapplicable export control laws and regulations, whether by us or any of oursubcontractors, could subject us to administrative, civil, and criminalpenalties.

 

## ***Our inability to maintain required governmentsecurity clearances or the impact of foreign ownership or control could resultin a loss of potential future spacecraft ground processing and otheropportunities.***

##  

In order to be a serviceand product provider for spacecraft ground processing and other relatedactivities, we are required to maintain certain government security clearancesand we must comply with laws that limit foreign ownership and control. We maybe subject to regulatory action and possibly other sanctions if we fail tocomply with applicable laws and regulations relating to required securityclearances and foreign ownership and control. This could harm our reputation,our prospects for future work and our operating results. Failure to complycould also result in the termination of current operations. A finding by theU.S. Government that we are not in compliance with security clearance standardscould materially and adversely affect us. Similarly, a finding by the U.S.Government that we are not in compliance with foreign ownership and controllaws or other related legislative requirements could materially and adverselyaffect us.

 

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## ***Our facilities located in Florida andCalifornia are particularly susceptible to damage caused by hurricanes,earthquakes, or other natural disasters.***

##  

Our largest Astrotechspacecraft processing facility, which we own, and our leased Flight Servicesfacility on the east coast of Florida are particularly susceptible to damagecaused by hurricanes or other natural disasters. In addition, our leased launchprocessing facilities at Vandenberg Air Force Base and the facilities weoperate at the Port of Long Beach are subject to damage caused by earthquakes.The extent to which the buildings located at these facilities are designed tosustain natural disasters varies. Although we insure our properties andmaintain business interruption insurance, there can be no assurance that suchinsurance would be sufficient. If a severe hurricane, earthquake, or othernatural disaster materially affected any of these facilities, our financialcondition and results of operations could be adversely affected.

 

## ***The loss of key management and otheremployees could have a material adverse effect on our business.***

##  

We are dependent on thepersonal efforts and abilities of our senior management, and our success willalso depend on our ability to attract and retain additional qualifiedemployees. We do not maintain key man insurance with any of these employees.Failure to attract personnel sufficiently qualified to execute our strategy, orto retain existing key personnel, could have a material adverse effect on ourbusiness.

 

## ***A long and protracted restructuring couldcause us to lose key management and technical employees and otherwise adverselyaffect our business.***

##  

Continuing operatinglosses or ineffective business strategies could lead to a protracted financialrestructuring that would further disrupt our business and would divert theattention of our management from operation of our business and implementationof our business plan. It is likely that such a prolonged financialrestructuring or bankruptcy proceeding would cause us to lose many of our keymanagement employees, particularly the most senior members of management. It isalso likely a prolonged financial restructuring or bankruptcy proceeding wouldcause us to lose customer contracts or be ineligible to obtain governmentcontracts. Such losses of key management employees would likely make itdifficult for us to complete a financial restructuring and may make it lesslikely that we will be able to continue as a viable business (see Item 7.Management’s Discussion and Analysis of Financial Condition and Results ofOperations – Liquidity and Capital Resources).

 

## ***There may be no market for our stock on anactive trading market.***

##  

The NASDAQ has notifiedus that we are in violation of their listing requirements, since we have notmaintained our share price for our common stock of $1.00 or more. If we do notmeet the share price requirement by October 6, 2008, our common stock maybe delisted from NASDAQ. If we are delisted we have no current plans to list onany securities exchange or other stock market. It is possible that the marketfor our stock will be subject to disruptions. Shareholders may not be able tosell their stock when they want and, if sold, may not be able to receive theexpected price.

 

## ***If we fail to comply with Section 404 ofthe Sarbanes-Oxley Act of 2002, our reputation, financial condition, and thevalue of our notes and capital stock may be adversely affected.***

##  

Beginning with our reportfor the fiscal year ending June 30, 2008, Section 404 of theSarbanes-Oxley Act of 2002 will require us to include an internal controlreport of management with our annual report on Form 10-K, which is toinclude management’s assessment of the effectiveness of our internal controlover financial reporting as of the end of the fiscal year.

 

In order to achievecompliance with Section 404 within the prescribed period, management hasadopted a detailed project work plan that assesses the adequacy of our internalcontrol over financial reporting, remediates any control weaknesses that may beidentified, validation through testing that controls are functioning asdocumented, and implementation of a continuous reporting and improvementprocess for internal control over financial reporting. However, we may not beable to complete the work necessary for our management to issue its managementreport in a timely manner, in future periods or to test and complete any workthat will be required for our management to be able to report that our internalcontrol over financial reporting is effective. In addition, our independentauditors when required, may not be able to issue an attestation report onmanagement’s assessment. Our failure to comply with Section 404, includingissuing the management report and obtaining the attestation report, maymaterially adversely affect our reputation, our financial condition, and thevalue of our securities, including our outstanding notes, exchange units, andcommon stock. Furthermore, our costs of compliance with Section 404,including the cost 

 

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of remedying anyidentified weaknesses, could be material and could adversely affect ourfinancial condition and results of operations.

 

## ***Our bank revolving credit facility expires inFebruary 2009.***

##  

In February 2008, weentered into a financing facility with a bank that provided a $4.0 million termloan terminating in February 2011 and a $2.0 million revolving creditfacility terminating in February 2009. The bank financing facilitycontains certain financial and other covenants that are required to preclude adefault and acceleration of amounts outstanding. The Company’s failure tocontinue to meet its covenant requirements or to renew the revolving creditfacility could have an adverse affect of the Company’s liquidity.

 

# **Item 1B. UnresolvedStaff Comments.**

# ** **

Not applicable.

 

# **Item 2. Properties.**

# ** **

Our five business units,Astrotech Space Operations, Astrotech Engineering Services, Flight Services,BioSpace Technologies, and SPACETECH, currently occupy four locations. Thecorporate headquarters was located at 12130 Highway 3, Webster, Texas 77598,which terminated on June 30, 2008, upon mutual agreement. In June 2008,the Company exchanged approximately 3.0 acres of land adjacent to its Webster,Texas offices for early termination of its lease for the former headquartersfacility, and moved its corporate offices to leased offices at 907 Gemini,Houston, Texas 77058. The new corporate offices are located in approximately16,000 square feet of office-shop space under lease through December 2008.Our executive management, accounting, marketing and communications, humanresources, and contracts administration along with the SPACETECH, BioSpace, andEngineering Services employees are located at the corporate offices.

 

Astrotech occupies twocompany-owned locations. Astrotech’s headquarters and Florida operations team,consisting of 24 personnel, are located in a nine-building complex located on a62-acre space technology campus at 1515 Chaffee Drive, Titusville, Florida32780. This campus encompasses 140,000 square feet of facility space supportingnon-hazardous and hazardous flight hardware processing, payload storage, andcustomer offices. The construction of an additional 50,000 square footspacecraft processing facility was completed in March 2002. Thesebuildings presently occupy one-third of the 62-acre property owned byAstrotech, with one-third available for expansion and the remaining one-thirdreserved for hazardous facility safety clearances.

 

Astrotech has afour-person technical staff located on Vandenberg Air Force Base in SantaBarbara County, California. Astrotech presently leases a 60-acre site on thebase and owns four buildings comprising 18,800 square feet, dedicated to thesame functions provided at the Florida facility. The term of the present landlease expires on July 13, 2013, with provisions to extend the lease at therequest of the lessee and the concurrence of the lessor. Upon final expirationof the land lease, all improvements on the property revert, at the lessor’soption, to the lessor at no cost. During fiscal year 2007, we began anexpansion of this facility that will be completed during 2009 that will enhanceour capabilities to process five-meter class satellite payloads.

 

Additionally, Astrotechhas seven employees who are housed at the Sea Launch Home Port facility in LongBeach, California provided in accordance with the provisions of the Astrotechcontract with Sea Launch Company, LLC.

 

Our Flight Servicespayload processing facility is located near the Kennedy Space Center in CapeCanaveral, Florida. The facility is contained in an approximately 52,000 squarefoot plant. 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 (“VCC”). This area includes eleven secureexperiment/payload integration and work areas ranging in size from 300 squarefeet to 1,000 square feet each. In addition, the facility provides officespace, stock rooms, storage areas, a machine shop, an electrical shop,conference rooms, and other miscellaneous accommodations. We negotiated anagreement with the Canaveral Port Authority for the lease of the land for aforty-three year period, which commenced on August 28, 1997. Uponexpiration of the land lease, all improvements on the property revert at nocost to the lessor. On May 2, 2005 we sold the facility in Cape Canaveral,Florida for $4.8 million. We now lease back 100% of the facility through December 31,2010, with an option period of an additional five years.

 

We believe that ourcurrent facilities and equipment are generally well maintained and in goodcondition, and are adequate for our present and foreseeable needs.

 

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# **Item 3. LegalProceedings.**

# ** **

In January 2004, theCompany initiated a formal proceeding against NASA in which the Company wasseeking damages in the amount of $87.7 million for the loss of its ResearchDouble Module (“RDM”) as a result of the 2003 Space Shuttle *Columbia* accident. In October 2004,NASA responded to this claim with the determination that its liability was $8.2million, including interest, and paid SPACEHAB this amount. SPACEHABsubsequently filed an appeal with the Armed Services Board of Contract Appeals,and over the next two years the two parties proceeded with preparations for acourt hearing. The Company also filed a tort claim in November 2004,seeking damages of $79.7 million for the loss of the RDM, to which the courtgranted a motion in June 2006 to stay the case until resolution of theCompany’s contract claim appeal.

 

On February 21,2007, the Company dismissed with prejudice all litigation against NASA relatingto losses incurred by the Company as a result of the February 2003 SpaceShuttle *Columbia* accident.

 

In July 2008, theCompany filed a claim with its insurance underwriter for recovery of up to$750,000 in lost revenue resulting from the January 2007 launch failureand subsequent closure of the Sea Launch operations. The insurance underwriterhas not confirmed or denied coverage and is evaluating the Company’s claim.

 

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

 

# **Item 4. Submission ofMatters to a Vote of Security Holders.**

# ** **

No matters were submittedto a vote of stockholders during the fourth quarter of the year ended June 30,2008.

 

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** **

**PART II**

** **

# **Item 5. Market forRegistrant’s Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities.**

# ** **

Our Common Stockpreviously traded on the NASDAQ National Market System under the symbol “SPAB”up until March 21, 2006 at which point our common stock commenced tradingon the NASDAQ Capital Market. The following table sets forth the quarterly highand low intra-day bid prices for the periods indicated.

 

 
| **Fiscal 2008** | ** ** | **High**   | ** ** | **Low**    | ** ** |
|----------------------|------------|------------|------------|------------|------------|
| ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| First Quarter        |       | $          | 6.50       |       | $          | 3.90 |   |
| Second Quarter       |       | $          | 3.25       |       | $          | 1.10 |   |
| Third Quarter        |       | $          | 2.26       |       | $          | 0.55 |   |
| Fourth Quarter       |       | $          | 0.82       |       | $          | 0.37 |   |

 
| **Fiscal  2007** | ** ** | **High** | ** ** | **Low** | ** ** |
|------------------|------------|----------|------------|---------|------------|
|             |       |     |       |    |       |
| First Quarter    |       | $        | 13.50      |    | $          | 6.70 |   |
| Second Quarter   |       | $        | 8.80       |    | $          | 5.60 |   |
| Third Quarter    |       | $        | 12.30      |    | $          | 5.70 |   |
| Fourth Quarter   |       | $        | 8.40       |    | $          | 4.10 |   |

 

We have never paid cashdividends. It is our present policy to retain earnings to finance the growthand development of our business; and therefore, we do not anticipate payingcash dividends on our Common Stock in the foreseeable future.

 

We have 75,000,000 sharesof Common Stock authorized for issuance. As of September 19, 2008 we had16,404,378 shares of Common Stock outstanding. We had approximately 259shareholders of record of our Common Stock on September 19, 2008.

 

The NASDAQ has notifiedus that we are in violation of their listing requirements, since we have notmaintained a share price of our Common Stock of $1.00 or more. If we do notmeet the share price requirement by October 6, 2008, our Common Stock maybe 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 securities  remaining available  for future issuance** | ** ** |
|-------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|
| ** **                                                  | ** ** | **(a)**                                                                                                                                               | ** ** | **(b)**                                                                                                               | ** ** | **(c)**                                                                                     | ** ** |
| Equity compensation plans approved by  security holders     |       | 235,400                                                                                                                                               |       | $                                                                                                                     | 10.03      |                                                                                        | 5,510,869  |   |
| Equity compensation plans not approved by  security holders |       | —                                                                                                                                                |       | —                                                                                                                |       | —                                                                                      |       |
| Total                                                       |       | 235,400                                                                                                                                               |       | $                                                                                                                     | 10.03      |                                                                                        | 5,510,869  |   |

 

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# **SPACEHAB StockPerformance Graph**

# ** **

*The following performance graphand table do not constitute soliciting material and the performance graph andtable should not be deemed filed or incorporated by reference into any otherprevious or future filings by us under the Securities Act of 1933, as amended,or the Securities Exchange Act of 1934, as amended, except to the extent thatwe specifically incorporate the performance graph and table by referencetherein.*

* *

The performance graph andtable below compare the five-year cumulative total return of our common stockwith the comparable five-year cumulative total returns of theStandard & 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, 2003 in SPACEHAB, S&P, and NASDAQ, and thereinvestment of all dividends.

 

**COMPARISON OF 5 YEAR CUMULATIVETOTAL RETURN***

Among SPACEHAB,Incorporated, The NASDAQ Composite Index

And The S&P Aerospace& Defense Index

 

 
| ** **                           | ** ** | **6/03**   | ** ** | **6/04**   | ** ** | **6/05**   | ** ** | **6/06**   | ** ** | **6/07**   | ** ** | **6/08**   | ** ** |
|--------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **SPACEHAB, Incorporated**           | ** ** | **100.00** | ** ** | **387.37** | ** ** | **188.42** | ** ** | **124.21** | ** ** | **68.42**  | ** ** | **6.01**   | ** ** |
| **NASDAQ Composite**                 | ** ** | **100.00** | ** ** | **128.49** | ** ** | **129.74** | ** ** | **140.22** | ** ** | **169.32** | ** ** | **149.51** | ** ** |
| **S&P Aerospace &  Defense** | ** ** | **100.00** | ** ** | **132.36** | ** ** | **154.68** | ** ** | **184.25** | ** ** | **228.80** | ** ** | **202.04** | ** ** |

 

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# **Issuer Purchases ofEquity Securities**

# ** **

On March 25, 2003,our Board of Directors authorized us to repurchase up to $1.0 million of ouroutstanding stock at market prices. As of June 30, 2008 we had repurchased11,660 shares at a cost of $117,320.

 

On July 13, 2005, weentered into an amendment to the Amended and Restated Rights Agreement, datedas of February 23, 2004, between us and American Stock Transfer &Trust Company, as rights agents, which had the effect of terminating our RightsAgreement effective July 13, 2005.

 

# **Sales of UnregisteredSecurities**

# ** **

## ***Equity Securities***

##  

On February 11,2008, the Company entered into a Stock Purchase Agreement with certaininvestors for the purchase of 55,000 shares of the Company’s Series Dconvertible preferred stock for a total price of $5.5 million. Consummation ofthe transaction was contingent upon NASA awarding us a funded Space ActAgreement under the Commercial Orbital Transportation Services (“COTS”) Programand shareholder approval of the transaction. As consideration for investorcommitment to this transaction, the Company issued 150,150 shares of commonstock upon entering into the transaction.

 

The Company was notawarded a funded Space Act Agreement under the COTS Program and, except for the150,150 commitment compensation paid, the offering was terminated.

 

## ***Private Placement of Common Stock***

##  

On June 5, 2008, theCompany entered into a Securities Purchase Agreement with certain investors,under which the investors agreed to subscribe for and purchase 1,329,787 sharesof the Company’s common stock for an aggregate purchase price of $625,000. Theconsummation of the transaction under the Securities Purchase Agreement wascontingent upon certain customary conditions precedent to each party’sobligation to close.

 

The 1,329,787 shares ofcommon stock issued under the Securities Purchase Agreement were sold inreliance on the exemption from registration pursuant to Rule 506 ofRegulation D promulgated by the Commission pursuant to the Securities Act of1933. The Company believes that such issuance of securities qualifies for anexemption under Rule 506 because there are no more than 35 purchasers ofsecurities and each Investor represents to the Company under the SecuritiesPurchase Agreement at the time of execution and closing that it is an “accreditedinvestor” within the meaning of Rule 501 of Regulation D.

 

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# **Table of Contents**

 

# **Item 6. SelectedFinancial Data.**

# ** **

The following table setsforth our selected consolidated financial data as of and for the years ended June 30,2004, 2005, 2006, 2007, and 2008. Such data has been derived from ourconsolidated financial statements audited by Grant Thornton LLP for the fiscalyears ended June 30, 2004, 2005, and 2006, and by PMB Helin Donovan, LLPfor fiscal years ended June 30, 2007 and 2008. The data set forth belowshould be read in conjunction with “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations,” “Risk Factors” and ourConsolidated Financial Statements and Notes thereto included in this annualreport. All amounts are in thousands.

 
| ** **                                                                  | ** ** | **Years Ended June 30,** | ** ** |
|-----------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                  | ** ** | **2004**                                | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** |
| **Statement of Operations Data:**                                           |       |                                    |       |   |   |   |   |   |   |   |   |
| Revenue from operations                                                     |       | $                                       | 77,606     | (1) | $ | 59,401 |   | $ | 50,746 |   | $ | 52,762 |   | $ | 25,544 |   |
| Costs of revenue                                                            |       | 45,678                                  |       | 47,158 |   | 46,855 | (5) | 51,029 | (7) | 19,540 |   |
| Gross profit                                                                |       | 31,928                                  |       | 12,243 |   | 3,891 |   | 1,733 |   | 6,004 |   |
| Selling, general and administrative  expenses                               |       | 20,982                                  | (2)        | 1,639 | (3) | 10,672 |   | 13,762 | (7) | 9,361 | (11) |
| Research and development expenses                                           |       | 223                                     |       | 77 |   | 410 |   | 801 |   | 1,375 |   |
| Income (loss) from operations                                               |       | 10,723                                  |       | 10,527 |   | (7,191 | ) | (12,830 | ) | (4,732 | ) |
| Interest expense, net of capitalized  amounts and interest and other income |       | 8,142                                   |       | 5,424 |   | 5,174 | (6) | 3,531 |   | 427 |   |
| Debt conversion expense                                                     |       | —                                  |       | — |   | — |   | — |   | 30,194 |   |
| Net income (loss)                                                           |       | 2,075                                   |       | 5,249 |   | (12,397 | ) | (16,292 | ) | (36,028 | ) |
| Net income (loss) per common share – basic                             |       | $                                       | 1.67       |   | $ | 4.16 |   | $ | (9.73 | ) | $ | (12.61 | ) | $ | (4.26 | ) |
| Net income (loss) per common share –  diluted                          |       | $                                       | 1.47       |   | $ | 3.70 |   | $ | (9.73 | ) | $ | (12.61 | ) | $ | (4.26 | ) |
| Shares used in computing net income (loss)  per common share – basic   |       | 1,245                                   |       | 1,261 |   | 1,274 |   | 1,292 |   | 9,254 |   |
| Shares used in computing net income (loss)  per common share – diluted |       | 1,414                                   |       | 1,419 |   | 1,274 |   | 1,292 |   | 9,254 |   |
| Cash dividends declared per common share                                    |       | —                                  |       | — |   | — |   | — |   | — |   |
|                                                                        |       |                                    |       |   |   |   |   |   |   |   |   |
| **Other Data:**                                                             |       |                                    |       |   |   |   |   |   |   |   |   |
| Cash provided by (used in) operations                                       |       | $                                       | 5,273      |   | $ | (7,153 | ) | $ | 3,984 | (6) | $ | 6,028 | (8) | $ | (8,598 | )(10) |
| Cash provided by (used in) investing  activities                            |       | 5,019                                   |       | 17,683 | (4) | (1,141 | ) | (1,077 | )(9) | (158 | ) |
|                                                                        |       |                                    |       |   |   |   |   |   |   |   |   |
| **Balance Sheet Data (at period end):**                                     |       |                                    |       |   |   |   |   |   |   |   |   |
| Working capital (deficit) surplus                                           |       | $                                       | (6,351     | ) | $ | 5,435 |   | $ | 2,753 |   | $ | (6,105 | ) | $ | 1,004 |   |
| Total assets                                                                |       | 99,925                                  |       | 101,951 |   | 85,450 |   | 72,475 |   | 58,211 |   |
| Long-term debt, excluding  current  portion                                 |       | 66,942                                  |       | 64,885 |   | 63,250 |   | 52,944 |   | 10,387 |   |
| Stockholders’ equity (deficit)                                         |       | 9,410                                   |       | 14,797 |   | 2,809 |   | (13,131 | ) | 34,936 |   |

 

----

| (1)  |   | Includes approximately $17.5 million due to  Boeing’s termination of its spacecraft processing contract with us.                                                                                                                                                                           |
|------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)  |   | Includes approximately $0.3 million of  non-cash expenses related to subleasing of excess facilities, $8.3 million of  goodwill impairment at our Engineering Services and Astrotech Space  Operations business units, and a $1.8 million non-cash write-down of an  investment in Guignè. |
| (3)  |   | Includes $7.7 million of net recovery from  non-recurring transactions related to the loss of our research double module.                                                                                                                                                                       |
| (4)  |   | Includes approximately $8.2 million from  ReALMS contract indemnification clause related to the loss of our research  double module.                                                                                                                                                            |
| (5)  |   | Includes approximately $6.3 million of  non-cash write downs related to our flight unit 3 and the shuttle based  flight assets.                                                                                                                                                                 |
| (6)  |   | Includes approximately $0.6 million of  non-cash charges related to the acceleration of debt placement fees related  to the convertible subordinated notes.                                                                                                                                     |
| (7)  |   | 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.                                                                  |
| (8)  |   | 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.                                                              |
| (9)  |   | Includes approximately $6.3 million of  restricted cash for the construction of a payload processing facility.                                                                                                                                                                                  |
| (10) |   | Includes $3.1 million payment for STS-118  flight insurance.                                                                                                                                                                                                                                    |
| (11) |   | Includes approximately $0.2 million of  non-cash write downs related to our inventory.                                                                                                                                                                                                          |

 

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# **Table of Contents**

 

# **Item 7. Management’sDiscussion and Analysis of Financial 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 operatedin three main areas generally related to space flight activities within theaerospace industry: space assets and mission support services for manned andunmanned space exploration and research missions; commercial and exploratorysatellite pre-launch services; and, engineering services in support of governmentand commercial space operations. Because of the diversity among the operationsof our activities, we report the results of each business as a separate segmentin our consolidated financial statements. Our consolidated financial resultsalso reflect corporate-level expenses such as general and administrative,interest, and depreciation and amortization, but because of their nature, theseitems are not reported as a separate segment.

 

# **Overview**

# ** **

We were incorporated as aWashington corporation in 1984. We provide a range of products and servicesthat focus on the needs of industry, governments and academia requiring accessto, and utilization of the unique environment of space. We employ a staff ofengineers and technicians who have supported hundreds of both manned andunmanned missions to space from multiple locations worldwide. The SPACEHAB nameand brand is one of a select few that has appeared in a multitude of photos andvideos highlighted during 23 space shuttle missions. We offer products andservices in the following areas:

 

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

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

•                  Engineering,analysis, and space-bound payload operations services;

•                  Programintegration and control; and

•                  Product design,development, and fabrication of space equipment.

 

# **Our Business Units**

# ** **

Astrotech SpaceOperations, Inc. provides all support necessary for its government andcommercial customers to successfully process complex communication, Earthobservation and deep space satellites in preparation for their launch on avariety of domestic and foreign launch vehicles. Processing activities includesatellite ground transportation; pre-launch hardware integration and testing;satellite encapsulation, fueling, launch pad delivery; and communication linkedlaunch control. Our ASO facilities can accommodate five meter class satelliteswith weights of 11,000 kilograms, encompassing the majority of U.S. basedsatellite preparation services. During fiscal year 2008, ASO accounted for 62%of our consolidated revenues.

 

Revenue for our ASObusiness 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 ASO operations arerelated to the number of commercial spacecraft launches, which reflects thegrowth in the satellite-based communications industries; and, the requirementto replace aging satellites. Other factors that have impacted, and are expectedto continue to impact earnings and cash flows for this business include:

 

•                  Our ability tocontrol our capital expenditures, which primarily are limited to modificationsto accommodate payload processing for new launch vehicles, upgrading communicationsinfrastructure, maintenance and safety, environmental and reliability projects,and other costs, through disciplined 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; and

•                  Our ability tocomplete customer specified facility modifications within budgeted costs andtime commitments.

 

Astrotech EngineeringServices, Inc. – Formerly SPACEHAB Government Services, AES provides largescale program technical support and specialized engineering analysis, productsand services, and configuration and data management support to NASA and othergovernment customers through the current fiscal year. AES derived most of itsrevenue from NASA’s Program Integration and Control (“PI&C”) contract forthe International Space Station (“ISS”). The Company’s role in the PI&Ccontract was terminated in June of 2008. During the first nine months of fiscalyear 2008, our AES business unit accounted for 21% of our consolidatedrevenues.

 

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Earnings from AES are dependentupon our ability to continue to win contracts with NASA or other governmententities through the competitive bidding process; and, our ability to sustainexemplary performance scores in order to achieve performance bonuses. Otherfactors that have impacted, and are expected to continue to impact earnings andcash flows for this business include:

 

•                  The terminationof the PI&C contract with the International Space Station program;

•                  Our ability tomaintain small business qualification for the AES business unit under NASAcontracting rules;

•                  Our ability tosecure other engineering services contracts with public or private sectorentities; and

•                  Our ability tocontrol costs within our budget commitments.

 

SPACEHAB OrbitalTransportation Services, Inc. – Historically called SPACEHAB FlightServices, offered a range of engineering, research, logistics, integration,operations, and ground support services supporting our space shuttle module andpallet assets. At this time, there are no more scheduled missions to beperformed under this business segment as the shuttle space transportationsystem nears retirement in 2010. During the fiscal year 2008, the Companycompleted space shuttle mission STS-118, its last contracted module mission,and recognized residual SOTS activity from previous missions. We continue toretain our space shuttle module assets to be available for future opportunitiesshould they arise. During fiscal year 2008, our Flight Services businessaccounted for 17% of our consolidated revenues.

 

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 research logisticsrequired 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 our competenciesin configuration and cargo handling;

•                  Commercialdemand for access to space launch capability and need for research cargologistics; and

•                  Space shuttlemission requirements for the manufacture of specialized cargo handlingequipment.

 

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

 

•                  Interestexpense, which has decreased due to the repayment of our maturing convertiblenotes during fiscal year 2008, and the successful execution of the ExchangeTransaction (see Note 16) resulting in the exchange of $46.1 million of the$52.9 million of our senior convertible notes into common stock; and

•                  Income taxes,with respect to which we currently only pay alternative minimum tax and minimalstate income taxes. Income taxes have been impacted by limitations on our netoperating loss carryforward upon consummation of our Exchange Transaction in November 2007(see Note 16).

 

# **New Business Initiatives**

# ** **

Our identified newbusiness initiatives are focused on space-based life sciences, end-to-end spacemission assurance services, and commercialization of space-based technologies,which are natural extensions of our 23 years of space industry experience andour core capabilities in these fields. These new business initiatives will requirelarge investments of capital and technical expertise. As of June 30, 2008,we have recorded no revenue from these new business initiatives.

##  

## ***BioSpace Technologies, Inc.***

##  

*BioSpaceTechnologies, Inc.* – A natural extension of SPACEHAB’smany years of experience preparing, launching and operating over 1,500 sciencepayloads in space, the Company is transitioning from supportinggovernment-sponsored basic research into producing commercial products from themicrogravity discoveries. This new business initiative involves the use ofmicrogravity platforms, such as the Space Shuttle and the ISS, for thedevelopment of space-made products that are to be sold on Earth. BioSpaceTechnologies has successfully processed vaccine samples in space on SpaceShuttle Flights, STS-118, STS-123, and STS-124, which have resulted inpreliminary salmonella vaccine production data. Through June 30, 2008,BioSpace Technologies has had no revenue.

 

## ***SPACETECH, Inc.***

##  

*SPACETECH, Inc.*– SPACETECH is an incubator envisioned to commercialize space-industrytechnologies into real-world applications to be sold to consumers and industry.The 1st Detect mini-mass spectrometer and the AirWard hazardouscargo containers, both developed by SPACEHAB engineers, are being positionedfor entry into 

 

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the commercialmarketplace. AirWard is a shipping container designed to meet the specificrequirements of the U.S. Department of Transportation for all commercialairlines in U.S. airspace to protect pressurized oxygen bottles from flame andheat during flight. The 1st Detect mini-mass spectrometer offers alow power, portable detection device. 1st Detect has been awarded aDevelopmental Testing and Evaluation designation from the U.S. Department ofHomeland Security as a “promising anti-terrorism technology.”

 

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

** **

***Balance Sheet***.Our total assets at June 30, 2008 were $58.2 million compared to totalassets of $72.5 million at the end of fiscal year 2007. The following tablesets forth the significant components of the balance sheet as of June 30,2008, compared with 2007 (in thousands):

 
| ** **                                            | ** ** | **2008** | ** ** | **2007** | ** ** | **Change** | ** ** |
|-------------------------------------------------------|------------|----------|------------|----------|------------|------------|------------|
| Assets:                                               |       |     |       |     |       |       |       |
| Current assets                                        |       | $        | 7,633      |     | $          | 19,644     |       | $ | (12,011 | ) |
| Property and equipment (net)                          |       | 40,999   |       | 43,884   |       | (2,885     | )          |
| Other assets (net)                                    |       | 9,579    |       | 8,947    |       | 632        |       |
| Total                                                 |       | $        | 58,211     |     | $          | 72,475     |       | (14,264 | ) |
| Liabilities and stockholders’ equity  (deficit): |       |     |       |     |       |       |       |
| Current liabilities                                   |       | $        | 6,629      |     | $          | 25,749     |       | $ | (19,120 | ) |
| Long-term debt-less current portion                   |       | 10,387   |       | 52,944   |       | (42,557    | )          |
| Other long-term liabilities                           |       | 6,259    |       | 6,913    |       | (654       | )          |
| Stockholders’ equity (deficit)                   |       | 34,936   |       | (13,131  | )          | 48,067     |       |
| Total                                                 |       | $        | 58,211     |     | $          | 72,475     |       | $ | (14,264 | ) |

 

Current assets as of June 30, 2008 decreased by $12.0 million ascompared to June 30, 2007. This decrease is primarily due to:

 

•                  Cash decrease of$7.1 million resulting primarily from payments to Astrium/EADS of $6.4 million,payments to U.S. Bank for principal and interest to bondholders in the amountof $3.2 million, payment to Willis for STS-118 flight insurance of $3.1million, and payments to various other vendors in the amount of $1.5 million,offset by receipts from our customer for the flight insurance of $3.1 millionand receipts from a term note facility in the amount of $4.0 million. Decreasein accounts receivable of $4.3 million is primarily attributable to thedecreased volume of sales in Flight Services due to our contracted missions forour shuttle assets ending their contracted period of performance.

•                  Decrease inother assets of $0.6 million is primarily a result of having reduced insurancepolicy premiums of $0.4 million in prepaids and of us valuing our inventory tomarket prices, which resulted in a non-cash write-down of the inventory by $0.2million.

 

The decrease in net property and equipment of $2.9 million from June 30,2008 to June 30, 2007 resulted primarily from the depreciation expense of$2.7 million and the exchange of the land in connection with the earlytermination of the Ellington lease for $0.3 million offset by new additions inthe amount of $0.1 million.

 

The increase in other assets of $0.6 million from June 30, 2008 toJune 30, 2007 resulted primarily from a decrease in net deferred financingcosts offset by an increase in notes receivable related to the sale of modulesto a space museum as well as increased spending on developing and protectingintellectual property.

 

Our current liabilities decreased by $19.1 million from June 30,2007 to June 30, 2008. The following summarizes significant items:

 

•                  Our accountspayable and accrued expenses decreased from $11.0 million to $5.3 million due areduction in mission activities in our Flight Services business unit and thetiming of payments.

•                  Our short-termdebt decreased by $10.3 million from June 30, 2007 to June 30, 2008as a result of restructuring our debt and converting the bonds that wereoriginally due in October 2007. This amount was offset by the $0.3 millionthat is the current portion of a $4.0 million term note acquired in February 2008.

•                  Current portionof our deferred gain on the sale of a building decreased by $0.1 million.

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

 

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•                  Our currentportion of deferred revenue decreased by $0.2 million for June 30, 2007 toJune 30, 2008 due to timing of payments receipt and recognizing revenuefor satellite related programs.

 

Our long-term debt as of June 30, 2008 decreased by $42.6 milliondue to the maturity of $10.3 million of our 8.0% convertible subordinated notesin October 2007, and the conversion of junior and senior convertiblenotes.

 

Other long-term liabilities decreased by $0.6 million at year end 2008compared to year end 2007. Our advances on the construction contract decreasedby $0.9 million from June 30, 2007 to June 30, 2008. The decrease inadvances on the construction contract was primarily due to receiving theinitial milestone payments on our contract with a governmental agency to designand build a new processing facility and corresponding payments tosubcontractors for work performed during the period. These cash decreases wereoffset by the $1.3 million increase in long term deferred revenue from ourAstrotech business unit. The long term portion of deferred gain on the sale ofbuildings decreased by $1.0 million.

 

**Liquidity and Capital Resources**

 

As of June 30, 2008we had cash and restricted cash-on-hand of $11.0 million and our workingcapital was approximately $1.0 million. Restricted cash, which consists ofadvance payments on a government contract to modify certain spacecraftprocessing facilities, and restricted deposits per bank covenant totaled $8.4million as of June 30, 2008. For fiscal year 2008 we used $8.6 millionfrom operating activities. Our $5.0 million revolving credit facility expiredas of February 11, 2007, and we elected not to renew the facility. A $4.0million term note facility and $2.0 million revolving note facility wereestablished in February 2008.

 

$10.3 million ofoutstanding 8.0% convertible notes were due on October 15, 2007 and our$52.9 million of 5.5% senior convertible notes are due in October 2010. OnOctober 5, 2007, we announced the successful closing of our offer toexchange (the “Exchange Offer”) any and all of our outstanding 8.0% ConvertibleSubordinated Notes due 2007 (the “Junior Notes”) and any and all of ouroutstanding 5.5% Senior Convertible Notes due 2010 (the “Senior Notes”). As aresult of the closing of the Exchange Offer, for the approximately $7.4 millionin principal amount of Junior Notes tendered, the holders received approximately550,000 shares of common stock and 8,927 shares of Series C ConvertiblePreferred Stock on a pre-reverse split basis. Following the closing of theExchange Offer, approximately $2.9 million of Junior Notes remained outstandingpursuant to the original terms of the indenture governing the Junior Notes. On October 15,2007 we redeemed the outstanding Junior Notes, including accrued interest, forcash. In addition, for the approximately $46.1 million in principal amount ofoutstanding Senior Notes tendered, the holders received approximately 30.7million shares of common stock and 46,083 shares of Series C ConvertiblePreferred Stock on a pre-reverse split basis. Following the closing of theExchange Offer, approximately $6.9 million of Senior Notes remained outstandingpursuant to an indenture governing the Senior Notes that was amended throughthe elimination of substantially all of the indenture’s restrictive covenants.

 

In addition, as a resultof the closing of the Restructuring and Exchange Agreement, effective as of August 31,2007, among the Company and certain holders of Junior Notes and Senior Notes,the Company issued to Astrium GmbH 1,333,334 shares of common stock and 6,540shares of Series C Convertible Preferred Stock on a pre-reverse splitbasis in exchange for Astrium’s existing 1,333,334 shares of Series BConvertible Preferred Stock .

 

As a consequence of theExchange Transaction, we recognized non-cash debt conversion expense of $30.2million in fiscal year 2008, and we increased our common stock by $98.4million.

 

In November 2007, weconverted the 61,550 shares of Series C convertible preferred stock into89.9 million shares of common stock on a pre-reverse split basis and affected a1 for 10 reverse stock split, reducing our issued and outstanding common stockto 13.6 million shares. All share amounts have been stated to reflect thissplit for all periods presented.

 

On February 6, 2008,we entered into a financing facility with a bank providing a $4.0 million termloan terminating February 2011 and a $2.0 million revolving creditfacility terminating in February 2009. The term loan is subject to monthlyamortization of $22,222 plus interest at the rate of prime plus 1.75% and therevolving credit facility incurs interest at the rate of prime plus 1.75%.Funds available under the revolving credit facility are limited to 80% ofeligible accounts receivable. The bank financing facilities are secured by theassets of our Astrotech Space Operations Florida facilities and other covenantsincluding a minimum tangible net worth covenant, a cash flow coverage covenant,a debt service coverage ratio, and a ratio of total liabilities to tangible networth covenant. The balance of the $4.0 million term loan at June 30, 2008was $3.8 million. No amounts have been drawn on the $2.0 million revolvingcredit facility.

 

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On May 22, 2008, the Company entered into aSecurities Purchase Agreement with certain investors, under which the investorsagreed to subscribe for and purchase 1,329,787 shares of the Company’s commonstock for an aggregate purchase price of $625,000.

 

The common stock issued on June 5, 2008 under theSecurities Purchase Agreement were sold in reliance on the exemption fromregistration pursuant to Rule 506 of Regulation D promulgated by theCommission pursuant to the Securities Act of 1933.

*** ***

***Cash Flows From OperatingActivities.*** Cash provided by (used in) operations for theyears ended June 30, 2008 and 2007 was ($8.6) million and $6.0 million,respectively. The significant items affecting the differences in cash flowsfrom operating activities in fiscal year 2008 as compared to fiscal year 2007are discussed below:

 

Fiscal Year 2008 Compared to Fiscal Year 2007.For fiscal year 2008 compared to fiscal year 2007, the significant itemsaffecting cash provided by operating activities were:

 

·                  Net loss for fiscal year 2008 was $36.0 million ascompared to net loss for fiscal year 2007 of $16.3 million. Included in the netloss for fiscal year 2008 is a $30.3 million of expenses related to the bondexchange transaction in October 2007.

·                  Depreciation and amortization for the year ended June 30,2008 was $2.7 million as compared to $6.4 million for the year ended June 30,2007. This reduction relates to the flight assets written down in June of2007.

·                  Restricted cash accounts increased by $2.1 million inthe fiscal 2008 as compared to $6.3 million in fiscal year 2007.

·                  Stock based compensation amounted to $0.8 million forthe year ended June 30, 2008. The portion awarded to executive and boardmembers subsequent to year end was $0.7 million.

·                  Recognition of a deferred gain from the 2005 sale ofthe Ellington facility in the amount of $0.8 million. The gain recognized wasreduced by the $0.3 million value in the land adjacent to the facility that wastransferred to the owner of the facility in negotiations to terminate the leaseagreement.

·                  Write down of our special metals inventory was $0.2million during the year ended June 30, 2008. This inventory was alsowritten down in June of 2007 in the amount of $1.6 million.

·                  For the year ended June 30, 2008, changes inassets provided $4.1 million in cash from operations related to:

·                  Decrease inaccounts receivable of $3.8 million due to the completion of our shuttlemission cargo contract with Lockheed Martin.

·                  Increase inprepaid and other expenses used $0.3 million in both years ended June 30,2008 and 2007. In fiscal year 2008 this amount was offset by the decrease inother assets in the amount of $0.6 million.

·                  Changes in liabilities for fiscal year 2008 used($8.3) million in cash from operations primarily due to:

·                  Decreases inaccounts payable, income taxes payable, accrued expenses and accounts payable –Astrium totaled ($1.3) million.

·                  Increase indeferred revenue related to new mission contracts in our ASO business unitamounted to $1.1 million.

·                  Decrease inaccrued subcontracting services relating to the modules leased in the FlightServices operations in the amount of ($3.6) million.

·                  Decrease incustomer deposits for flight insurance for ($3.1) million.

·                  Decrease inadvances for construction and other contract cost in the amount of ($0.9)million is a result of the recognition of some profit on the new facilityproject.

*** ***

***Cash Flows From InvestingActivities***. For the years ended June 30, 2008 and2007, cash flows provided by (used in) investing activities were ($0.2) millionand ($1.1) million, respectively. The significant items affecting thedifferences in cash flows from investing activities in fiscal year 2008compared to fiscal year 2007 are as follows:

 

For fiscal year 2008 compared to fiscal year 2007, thesignificant items affecting cash provided by operating activities were:

 

·                  Property and equipment purchases of $0.2 million forfiscal 2008 as compared to $0.6 million for fiscal year 2007. This reduction isa continuation of our efforts to reduce capital expenditures.

·                  There was a $0.5 million payment for a legal claimsettlement in fiscal year 2007.

*** ***

***Cash Flows From FinancingActivities***. For the years ended June 30, 2008 and2007, cash flows provided by (used in) financing activities were $1.7 millionand ($1.5) million, respectively. The significant items affecting the differencesin cash flows from financing activities in fiscal year 2008 compared to fiscalyear 2007 are as follows:

 

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For the fiscal year 2008compared to fiscal year 2007, the significant items affecting cash used infinancing activities were:

 

·                  Proceeds received from issuance of common stockamounted to $0.7 million and $0.1 million in years ended June 30, 2008 and2007 respectively.

·                  Payment of junior notes not participating in the October bondconversion in the amount of ($2.9) million.

·                  Net proceeds received from a term loan facility was$3.8 million at June 30, 2008.

·                  Payment of a mortgage loan in fiscal year ended 2007amounted to $1.6 million.

*** ***

***Liquidity***. We continueto focus our efforts on improving overall liquidity through identifying newbusiness 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.

 

Our capital requirements for continuing operationsconsist of our general working capital needs, scheduled principal and interest paymentson our debt obligations, certain contractual commitments, research anddevelopment and other investments in new programs, and capital expenditures.This includes short-term capital to finance continuing operations at the end of2007, and long-term capital to finance our growth.

 

# **Critical AccountingPolicies**

* *

*Revenue Recognition*. Our businessunits’ revenue is derived primarily from long-term contracts with the U.S.Government and commercial customers. Revenues under these contracts arerecognized using the methods described below. Estimating future costs and,therefore, revenues and profits is a process requiring a high degree ofmanagement judgment. “Risk See Factors—Risks Related to Our Business—Ourfinancial results could be affected if the estimates that we use in accountingfor contracts are incorrect and need to be changed.” We base our estimate onhistorical experience and on various assumptions that are believed to bereasonable under the circumstances including the negotiation of equitable adjustmentson our fixed-price contracts due to launch delays. Costs to complete include,when appropriate, material, labor, subcontracting costs, lease costs,commissions, insurance, and depreciation. Our business units’ personnel performperiodic contract status and performance reviews. In the event of a change intotal estimated contract cost or profit, the cumulative effect of such changeis recorded in the period that 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 |
| Engineering  Services |       | Configuration  Management, Engineering Services                                       |       | Cost  Reimbursable Award/Fixed Fee                                                                        |       | Reimbursable  costs incurred plus award/fixed fee                                                                                                                                  |

 

*Long-Lived Assets*. In assessingthe recoverability of long-lived assets, fixed assets, assets underconstruction and intangible assets, we evaluate the recoverability of thoseassets in accordance with the provisions of the Statement of FinancialAccounting Standards No. 144, “Accounting for the Impairment or Disposalof Long-Lived Assets.” This

 

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Statement requires that certain of our long-livedfixed assets be reviewed for impairment whenever events or changes incircumstances 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 asset exceeds the fair value of the asset. Assets to be disposedof are reported at the lower of the carrying amount or fair value less costs tosell.

** **

**RESULTSOF OPERATIONS**

# ** **

# **Resultsof Operations for the Years Ended June 30, 2008 and 2007**

* *

*Overview*. In this section wediscuss our results of operations, both on a consolidated basis, and whereappropriate, by business unit for our fiscal years ended June 30, 2008 and2007. Where we report earnings or loss on a per share basis, we have done so ona “diluted earnings per share” basis. The weighted average number of commonshares applicable to diluted earnings for 2008 and 2007 were 9,254,346, and 1,291,951,respectively.

 

We had net losses of ($36.028) million or ($4.26) perdiluted share on revenues of $25.544 million for our 2008 fiscal yearcompared to ($16.292) million or ($1.26) per diluted share on revenues of$52.762 million for 2007.

* *

*Revenue*. Our revenue for thetwelve months ended June 30, 2008 and 2007 was generated primarily fromthe contracts with Lockheed Martin, Boeing, NASA, and other commercialsatellite providers in our Astrotech business unit, Lockheed Martin CargoMission Contract and contracts with related commercial customers in the FlightServices business unit; and the PI&C contract in our Engineering Servicesbusiness unit.

 

Our Astrotech business unit emerged as our primaryrevenue producer for the fiscal year 2008. In addition to the increasedcommercial and government satellite launch activity our satellite processingwork done for Sea Launch resumed providing $1.6 million in revenue. Theactivity had been dormant as a result of the failed launch in January of2007. During fiscal year 2008, our Flight Services business unit completed itssupport of NASA’s spaceflight activities on the STS-118 mission. In additionthis unit completed its contract work for other customers. Currently, we do nothave any revenue producing activities in this business unit. Our EngineeringServices business unit primary contract was terminated during the last month ofthe fiscal year by the customer, which will have an impact on future earningsfrom this segment.

 

During the twelve months ended June 30, 2008,deferred revenue increased by $1.1 million as compared to a decrease of $0.2million during the same period the prior year. We acquired new contracts wheremilestone payments were received prior to the recognition of revenue. Inaddition, the completion of the Lockheed Martin Cargo Mission Contract had animpact, as it was typically billed on milestones. We don’t expect significantchange in deferred revenue through the next twelve months, as Astrotech has astable backlog of business.

* *

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

* *

*Non-GAAP Financial Measures*. Weuse income from operations before charges as one measure of financialperformance. Income from operations before charges is a non-GAAP financialmeasure and consists of operating income before unusual and infrequent eventssuch as: goodwill impairments; asset impairments; investment impairments; and,the 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

 

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that are incurred for our overall operations that arenot allocable to any specific business unit and results of operations for ourSpace Media, Inc. (“SMI”) segment.

 

The following tables provide summary financial dataregarding our consolidated and segmented results of operations for our 2008 and2007 fiscal years, respectively (in millions):

** **

**FiscalYear Ended June 30, 2008**

 
| ** **                                   | ** ** | **Astrotech  Business  Unit** | ** ** | **Engineering  Services  Business  Unit** | ** ** | **Flight  Services  Business  Unit** | ** ** | **Spacetech  Business  Unit** | ** ** | **Other** | ** ** | **Total** | ** ** |
|----------------------------------------------|------------|-------------------------------|------------|-------------------------------------------|------------|--------------------------------------|------------|-------------------------------|------------|-----------|------------|-----------|------------|
|                                         |       |                          |       |                                      |       |                                 |       |                          |       |      |       |      |       |
| Income (loss) from operations before charges |       | $                             | 4.9        |                                      | $          | 0.2                                  |       | $                             | (2.6       | )         | $          | (0.6      | )          | $ | (6.6 | ) | $ | (4.7 | ) |
|                                         |       |                          |       |                                      |       |                                 |       |                          |       |      |       |      |       |
| Operating income (loss)                      |       | 4.9                           |       | 0.2                                       |       | (2.6                                 | )          | (0.6                          | )          | (6.6      | )          | (4.7      | )          |
|                                         |       |                          |       |                                      |       |                                 |       |                          |       |      |       |      |       |
| Debt conversion expense                      |       | —                        |       | —                                    |       | —                               |       | —                        |       | 30.2      |       | 30.2      |       |
| Other (income)/expense, net                  |       | (0.3                          | )          | —                                    |       | (0.1                                 | )          | —                        |       | (0.8      | )          | (1.2      | )          |
| Interest expense                             |       | 0.1                           |       | —                                    |       | —                               |       | —                        |       | 1.5       |       | 1.6       |       |
|                                         |       |                          |       |                                      |       |                                 |       |                          |       |      |       |      |       |
| Pre-tax income (loss)                        |       | 5.1                           |       | 0.2                                       |       | (2.5                                 | )          | (0.6                          | )          | (37.5     | )          | (35.3     | )          |
| Income tax expense                           |       | —                        |       | —                                    |       | —                               |       | —                        |       | 0.7       |       | 0.7       |       |
|                                         |       |                          |       |                                      |       |                                 |       |                          |       |      |       |      |       |
| Net income (loss)                            |       | $                             | 5.1        |                                      | $          | 0.2                                  |       | $                             | (2.5       | )         | $          | (0.6      | )          | $ | (38.2 | ) | $ | (36.0 | ) |

** **

**Fiscal Year Ended June 30, 2007**

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

 

*Operating Income (Loss)*.Operating income (loss) was ($36.0) million in fiscal year 2008, compared to($16.3) million for fiscal year 2007. The following summarizes the activity ineach of our operating segments:

## *** ***

## ***Astrotech Space Operations***

 

Operating income for our Astrotech business unit was $4.9million for fiscal year 2008, compared to $2.0 million for fiscal year 2007.Operating income for 2008 included selling, general and administrative expenseof $1.2 million and depreciation and amortization expense of $2.1 million ascompared to selling, general and administrative expense of $0.3 million anddepreciation and amortization expense of $2.1 million for fiscal year 2007.Please see “Results of Operations for the Years Ended June 30, 2008 and2007 — Other” for a consolidated discussion of selling, general andadministrative expense and depreciation and amortization expense.

 

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*Astrotech Business Unit OperatingResults for Fiscal Year ended June 30, 2008 as Compared to the Fiscal YearEnded June 30, 2007*

 

Our Astrotech business unit’s operating income beforecharges increased by $3.0 million from fiscal year 2007 to fiscal year 2008.The following summarizes significant changes for our fiscal year ended June 30,2008 as compared to our fiscal year ended June 30, 2007:

 

Revenue increases of $3.7million, consisting of the following:

 

·                  Increase in revenue of $2.4 million due to threedifferent satellites in our VAFB, California facility, whereas, for the sameperiod last fiscal year, there was only one satellite processed there.

·                  Increase in other revenue of $1.2 million mainly dueto mission unique services requested by the customer in addition to increasedpricing on the Lockheed Martin guaranteed mission contract renewal.

·                  Astrotech supported three satellite launches at itsSea Launch facility during fiscal year 2008 and fiscal year 2007. Revenueincreased by $0.1 for the same number of missions due contract pricing. On January 30,2007 Sea Launch experienced a launch failure resulting in the loss of asatellite and damage to the floating launch platform, which reduced the numberof launches in both fiscal years 2008 and 2007.

 

Cost of revenue from our Astrotech business unitdecreased for the fiscal year 2008 as compared to fiscal year ended 2007 by$0.2 million. The decrease is mainly due to higher professional services of$0.6 million for the contract to design a satellite processing facility paid infiscal year 2007. This cost decrease was offset by the cost recognized on theconstruction portion of the contract by approximately the same amount.Additionally, mission specific expenses increased by $0.2 million due toincreased mission support services in Florida and Vandenberg.

## *** ***

## ***Astrotech Engineering*** Services

 

Operating income for our Engineering Services businessunit was $0.2 million for fiscal year 2008, compared to $0.9 million fiscalyear 2007. Operating income for 2008 included selling, general andadministrative expense of $0.6 million and depreciation and amortizationexpense of zero as compared to selling, general and administrative expense of$0.3 and depreciation and amortization expense of zero for fiscal years 2007.Please see “Results of Operations for the Years Ended June 30, 2008 and2007 — Other” for a consolidated discussion of selling, general andadministrative expense and depreciation and amortization expense.

* *

*Engineering Services Business Unit Results ofOperations for Fiscal year ended June 30, 2008 as Compared to the FiscalYear Ended June 30, 2007*

 

Our Engineering Services business unit’s operatingincome before charges decreased by $0.7 million from fiscal year 2007 to fiscalyear 2008. The following summarizes significant changes for our fiscal yearended June 30, 2008 as compared to our fiscal year ended June 30,2007:

 

Revenue decreases of $0.7 million, consisting of thefollowing:

 

·                  Decrease in revenue from the sale of our Destinymodule to the Seattle Space Museum in the amount of $0.3 million during fiscalyear 2007.

·                  Decrease in revenue from our subcontract with ARES onthe PI&C contract of $0.4 million. This decrease is due to a reduction inour statement of work associated with the contract as of June 6, 2008.

 

Cost of revenue decreaseof $0.3 million, consisting of the following:

 

·                  Decrease incost of 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.

## *** ***

## ***SPACEHAB Flight Services***

 

Operating loss for our Flight Services business unitwas ($2.6) million for fiscal year 2008, compared to ($7.6) million for fiscalyear 2007. Operating loss for 2007 included an asset impairment charge of $12.5million for the write down of our flight unit 2 module and other flight basedassets due to our analysis of the remaining space shuttle flights and NASA’spotential need for our module. Operating income for 2008 included general andadministrative expense of $1.7 million and depreciation and amortizationexpense of $0.5 million as compared to general and administrative expenses of$1.2 million and depreciation and amortization expense of $3.6 million forfiscal year 2007. Please see “Results of Operations for the Years Ended June 30,2008 and 2007 — Other” for a consolidated discussion of general andadministrative expense and depreciation and amortization expense.

 

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*Flight Services Business UnitResults of Operations for the Fiscal Year Ended June 30, 2008 as Comparedto the Fiscal Year Ended June 30, 2007*

 

The Flight Services business unit’s operating incomebefore charges increased by $5.0 million from fiscal year 2007 to fiscal year2008. The following summarizes significant changes for our fiscal year ended June 30,2008 as compared to our fiscal year ended June 30, 2007:

 

Revenue net decreases of $30.1 million, consisting ofthe following:

 

·                  Decrease in revenue from STS-116, STS-121, and STS-118missions in the amount of $30.5 million under the CMC with Lockheed Martin thatwas completed in the first quarter of fiscal year 2008. There are no morescheduled missions under our CMC contract with Lockheed Martin.

·                  Increase in revenue of approximately $0.4 million forthe manufacture of flight hardware for Lockheed Martin and flight bags for Mitsubishi.

 

Cost of Revenue decreases of $31.2 million, consistingof the following:

 

·                  Direct cost related to the STS-116, STS-121, andSTS-118 missions that were all completed in the first quarter of 2008 amountingto $16.1 million.

·                  June 30, 2007 write down of flight assets in theamount of $1.9 million.

·                  Decrease in the amount of $10.7 million due to thetermination of the ICC/VCC leases in August 2007.

·                  Reduction of workforce commencing in January 2007decreased cost approximately $2.5 million.

## *** ***

## ***SPACETECH, Inc.***

* *

*SPACETECH Business Unit Results of Operations forFiscal year ended June 30, 2008*

## *** ***

## ***Operating loss for fiscalyear 2008 was ($0.6) million for this new business unit created during thethird quarter. Being new there is no comparison to present versus the fiscalyear 2007.***

 

Revenue for this businessunit was $0.1 million related to the manufacturing type work we are doing forcustomers. This work includes the creation of a mock-up spacecraft, as well asthe production of cargo transfer bags (CTB).

 

Cost of revenue was $0.3million consisting primarily of labor and material cost related to themanufactured goods.

## *** ***

## ***Other***

 

Other operating loss was ($6.6) million for fiscalyear 2008, compared to ($8.1) million for fiscal year 2007. The reduced loss for2008 was comprised of primarily selling, general and administration expensesand depreciation and amortization expenses incurred at the corporate level. The$8.1 million operating loss for fiscal year 2007 relates to primarily selling,general and administrative expenses and depreciation and amortization expenses,which were incurred at the corporate level and an impairment charge of $0.1million attributable to our non-cash write-down of our investment in AppliedAstronautics Corporation (“AAC”).

 

Consolidated selling, general and administrativeexpenses, other than the asset impairment charges for our shuttle- based assetsand our investment in Applied Astronautics Corporation, and research anddevelopment were $10.5 million in fiscal year 2008, compared to $10.8 millionin 2007. The $0.3 million decrease for fiscal year 2007 to 2008 is principallydue to:

 

·                  Decrease of $0.8 million in legal expenses resultingfrom us dropping our claims against NASA related to the loss of our RDM (seeItem 3 Legal Proceedings).

·                  Decrease in audit fees of $0.3 million due to adecrease in audit and tax for fiscal year 2008 as compared to fiscal year 2007.

·                  Decrease in severance fees paid in the amount of $0.3million as a result of the January 2007 reduction in force.

·                  Increase of$1.1 million related to stock and cash bonus compensation awarded and paid toan executive officer and board members in July 2008 (see Note 29).

* *

*Interest Expense*. Interestexpense totaled $1.5 million for fiscal year 2008, compared with $4.3 millionfor 2007. The $2.8 million decrease for 2008 as compared to 2007 is related to:

 

·                  Decrease in interest expense of $2.7 million due tothe conversion of $7.4 million of 8.0% convertible subordinated notes due October 2007and $46.1 million of our 5.5% senior convertible notes due October 2010

 

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into common and convertible preferred stock on October 5,2007, and repayment of the remaining $2.9 million of 8.0% convertiblesubordinated notes on October 15, 2007.

·                  Decrease of $0.1 million resulting from the mortgageloan on our Astrotech facility reaching maturity in January 2007 with thefinal payment being made in December 2006.

 

*Income Tax Provision (Benefit)*.For fiscal year 2008 we recorded an income tax expense of $0.7 million. Werecorded income tax benefit for fiscal year 2007 in the amount of $0.07million. As of June 30, 2008, we had approximately $13.25 million ofavailable net operating loss carryforwards expiring between 2021 and 2026 tooffset future regular taxable income.

* *

*Inflation*. The effects ofinflation and changing prices had no material effect on our revenue or incomefrom continuing operations during the years ended June 30, 2008 and 2007.

# ** **

# **Market Risk**

 

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

# ** **

# **Off Balance SheetArrangements**

 

We did not have any off-balance sheet arrangements asof June 30, 2008.

# ** **

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

 

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

 

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# ** **

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

# ** **

# **Report of IndependentRegistered Public Accounting Firm**

 

The Board of Directors and Stockholders

 

SPACEHAB, Incorporated and Subsidiaries:

 

We have audited the accompanying consolidated balancesheets of SPACEHAB, Incorporated and subsidiaries (the “Company”) as of June 30,2008 and 2007, and the related consolidated statements of operations,stockholders’ equity (deficit) and cash flows for the years then ended. Theseconsolidated financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audit.

 

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audits to obtainreasonable assurance about whether the consolidated 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 consolidatedfinancial statements, assessing the accounting principles used, and significantestimates made by management, as well as evaluating the overall consolidatedfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the consolidatedfinancial position of the Company as of June 30, 2008 and 2007, and theresults of their operations and their cash flows for the years then ended inconformity with accounting principles generally accepted in the United Statesof America.

 

/s/PMB HELIN DONOVAN LLP

 

Houston, Texas

September 26, 2008

 

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**SPACEHAB,INCORPORATED AND SUBSIDIARIES**

Consolidated Balance Sheets

(In thousands, exceptshare data)

 
| ** **                                                                                                                                                                                                  | ** ** | **June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|
| ** **                                                                                                                                                                                                  | ** ** | **2008**          | ** ** | **2007** | ** ** |
| **Assets**                                                                                                                                                                                                  |       |              |       |   |   |
| Current assets                                                                                                                                                                                              |       |              |       |   |   |
| Cash and cash equivalents                                                                                                                                                                                   |       | $                 | 2,640      |   | $ | 9,724 |   |
| Accounts receivable, net                                                                                                                                                                                    |       | 3,872             |       | 8,224 |   |
| Inventory                                                                                                                                                                                                   |       | 482               |       | 695 |   |
| Short term note receivable, net                                                                                                                                                                             |       | 175               |       | 95 |   |
| Prepaid expenses and other current assets                                                                                                                                                                   |       | 464               |       | 906 |   |
| Total current assets                                                                                                                                                                                        |       | 7,633             |       | 19,644 |   |
| Property and equipment                                                                                                                                                                                      |       |              |       |   |   |
| Flight assets                                                                                                                                                                                               |       | 49,210            |       | 49,210 |   |
| Capital improvements in progress                                                                                                                                                                            |       | 76                |       | 62 |   |
| Payload processing facilities                                                                                                                                                                               |       | 42,600            |       | 42,588 |   |
| Furniture, fixtures, equipment and leasehold  improvements                                                                                                                                                  |       | 18,244            |       | 18,869 |   |
|                                                                                                                                                                                                        |       | 110,130           |       | 110,729 |   |
| Less accumulated depreciation and amortization                                                                                                                                                              |       | (69,131           | )          | (66,845 | ) |
| Property and equipment, net                                                                                                                                                                                 |       | 40,999            |       | 43,884 |   |
| Restricted cash                                                                                                                                                                                             |       | 8,386             |       | 6,282 |   |
| Deferred financing costs, net                                                                                                                                                                               |       | 264               |       | 1,596 |   |
| Long term note receivable, net                                                                                                                                                                              |       | 717               |       | 853 |   |
| Other assets, net                                                                                                                                                                                           |       | 212               |       | 216 |   |
| Total assets                                                                                                                                                                                                |       | $                 | 58,211     |   | $ | 72,475 |   |
| **Liabilities and Stockholders’  Equity (Deficit)**                                                                                                                                                    |       |              |       |   |   |
| Current liabilities                                                                                                                                                                                         |       |              |       |   |   |
| Convertible subordinated notes payable – 8.0%                                                                                                                                                          |       | $                 | —     |   | $ | 10,306 |   |
| Term note payable - current                                                                                                                                                                                 |       | 267               |       | –– |   |
| Accounts payable                                                                                                                                                                                            |       | 1,845             |       | 1,494 |   |
| Accounts payable- Astrium                                                                                                                                                                                   |       | 754               |       | 2,955 |   |
| Income tax payable                                                                                                                                                                                          |       | 463               |       | –– |   |
| Accrued interest                                                                                                                                                                                            |       | 83                |       | 789 |   |
| Accrued expenses                                                                                                                                                                                            |       | 2,124             |       | 2,056 |   |
| Accrued subcontracting services                                                                                                                                                                             |       | —            |       | 3,669 |   |
| Deferred gains on sale of buildings                                                                                                                                                                         |       | 86                |       | 221 |   |
| Customer deposit                                                                                                                                                                                            |       | —            |       | 3,106 |   |
| Deferred revenue, current portion                                                                                                                                                                           |       | 1,007             |       | 1,153 |   |
| Total current liabilities                                                                                                                                                                                   |       | 6,629             |       | 25,749 |   |
| Accrued contract costs and other                                                                                                                                                                            |       | 40                |       | 39 |   |
| Advances on construction contract                                                                                                                                                                           |       | 4,863             |       | 5,722 |   |
| Deferred gains on sale of buildings                                                                                                                                                                         |       | 129               |       | 1,152 |   |
| Deferred revenue, non-current                                                                                                                                                                               |       | 1,227             |       | –– |   |
| Term note payable - non current                                                                                                                                                                             |       | 3,526             |       | –– |   |
| Senior convertible subordinated notes payable –  5.5%                                                                                                                                                  |       | 6,861             |       | 52,944 |   |
| Total liabilities                                                                                                                                                                                           |       | 23,275            |       | 85,606 |   |
| Commitments and contingencies                                                                                                                                                                               |       |              |       |   |   |
| Stockholders’ equity (deficit)                                                                                                                                                                         |       |              |       |   |   |
| Preferred stock, no par value, convertible,  authorized 2,500,000 shares, issued and outstanding 0 and 1,333,334 shares,  (liquidation preference of $12,000) at June 30, 2008 and 2007,  respectively |       | ––      |       | 11,892 |   |
| Common stock, no par value, 75,000,000 and  7,000,000 shares authorized at June 30, 2008 and 2007 respectively 9,254,346  and 1,314,329 shares issued at June 30, 2008 and 2007, respectively     |       | 183,306           |       | 84,122 |   |
| Treasury stock, 11,650 shares at cost                                                                                                                                                                       |       | (117              | )          | (117 | ) |
| Additional paid-in capital                                                                                                                                                                                  |       | 691               |       | 544 |   |
| Accumulated deficit                                                                                                                                                                                         |       | (148,944          | )          | (109,572 | ) |
| Total stockholders’ equity (deficit)                                                                                                                                                                   |       | 34,936            |       | (13,131 | ) |
| Total liabilities and stockholders’ equity  (deficit)                                                                                                                                                  |       | $                 | 58,211     |   | $ | 72,475 |   |

 

See accompanying notes to consolidated financialstatements.

 

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**SPACEHAB,INCORPORATED AND SUBSIDIARIES**

 

Audited Consolidated Statements of Operations

(In thousands, exceptshare data)

 
| ** **                                                         | ** ** | **Twelve Months Ended June 30,** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                         | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
|                                                               |       |                                                 |       |   |   |
| Revenue                                                            |       | $                                                    | 25,544     |   | $ | 52,762 |   |
|                                                               |       |                                                 |       |   |   |
| Costs of revenue                                                   |       | 19,540                                               |       | 40,638 |   |
|                                                               |       |                                                 |       |   |   |
| Impairment of flight asset                                         |       | ––                                         |       | 10,391 |   |
|                                                               |       |                                                 |       |   |   |
| Gross profit                                                       |       | 6,004                                                |       | 1,733 |   |
|                                                               |       |                                                 |       |   |   |
| Operating expenses                                                 |       |                                                 |       |   |   |
| Selling, general and administrative                                |       | 9,148                                                |       | 9,883 |   |
| Research and development                                           |       | 1,375                                                |       | 801 |   |
| Asset impairment charge                                            |       | 213                                                  |       | 3,879 |   |
|                                                               |       |                                                 |       |   |   |
| Total operating expenses                                           |       | 10,736                                               |       | 14,563 |   |
|                                                               |       |                                                 |       |   |   |
| Loss from operations                                               |       | (4,732                                               | )          | (12,830 | ) |
| Debt conversion expense                                            |       | (30,194                                              | )          |   |   |
| Interest expense                                                   |       | (1,596                                               | )          | (4,290 | ) |
| Interest and other income, net                                     |       | 1,169                                                |       | 759 |   |
|                                                               |       |                                                 |       |   |   |
| Loss before income taxes                                           |       | (35,353                                              | )          | (16,361 | ) |
|                                                               |       |                                                 |       |   |   |
| Income tax (expense) benefit                                       |       | (675                                                 | )          | 69 |   |
|                                                               |       |                                                 |       |   |   |
| Net loss                                                           |       | $                                                    | (36,028    | ) | $ | (16,292 | ) |
|                                                               |       |                                                 |       |   |   |
| Deemed dividend related to induced conversion of  preferred shares |       | $                                                    | (3,344     | ) | $ | –– |   |
| Net loss applicable to common shares                               |       | $                                                    | (39,372    | ) | $ | (16,292 | ) |
| Loss per common share                                              |       |                                                 |       |   |   |
| Loss per share – basic and diluted                            |       | $                                                    | (4.26      | ) | $ | (12.61 | ) |
| Shares used in computing loss per share – basic  and diluted  |       | 9,254,346                                            |       | 1,291,951 |   |

 

See accompanying notes to consolidated financialstatements.

 

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** **

**SPACEHAB, INCORPORATED ANDSUBSIDIARIES**

Consolidated Statements ofStockholders’ Equity (Deficit)

(In thousands, except share data)

 
| ** **                                                                | ** ** | **Convertible Preferred Stock** | ** ** | **Common Stock** | ** ** | **Treasury  Stock** | ** ** | **Add’l.  Paid-In-** | ** ** | **Accumulated** | ** ** | **Total  Stockholders’  Equity** | ** ** |
|---------------------------------------------------------------------------|------------|-------------------------------------------|------------|------------------|------------|---------------------|------------|---------------------------|------------|-----------------|------------|---------------------------------------|------------|
| ** **                                                                | ** ** | **Shares**                                | ** ** | **Amount**       | ** ** | **Shares**          | ** ** | **Amount**                | ** ** | **Amount**      | ** ** | **Capital**                           | ** ** | **Deficit** | ** ** | **(Deficit)** | ** ** |
|                                                                      |       |                                      |       |             |       |                |       |                      |       |            |       |                                  |       |   |   |   |   |
| Balance at June 30, 2006                                             |       | 1,333,334                                 |       | $                | 11,892     |                | 1,297,626  |                      | $          | 84,030          |       | $                                     | (117       | ) | $ | 284 |   | $ | (93,280 | ) | $ | 2,809 |   |
| Stock-based compensation                                                  |       | —                                    |       | —           |       | —              |       | —                    |       | —          |       | 260                                   |       | — |   | 260 |   |
| Common Stock issued under     employee stock purchase plan |       | —                                    |       | —           |       | 16,703              |       | 92                        |       | —          |       | —                                |       | — |   | 92 |   |
| Net loss                                                                  |       | —                                    |       | —           |       | —              |       | —                    |       | —          |       | —                                |       | (16,292 | ) | (16,292 | ) |
|                                                                      |       |                                      |       |             |       |                |       |                      |       |            |       |                                  |       |   |   |   |   |
| Balance at June 30, 2007                                             |       | 1,333,334                                 |       | $                | 11,892     |                | 1,314,329  |                      | $          | 84,122          |       | $                                     | (117       | ) | $ | 544 |   | $ | (109,572 | ) | $ | (13,131 | ) |
| Stock-based compensation                                                  |       | —                                    |       | —           |       | —              |       | —                    |       | —          |       | 147                                   |       | — |   | 147 |   |
| Common Stock issued under private placements:                             |       |                                      |       |             |       |                |       |                      |       |            |       |                                  |       |   |   |   |   |
| October 2007                                                         |       | —                                    |       | —           |       | 150,150             |       | 168                       |       | —          |       | —                                |       | — |   | 168 |   |
| June 2008                                                            |       | —                                    |       | —           |       | 1,329,787           |       | 625                       |       | —          |       | —                                |       | — |   | 625 |   |
| Common stock issued in exchange for outstanding 5.5% senior notes         |       | —                                    |       | —           |       | 9,723,221           |       | 70,865                    |       | —          |       | —                                |       | — |   | 70,865 |   |
| Common stock issued in exchange for outstanding 8.0% subordinated notes   |       | —                                    |       | —           |       | 1,348,064           |       | 12,290                    |       | —          |       | —                                |       | — |   | 12,290 |   |
| Common stock issued in exchange for preferred stock                       |       | (1,333,334                                | )          | $                | (11,892    | )                   | 1,088,827  |                      | $          | 15,236          |       | —                                |       | — |   | (3,344 | ) | — |   |
| Net loss                                                                  |       |                                      |       |             |       |                |       |                      |       |            |       |                                  |       | (36,028 | ) | (36,028 | ) |
|                                                                      |       |                                      |       |             |       |                |       |                      |       |            |       |                                  |       |   |   |   |   |
| Balance at June 30, 2008                                             |       | ––                              |       | ––     |       | 14,954,378          |       | $                         | 183,306    |            | $          | (117                                  | )          | $ | 691 |   | $ | (148,944 | ) | $ | 34,936 |   |

 

See accompanying notes to consolidated financialstatements.

 

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**SPACEHAB,INCORPORATED AND SUBSIDIARIES**

Consolidated Statements of Cash Flows

(In thousands)

 
| ** **                                                                                       | ** ** | **Twelve Months Ended June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                       | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| Cash flows from operating activities                                                             |       |                                                 |       |   |   |
| Net loss                                                                                         |       | $                                                    | (36,028    | ) | $ | (16,292 | ) |
| Adjustments to reconcile net loss to net cash  (used in) provided by operating activities:       |       |                                                 |       |   |   |
| Non-cash debt conversion expense                                                                 |       | 30,194                                               |       | –– |   |
| Increase in restricted cash                                                                      |       | (2,104                                               | )          | (6,282 | ) |
| Stock-based compensation                                                                         |       | 800                                                  |       | 260 |   |
| Impairment of investment in AAC                                                                  |       | —                                               |       | 100 |   |
| Depreciation and amortization                                                                    |       | 2,668                                                |       | 6,362 |   |
| Amortization of deferred financing cost                                                          |       | 78                                                   |       | — |   |
| Impairment of inventory                                                                          |       | 213                                                  |       | 1,674 |   |
| Loss on asset sales and write-offs                                                               |       | 19                                                   |       | 12,496 |   |
| Recognition of deferred gain                                                                     |       | (1,158                                               | )          | (221 | ) |
| Land transferred in lease termination  transaction                                               |       | 345                                                  |       | –– |   |
| Changes in assets and liabilities:                                                               |       |                                                 |       |   |   |
| Decrease in accounts receivable                                                                  |       | 3,780                                                |       | 2,882 |   |
| Increase in prepaid expenses and other current  assets                                           |       | (339                                                 | )          | (296 | ) |
| Decrease in other assets                                                                         |       | 679                                                  |       | 23 |   |
| Increase (decrease) in deferred revenue                                                          |       | 1,081                                                |       | (168 | ) |
| Decrease in accounts payable, income tax  payable, accrued expenses and accounts payable-Astrium |       | (1,165                                               | )          | (388 | ) |
| Decrease in accrued subcontracting services and  other                                           |       | (3,612                                               | )          | (2,893 | ) |
| Increase (decrease) in advances for  construction contract                                       |       | (848                                                 | )          | 5,722 |   |
| Increase (decrease) in customer deposits                                                         |       | (3,106                                               | )          | 3,106 |   |
| Decrease in long-term contracts costs and other  liabilities                                     |       | (96                                                  | )          | (57 | ) |
| Net cash (used in) provided by operating  activities                                             |       | (8,598                                               | )          | 6,028 |   |
| Cash flows from investing activities                                                             |       |                                                 |       |   |   |
| Purchases of property, equipment and leasehold  improvements                                     |       | (158                                                 | )          | (577 | ) |
| Payment for legal claim settlement                                                               |       | ––                                         |       | (500 | ) |
| Net cash (used in) provided by investing  activities                                             |       | (158                                                 | )          | (1,077 | ) |
| Cash flows from financing activities                                                             |       |                                                 |       |   |   |
| Proceeds from issuance of Common Stock                                                           |       | 746                                                  |       | 92 |   |
| Payment of junior notes not participating in  exchange                                           |       | (2,867                                               | )          | –– |   |
| Proceeds from term loan payable                                                                  |       | 3,793                                                |       | –– |   |
| Repayment of mortgage loan                                                                       |       | ––                                         |       | (1,636 | ) |
| Net cash (used in) provided by financing  activities                                             |       | 1,672                                                |       | (1,544 | ) |
| Net change in cash and cash equivalents                                                          |       | (7,084                                               | )          | 3,407 |   |
| Cash and cash equivalents at beginning of  period                                                |       | 9,724                                                |       | 6,317 |   |
| Cash and cash equivalents at end of period                                                       |       | $                                                    | 2,640      |   | $ | 9,724 |   |

 

Supplemental disclosures of non-cash investingand financing activities (see Note 3).

See accompanying notes to consolidated financialstatements.

 

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# **Table of Contents**

 

# **NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**(1)**                     Description of the Company and Operating Environment

 

SPACEHAB is a developer and operator of spaceflight hardware assets, a provider of manned and unmanned payload processingservices, and an entrepreneurial force in space commerce providing access to,and utilization of the unique environment of space.

 

Historically, a substantial portion of ourrevenue has been generated under contracts with NASA, which were subject toperiodic funding allocations by the agency. NASA’s funding is dependent onreceiving annual appropriations from the U.S. Government. During the yearsended June 30, 2008 and 2007 approximately 84% and 80% of our revenueswere generated under U.S. Government contracts, respectively.

 

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 Vandenberg Air Force Base in California. Additionally, Astrotechsupplies payload processing and facilities maintenance support services to SeaLaunch Company, LLC for its Sea Launch program at the Home Port facilities inLong Beach, California. Our facilities and services are provided on a fixedprice per launch basis.

 

Our Astrotech Engineering Services subsidiarymanages projects in need of comprehensive engineering solutions, and providesunique capabilities such as specialty engineering, hardware design anddevelopment, and configuration and data management. Astrotech EngineeringServices also designs and fabricates space flight hardware. We continuouslyreview and seek new business opportunities with NASA, the Department ofDefense, and other governmental agencies, either through current contractexpansion or teaming with other aerospace companies on new contract bidinitiatives.

 

SPACEHAB Flight Services offered a range ofengineering, research, logistics, integration, operations, and ground supportservices supporting our space shuttle module and pallet assets. At this time,there are no more scheduled missions to be performed under this businesssegment as the shuttle space transportation system nears retirement. During thefiscal year 2008, the Company completed space shuttle mission STS-118, its lastcontracted module mission, and recognized residual SFS activity from previousmissions. We continue to retain our space shuttle module assets available forfuture opportunities.

 

Leveraging our heritage of supporting 23space shuttle missions with the development and provision of flight qualifiedhardware assets, and our experience with the integration of complex sciencepayloads enables our entrance into the field of microgravity processing of highvalue bioscience products for the benefit of the general public.

 

We believe that NASA’s current majorprograms, 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.

 

BioSpace Technology involves the commercialutilization of the ISS, and other microgravity platforms for the development of‘biospace’ products to improve life on Earth. Specifically, BioSpaceTechnologies is processing experiments for vaccines and proteins, which will becultured in a microgravity setting on space shuttle missions to the ISS, andlater tested on Earth. Early experiments have already proven to show singularresults unlike those acquired from earth-originated trials.

 

SPACETECH develops commercial products, whichutilize space-based technologies to translate aerospace ingenuity intoreal-world applications. The 1st Detect mini-mass spectrometer and the AirWardhazardous cargo containers both trace their origins to space based technologyand are now positioned and ready for entry into the commercial marketplace.

## *** ***

## ***Liquidity***

 

The Company has incurred net losses in theyears ended June 30, 2008 and 2007. Historically, the Company has financedits capital expenditures, research and development and working capitalrequirements with progress payments under its various contracts, as well aswith proceeds received from both public and private debt and equity offeringsand borrowings under credit facilities.

 

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As of June 30, 2008, we had cash andrestricted cash-on-hand of $11.0 million and our working capital wasapproximately $1.0 million. Restricted cash, which consists of advance paymentson a government contract to modify certain spacecraft processing facilities andrestricted deposit relating to bank covenants, totaled $8.4 million at June 30,2008. We carry a liability of $4.9 million for obligations under thisconstruction contract. For fiscal year 2008 we used $8.6 million of cash in ouroperating activities.

 

In February 2008 (see Note 5), weconsummated a financing facility with a commercial bank. This facility providesfor a three year $4.0 million term loan, payable in monthly installments ofprincipal in the amount of $22,222 plus interest and a $2.0 million revolvingcredit facility. The term loan is secured by the assets of our Astrotechsubsidiary and the one-year revolving credit facility is secured by Astrotech’saccounts receivable. As of June 30, 2008, we have no outstanding balanceunder the revolving credit facility.

 

We believe we have sufficient liquidity andbacklog to fund ongoing operations for at least the next fiscal year and expectto utilize existing cash and proceeds from operations to support strategies fornew business initiatives.

** **

**(2)**                     Summary of Significant Accounting Policies

## *** ***

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

 

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

## *** ***

## ***Reclassification***

 

Certain prior year amounts have beenreclassified to conform to the current year presentation.

## *** ***

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

 

The Company considers short-term investmentswith original 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.

## *** ***

## ***Concentration of Credit Risk***

 

We maintain our cash primarily with majorU.S. domestic banks and other financial institutions. The amounts held in banksperiodically exceed the insured limit of $100,000 and exceeded that balance asof June 30, 2008 and June 30, 2007 by $6.3 million and $15.9 million,respectively. The terms of these deposits are on demand to minimize risk. Inaddition, on June 30, 2008 we held an investment account of $5.0 millionwith a financial institution other than a bank. These funds are invested inmoney market funds. We have not incurred losses related to these deposits.

## *** ***

## ***Accounts Receivable***

 

The carrying value of the Company’sreceivable, net of the allowance for doubtful accounts, represents theirestimated net realizable value. We estimate the allowance for doubtful accountsbased on type of customer, age of outstanding receivable, historical collectiontrends, and existing economic conditions. Accounts are considered past dueafter 90 days from invoice date. If events or changes in circumstances indicatethat a specific receivable balance may be unrealizable, further considerationis given to 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 notreadily available for general purpose cash needs. As of June 30, 2008 and2007 there was $8.4 million and $6.3 million, respectively classified asrestricted cash. Of this amount $7.8 million and $6.3 million as of June 30,2008 and 2007, respectively is designated for use in constructing a long liveasset and is therefore classified as a non-current asset. We have recorded aliability of $4.9 million and $5.7 million as of June 30, 2008 and 2007,respectively for obligations under this construction contract. A total of $0.6million is also restricted as to obligations under our $4.0 million term loan.

 

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## ***Table of Contents***

 

## ***Inventories***

 

We state inventories at the lower of cost ormarket as determined by the first-in-first-out (FIFO) method. Our inventoryconsist of aerospace grade materials previously intended for use inconstructing space-flight assets.

## *** ***

## ***Investments***

 

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

 

Available-for-sale securities are recorded atfair value on the balance sheet with the change in fair value during the periodexcluded from earnings and recorded as a component of other comprehensiveincome.

 

For the years ended June 30, 2008 and2007, interest income was $0.4 million and $0.5 million, respectively. Interestincome is recorded as a component of other income.

## *** ***

## ***Property and Equipment***

 

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

 

We have estimatedthe useful lives of our space flight assets, which is a component of propertyand equipment, through August 31, 2007, based on current availableinformation published by NASA.

 

Leaseholdimprovements are amortized over the shorter of the useful life of the buildingor the term of the lease. Repairs and maintenance are expensed when incurred.

 

From time to time,we purchase 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.

 

Depreciation andamortization expense of property and equipment and patent costs for the yearsended June 30, 2008 and 2007 was $2.7 million and $6.4 million,respectively.

## *** ***

## ***Deferred Financing Costs***

 

Deferred financingcosts represent loan origination fees paid to the lender and relatedprofessional fees. These costs are amortized on a straight-line basis over theterm of the respective loan agreements. Amortization expense for the yearsended June 30, 2008 and 2007 were $0.1 million and $0.5 million,respectively.

## *** ***

## ***Investments in Affiliates***

 

We use the equity method of accounting forour investments 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 than 20% ownership and no significant influence are accounted for underthe cost method.

## *** ***

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

 

We account for long-lived assets inaccordance with the provisions of the Statement of Financial AccountingStandards (“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 19). Assetsto be disposed of are reported at the lower of the carrying amount or fairvalue less costs to sell.

 

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## ***Table of Contents***

 

## ***Fair Value of Financial Instruments***

 

Our financial instruments consist of accountsreceivable, accounts payable and notes payable liabilities. The fair values ofthese assets and liabilities, in the opinion of Company’s management, reflecttheir respective carrying amounts.

## *** ***

## ***Share Based Compensation***

## *** ***

## ***The Company accounts for share-basedawards to employees based on the fair value of the award on the grant date. Thefair value of the stock options is estimated using expected dividend yields ofthe Company’s stock, the expected volatility of the stock, the expected lengthof time the options remain outstanding and risk-free interest rates. Changes inone or more of these factors may significantly affect the estimated fair valueof the stock options. Additionally, the Company estimates the number ofinstruments for which the required service is expected to be rendered. TheCompany estimates forfeitures using historical forfeiture rates for previousgrants of equity instruments. The fair value of awards that are expected tovest is recorded as an expense over the vesting period.***

## *** ***

## ***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 costs incurredover the period of the contract. Revenue provided by Engineering Services isprimarily derived from cost-plus award fee contracts, whereby revenue isrecognized to the extent of reimbursable costs incurred plus award fee. Awardfees, which provide earnings based on our contract performance as determined byNASA evaluations, are recorded when the amounts are probable and can bereasonably estimated. Changes in estimated costs to complete and provisions forcontract losses and estimated amounts recognized as award fees are recognizedin the period they become known. Revenue generated by Astrotech’s payload processingservices is recognized ratably over the occupancy period of the satellite whilein the Astrotech facilities. For the multi-year contract with Lockheed Martin,revenue is billed and recognized on a quarterly basis.

## *** ***

## ***Deferred Revenue***

 

Deferred revenue represents amounts collectedfrom customers 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 expensedas incurred.

## *** ***

## ***Income Taxes***

 

We recognize income taxes under the asset andliability method. Deferred tax assets and liabilities are recognized for the futuretax consequences attributable to differences between the financial statementcarrying amounts of existing assets and liabilities, and their respective taxbases and operating loss and tax credit carryforward. 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 iscalculated by dividing net income (loss) by the weighted average number ofcommon shares outstanding during the period. Diluted net income (loss) pershare includes all Common Stock options and other Common Stock equivalents thatpotentially may be issued as a result of conversion privileges, including theconvertible subordinated notes payable and convertible preferred stock (seeNote 11). In November 2007, we affected a 1 for 10 reverse stock split,reducing our issued and outstanding

 

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common stock to 13.6 million shares. Allshare amounts have been stated to reflect this split for all periods presented(see Note 16).

## *** ***

## ***Accounting Estimates***

 

The preparation of consolidated financialstatements in conformity with accounting principles generally accepted in theU.S. requires management to make estimates and assumptions that affect thereported amounts of assets and liabilities, and disclosure of contingent assetsand liabilities 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.

## *** ***

## ***Recent Accounting Pronouncements***

 

Staff Accounting Bulletin (“SAB”) 108, “Consideringthe Effects of Prior-Year Misstatements when Quantifying Misstatements inCurrent Year Financial Statements” – The Securities and Exchange Commissionreleased SAB 108 to provide interpretive guidance on how the effects of thecarry-over or reversal of prior year misstatements should be considered inquantifying a current year misstatement. There have been two approachescommonly used to quantify such errors. Under one approach, the error isquantified as the amount by which the current year income statement ismisstated. The other approach quantifies the error as the cumulative amount bywhich the current year balance sheet is misstated. The SEC staff believes thatcompanies should quantify errors using both a balance sheet and an incomestatement approach and evaluate whether either approach results in quantifyinga misstatement that, when all relevant quantitative and qualitative factors areconsidered, is material. We do not expect the application of thisinterpretation to have a material impact on our financial position or resultsof operations.

 

In September 2006 the FinancialAccounting Standards Board issued FASB Statement No. 157, Fair ValueMeasurements. Statement No. 157 establishes a common definition for fairvalue to be applied to U.S. generally accepted accounting principles requiringuse of fair value, establishes a framework for measuring fair value, andexpands disclosure about such fair value measurements. Statement No. 157is effective for fiscal years beginning after November 15, 2007. Theadoption of this statement is not expected to have a material impact on theCompany’s consolidated financial position and results of operations.

** **

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

 

(a)          Cash paid for interest costswas approximately $0.6 million and $3.8 million for the years ended June 30,2008 and 2007, respectively.

 

(b)         The Company paid $0.2million in income taxes for the year ended June 30, 2008 and no taxes forthe year ended June 30, 2007.

 

(c)          In October 2007, theCompany closed the Exchange Offer (Note 16), whereby the Company exchanged550,000 shares of common stock and 8,927 shares of Series C ConvertiblePreferred Stock, on a pre-reverse split basis, for approximately $7.4 millionof Junior Notes. Additionally, the Company exchanged approximately 30.7 millionshares of common stock and 46,083 shares of Series C Convertible PreferredStock, on a pre-reverse split basis, for approximately $46.1 million of SeniorNotes.

 

(d)         In August 2007, inconnection with the Restructuring and Exchange Agreement (Note 8), the Companyissued 1,333,334 shares of common stock and 6,540 shares of Series CConvertible Preferred Stock in exchange for 1,333,334 shares of Series BConvertible Preferred Stock, on a pre-reverse split basis. This transactionresulted in a non-cash deemed dividend of $3.3 million.

 

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**(4)**                     Accounts Receivable

 

At June 30, 2008 and2007, accounts receivable consisted of the following (in thousands):

 
| ** **                                               | ** ** | **2008** | ** ** | **2007**     | ** ** |
|----------------------------------------------------------|------------|----------|------------|--------------|------------|
| U.S. Government contracts:                               |       |     |       |         |       |
| Billed                                                   |       | $        | 757        |         | $          | 5,272 |   |
| Unbilled:                                                |       |     |       |         |       |
| Revenues in excess of milestone and time-based  billings |       | 247      |       | 1,072        |       |
|                                                     |       |     |       |         |       |
| Total U.S. Government contracts                          |       | 1,004    |       | 6,344        |       |
|                                                     |       |     |       |         |       |
| Commercial contracts:                                    |       |     |       |         |       |
| Billed                                                   |       | 2,036    |       | 1,154        |       |
| Unbilled                                                 |       | 599      |       | 726          |       |
| Allowances                                               |       | (25      | )          | –– |       |
| Total commercial contracts                               |       | 2,610    |       | 1,880        |       |
| Other receivables                                        |       | 258      |       | –– |       |
| Total accounts receivable                                |       | $        | 3,872      |         | $          | 8,224 |   |

 

Other receivables include $210,000 from SpaceFlorida and $47,000 for subscribed common stock related to the PrivatePlacement described further in Note 17, which was received in July 2008.See Note 28 regarding commercial receivables of $1.4 million due from ARESCorporation.

 

The Company anticipates collecting allunreserved receivables within one year.

 

The accuracy and appropriateness of ourdirect and indirect costs and expenses under government contracts; andtherefore, our accounts receivable recorded pursuant to such contracts, aresubject to extensive regulation and audit by the U.S. Defense Contract AuditAgency or by other appropriate agencies of the U.S. Government. Such agencieshave the right to challenge our cost estimates or allocations with respect toany government contract. Additionally, a substantial portion of the payments tothe Company under government contracts are provisional payments that aresubject to potential adjustment upon audit by such agencies. In the opinion ofmanagement, any adjustments likely to result from inquiries or audits of itscontracts would not have a material adverse impact on our financial conditionor results of operations.

** **

**(5)**                     Long-term Debt

## *** ***

## ***Revolving Loan Payable***

 

On February 11, 2005 we entered into arevolving one-year credit facility with a bank providing for loans up to $5.0million secured by the Company’s accounts receivable. In February 2006 therevolving credit facility was renewed and the term extended until February 11,2007 with substantially the same terms as the original agreement. Fundsavailable under the revolving credit facility were limited to 80% of eligibleaccounts receivable, and we were subject to various financial and othercovenants including a minimum tangible net worth covenant, a cash flow coveragecovenant, and a secured debt coverage covenant. This credit facility expired onFebruary 11, 2007 and we elected not to renew.

 

On February 6, 2008, we entered into afinancing facility with a bank providing a $4.0 million term loan terminating February 2011and a $2.0 million revolving credit facility terminating in February 2009.The term loan requires monthly payments of principal totaling $22,222, plusinterest at the rate of prime plus 1.75% and the revolving credit facilityincurs interest at the rate of prime plus 1.75%. Funds available under therevolving credit facility are limited to 80% of eligible accounts receivable.The bank financing facilities are secured by the assets of our Astrotech SpaceOperations Florida facilities and other covenants including a minimum tangiblenet worth covenant, a cash flow coverage covenant, a debt service coverageratio, and a ratio of total liabilities to tangible net worth covenant. Thebalance of the $4.0 million term loan at June 30, 2008 was $3.8 million.No amounts have been drawn on the $2.0 million revolving credit facility.

 

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## ***Mortgage Loan Payable***

 

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

 

The loan agreement was amended on January 29,2004, whereby the maturity date was shortened to January 2007, theinterest rate was fixed at 5.5%, and the hedge requirement was eliminated. Forthe fiscal year ended June 30, 2007, the remaining $1.6 million ofprincipal was repaid.

## *** ***

## ***Convertible Subordinated NotesPayable***

 

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

 

On November 22, 2005 we exchanged$52,944,000 of 8.0% Convertible Subordinated Notes for a like amount of 5.5%Senior Convertible Notes due 2010 and convertible into shares of the Company’sCommon Stock at a per share price of $1.50, which include a mandatoryconversion feature once the stock price reaches $1.95 per share for twentyconsecutive days. The 5.5% Senior Convertible Notes will accrue interest fromthe issue date at a rate of 5.5% per year. We will pay interest on the exchangenotes semi-annually on each April 15 and October 15.

 

As a result of converting these notes in November 2005,we wrote-off $0.6 million of debt placement fees associated with the originalissuance of these notes. The Subordinated Convertible Notes that were notconverted into Senior Convertible Notes in the exchange continued to accrueinterest at 8.0% annually, paid semiannually, and matured in October 2007.

 

On October 5, 2007, we announced thesuccessful closing of our offer to exchange (the “Exchange Offer”) any and allof our outstanding 8.0% Convertible Subordinated Notes due 2007 (the “JuniorNotes”) and any and all of our outstanding 5.5% Senior Convertible Notes due2010 (the “Senior Notes”). As a result of the closing of the Exchange Offer,for the approximately $7.4 million in principal amount of Junior Notestendered, the holders received approximately 550,000 shares of common stock and8,927 shares of Series C Convertible Preferred Stock on a pre-reversesplit basis. Following the closing of the Exchange Offer, approximately $2.9million of Junior Notes remained outstanding pursuant to the original terms ofthe indenture governing the Junior Notes. On October 15, 2007 we redeemedthe outstanding Junior Notes, including accrued interest, for cash. Inaddition, for the approximately $46.1 million in principal amount ofoutstanding Senior Notes tendered, the holders received approximately 30.7million shares of common stock and 46,083 shares of Series C ConvertiblePreferred Stock on a pre-reverse split basis. Following the closing of theExchange Offer, approximately $6.9 million of Senior Notes remained outstandingpursuant to an indenture governing the Senior Notes that was amended throughthe elimination of substantially all of the indenture’s restrictive covenants.

 

As a consequence of the Exchange Transaction,we recognized non-cash debt conversion expense of $30.2 million in the ninemonths ended March 31, 2008, and we increased our common stock by $98.4million.

 

In November 2007 we converted the 61,550shares of Series C convertible preferred stock into 89.9 million shares ofcommon stock on a pre-reverse split basis and affected a 1 for 10 reverse stocksplit, reducing our issued and outstanding common stock to 13.6 million shares.All share amounts have been stated to reflect this split for all periodspresented.

 

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The Company’s debt repayments are due asfollows (in thousands):

 
| ** **                                    | ** ** | **Balance**   | ** ** | ** **   | ** ** | ** **   | ** ** | ** ** | ** ** | ** **   | ** ** | ** **   | ** ** |
|-----------------------------------------------|------------|---------------|------------|--------------|------------|--------------|------------|------------|------------|--------------|------------|--------------|------------|
| ** **                                    | ** ** | **6/30/2008** | ** ** | **FY09**     | ** ** | **FY10**     | ** ** | **FY11**   | ** ** | **FY12**     | ** ** | **FY13**     | ** ** |
| Term Note                                     |       | $             | 3,793      |         | $          | 267          |       | $          | 267        |         | $          | 3,259        |       | $ | –– |   | $ | –– |   |
| Senior Convertible Notes  Payable – 5.5% |       | 6,861         |       | –– |       | –– |       | 6,861      |       | –– |       | –– |       |
|                                          |       | $             | 10,654     |         | $          | 267          |       | $          | 267        |         | $          | 10,120       |       | $ | –– |   | $ | –– |   |

** **

**(6)**                     Fair Value of Financial Instruments

 

In general, fair values utilize quoted prices(unadjusted) in active markets for identical assets or liabilities. Thefollowing table presents the carrying amounts and estimated fair values ofcertain of the Company’s financial instruments as of June 30, 2008 and2007 in accordance with SFAS No. 107, “Disclosures about Fair Value of Financial Instruments” (in thousands):

 
| ** **                                   | ** ** | **June 30, 2008** | ** **   | **June 30, 2007** | ** ** |
|----------------------------------------------|------------|-----------------------------|--------------|-----------------------------|------------|
| ** **                                   | ** ** | **Carrying  Amount**        | ** **   | **Fair  Value**             | ** ** | **Carrying  Amount** | ** ** | **Fair  Value** | ** ** |
| Term Loan Payable                            |       | $                           | 3,793        |                        | $          | 3,793 |   | $ | –– |   | $ | –– |   |
| Senior Convertible Notes Payable – 5.5% |       | $                           | 6,861        |                        | $          | 3,775 |   | $ | 52,944 |   | $ | 50,694 |   |
| Junior Convertible Notes Payable – 8.0% |       | $                           | –– |                        | $          | –– |   | $ | 10,306 |   | $ | 5,501 |   |

 

The fair value of our long-term debt is basedon quoted market prices, or is estimated based on the current rates offered tous for debt of similar remaining maturities and other terms. The carryingamounts of cash and cash equivalents, investments, accounts receivable,accounts payable, and accrued expenses approximate their fair market valuebecause of the relatively short duration of these instruments.

** **

**(7)**                     Business Concentration – NASA Contracts

 

Historically, a substantial portion of ourrevenue has been generated under contracts with NASA, which were subject toperiod funding allocations by the agency. NASA’s funding is dependent onreceiving annual appropriations from the U.S. Government. During the yearsended June 30, 2008 and 2007, approximately 84% and 80% of our revenueswere generated under U.S. Government contracts, respectively. Of the accountsreceivable balance as of June 30, 2008 totaling $3.8 million, 56% of thebalance is attributed to two customers.

## *** ***

## ***Cargo Mission Contract***

 

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

## *** ***

## ***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 providingISS Configuration 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. This contract was terminated as of June 6, 2008, byARES Corporation, the prime contractor.

 

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## ***Astrotech’s NASA Contracts***

##  

During fiscal year 2004 Astrotech starteddirect spacecraft processing support for NASA. Currently, Astrotech has threeIDIQ contracts with NASA. One is valued at $4.9 million that has threeauthorized task orders. The second is valued at $9.9 million that has twoauthorized task orders. The third is valued at $35.0 million and was awarded inJune 2007.

 

**(8)**                     Convertible Preferred Stock

** **

On August 2, 1999 Astrium (formerlyEADS), a related party and shareholder, purchased an additional $12.0 millionequity interest in SPACEHAB representing 1,333,334 shares of Series BSenior Convertible Preferred Stock. Under the agreement, Astrium purchased allof SPACEHAB’s 975,000 authorized and unissued shares of preferred stock. On October 14,1999, the shareholders approved the proposal to increase the number ofauthorized shares of preferred stock to 2,500,000, in order to complete thetransaction with Astrium allowing them to purchase the additional 358,334preferred shares. The 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 16).

 

As a result of the closing of theRestructuring and Exchange Agreement, effective as of August 31, 2007,among the Company and certain holders of Junior Notes and Senior Notes, and theSeries B Convertible Preferred Stock, the Company issued to Astrium GmbH1,333,334 shares of common stock and 6,540 shares of Series C ConvertiblePreferred Stock in exchange for Astrium’s existing 1,333,334 shares of Series BConvertible Preferred Stock on a pre-reverse split basis. This transactionresulted in a deemed dividend of $3.3 million, which reflected the excess fairvalue of the common and Series C Preferred Stock over the Series BPreferred Stock.

 

Also as a result of the closing of theExchange Offer (see Note 16), the approximately $7.4 million in principalamount of Junior Notes tendered, the holders received approximately 550,000shares of common stock and 8,927 shares of Series C Convertible PreferredStock on a pre-reverse split basis. In addition, the approximately $46.1million in principal amount of outstanding Senior Notes tendered, the holdersreceived approximately 30.7 million shares of common stock and 46,083 shares ofSeries C Convertible Preferred Stock on a pre-reverse split basis.

 

In November 2007, we converted the61,550 shares of Series C convertible preferred stock into 89.9 millionshares of common stock on a pre-reverse split basis and affected a 1 for 10reverse stock split, reducing our issued and outstanding common stock to 13.6million shares. All share amounts have been stated to reflect this split forall periods presented.

 

**(9)**                     Common Stock Incentive and StockPurchase Plans

** **

As of June 30, 2008, 5,510,869 shares ofCommon Stock were reserved for future grants of stock incentive grants underthe Company’s three stock incentive plans.

 

## ***The 1994 Plan***

 

Under the terms of the 1994 Plan, the numberand price of the stock incentive awards granted to employees is determined bythe Board of Directors and such grants vest, in most cases, incrementally overa period of four years and expire no more than ten years after the date ofgrant. The total number of shares that are available under this plan is395,000. As of June 30, 2008 there are 140,369 available for grant.

 

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

##  

Each new non-employee director receives aone-time grant of an option to purchase 10,000 shares of Common Stock at anexercise price equal to the fair market value on the date of grant. Inaddition, effective as of the date of each annual meeting of the Company’sstockholders, each non-employee director who is elected or continues as amember of the Board of Directors of the Company shall be awarded an option topurchase 5,000 shares of Common Stock. Options under the Director’s Plan vestafter one year and expire seven years from the date of grant. The total numberof options that are available under this plan is 50,000. Through June 30,2008 there are 20,500 available for grant.

 

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

##  

We adopted an employee stock purchase planthat permits eligible employees to purchase shares of Common Stock of theCompany at prices no less than 85% of the current market price. Eligibleemployees may elect to participate in the plan by authorizing payrolldeductions from 1% to 10% of gross compensation for each payroll period. On thelast day of each quarter, each participant’s contribution account is used topurchase the maximum number of whole and fractional shares of Common Stockdetermined by dividing the contribution account’s balance by the lesser of 85%of the price of a share of Common Stock on the first day of the quarter or thelast day of a quarter. The number of shares of Common Stock that may bepurchased under the plan is 150,000. Through June 30, 2008 employees havepurchased 148,265 shares under the plan. The shares purchased under this planare considered compensation for accounting and reporting purposes (see SFAS No. 123Rbelow). During the fourth quarter of fiscal year 2007, we discontinued thepurchasing of Common Stock by the employees 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 for employees, officers, directors and consultants of SMI. Underthe terms of the SMI Plan, 1,500,000 shares have been reserved for futuregrants for which the number and price of the options granted is determined by theBoard of Directors. For fiscal years ended June 30, 2007 and June 30,2008, there were no options issued or outstanding under this plan. Theoperations of SMI have been discontinued.

 

## ***2008 Stock Incentive Plan (“2008 Plan”)***

##  

On March 27, 2008 the stockholders ofthe Company approved the 2008 Stock Incentive Plan. The purpose of the 2008Plan is to foster and promote the long-term financial success of the Company,and to increase shareholder value by attracting, motivating, and retaining keyemployees, consultants, and directors and providing such participants in the2008 Plan with a program for obtaining an ownership interest in the Companythat links and aligns their personal interests with the Company’s stockholders.The 2008 Plan authorizes grants of stock compensation, restricted stock, stockoptions, performance units, and other equity based performance awards. Thetotal number of shares that are available under the 2008 Plan is 5,500,000.150,000 shares of restricted stock were issued to outside directors in March of2008 at a value of $0.66 per share resulting in total stock compensationexpense of $99,000, of which $6,188 was recognized in 2008. These shares vestover a two-year period beginning in January 2009. As of June 30,2008, there were 5,350,000 shares available for future grant.

 

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## ***Stock OptionActivity Summary***

##  

The following table summarizesstock options under the Company’s stock incentive plans:

 
| ** **                                                                                                         | ** ** | **2008 Plan**      | ** ** | **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,  2005                                                                                 |       | —                  |       | $                                      | —     |                          | 155,024    |   | $ | 38.90 |   | 265,000 |   | $ | 32.00 |   |
| Granted                                                                                                            |       | —                  |       | —                                 |       | 21,200                        |       | 14.30 |   | 30,000 |   | 7.70 |   |
| Exercised                                                                                                          |       | —                  |       | —                                 |       | (1,700                        | )          | 8.70 |   | — |   | — |   |
| Forfeited                                                                                                          |       |                    |       | —                                 |       | (41,304                       | )          | 52.80 |   | (50,000 | ) | 70.00 |   |
| Outstanding at June 30,  2006                                                                                 |       | —                  |       | $                                      | —     |                          | 133,220    |   | $ | 31.10 |   | 245,000 |   | $ | 21.40 |   |
| Granted                                                                                                            |       | —                  |       | —                                 |       | 31,000                        |       | 11.50 |   | 30,000 |   | 7.20 |   |
| Exercised                                                                                                          |       | —                  |       | —                                 |       | —                        |       | — |   | — |   | — |   |
| Forfeited                                                                                                          |       | —                  |       | —                                 |       | (83,527                       | )          | 24.80 |   | (5,000 | ) | (9.90 | ) |
| Outstanding at June 30,  2007                                                                                 |       |                    |       | $                                      |       |                          | 80,694     |   | $ | 28.10 |   | 27,000 |   | $ | 20.00 |   |
| Granted                                                                                                            |       | —                  |       | —                                 |       | —                        |       |   |   | 1,000 |   |   |   |
| Exercised                                                                                                          |       | —                  |       | —                                 |       | —                        |       |   |   | — |   |   |   |
| Forfeited                                                                                                          |       | —                  |       | —                                 |       | (19,794                       | )          |   |   | (3,500 | ) |   |   |
| Outstanding at June 30,  2008                                                                                 |       | —                  |       | —                                 |       | 60,900                        |       | $ | 30.49 |   | 24,500 |   | $ | 16.50 |   |
|                                                                                                               |       |                    |       |                                   |       |                          |       |   |   |   |   |   |   |
| Options exercisable at:                                                                                            |       |                    |       |                                   |       |                          |       |   |   |   |   |   |   |
|                                                                                                               |       |                    |       |                                   |       |                          |       |   |   |   |   |   |   |
| June 30, 2006                                                                                                 |       | —                  |       | —                                 |       | 86,070                        |       | 39.50 |   | 21,500 |   | 23.30 |   |
| June 30, 2007                                                                                                 |       | —                  |       | —                                 |       | 51,694                        |       | 35.90 |   | 24,000 |   | 21.60 |   |
| June 30, 2008                                                                                                 |       | —                  |       | —                                 |       | 49,800                        |       | 34.21 |   | 23,500 |   | 17.01 |   |
|                                                                                                               |       |                    |       |                                   |       |                          |       |   |   |   |   |   |   |
| Weighted-average fair value (pursuant  to FAS 123) at date of grant of options issued during the fiscal year ended |       |                    |       |                                   |       |                          |       |   |   |   |   |   |   |
|                                                                                                               |       |                    |       |                                   |       |                          |       |   |   |   |   |   |   |
| June 30, 2006                                                                                                 |       | —                  |       | —                                 |       | 21,200                        |       | 13.90 |   | 3,000 |   | 7.00 |   |
| June 30, 2007                                                                                                 |       | —                  |       | —                                 |       | 31,000                        |       | 5.40 |   | 3,000 |   | 9.80 |   |
| June 30, 2008                                                                                                 |       | —                  |       | —                                 |       | —                        |       | — |   | 1,000 |   | 4.40 |   |

 
| ** **                                  | ** **   | **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** | ** ** |
| $                                           | 4.400        |  –                 | 11.500     |                                                              | 30,500     |   | 5.06 |   | 9.278 |   | 22,600 |   | $ | 8.815 |   |
| 14.300                                      |  – | 26.000                       |       | 23,200                                                            |       | 4.92 |   | 20.163 |   | 19,000 |   | 20.373 |   |
| 34.380                                      |  – | 48.750                       |       | 11,700                                                            |       | 2.01 |   | 41.471 |   | 11,700 |   | 41.471 |   |
| 51.250                                      |  – | 51.250                       |       | 20,000                                                            |       | 1.00 |   | 51.250 |   | 20,000 |   | 51.250 |   |
| $                                           | 4.400        |  –                 | 51.250     |                                                              | 85,400     |   | 3.65 |   | $ | 26.475 |   | 73,300 |   | $ | 28.696 |   |
|                                             |              |                              |            |                                                                   |            |  |  |  |  |  |  |  |  |  |  |  |

 

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A summary of our stock option activity as of June 30,2008, and changes during fiscal year 2008 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, 2007 |       | 107,694                                   |       | $                                       | 26.06      |                                                 | 4.94       |                            | $          | — |   |
| Granted                           |       | 1,000                                     |       | 4.40                                    |       |                                                 |       | $                               | —     |   |
| Exercised                         |       | —                                    |       | —                                  |       |                                                 |       | $                               | —     |   |
| Forfeited/Expired                 |       | (23,294                                   | )          | 23.70                                   |       |                                                 |       | $                               | —     |   |
| Outstanding at June 30, 2008 |       | 85,400                                    |       | 26.48                                   |       | 3.65                                                 |       | $                               | —     |   |
| Exercisable                       |       | 73,300                                    |       | 28.70                                   |       | 3.02                                                 |       | $                               | —     |   |
| Vested at June 30, 2008      |       | 73,300                                    |       | 28.70                                   |       | 3.02                                                 |       | $                               | —     |   |
|                                   |            |                                           |            |                                         |            |                                                      |            |                                 |            |  |  |

 

The weighted-average grant-date fair value ofoptions granted during fiscal year 2008 was $4.40 per share. The intrinsicvalue for stock options is defined as the difference between the current marketvalue and the grant price.

 

Compensation costs recognized related tovested stock option awards during the year ended June 30, 2008 and 2007was $0.1 million and $0.3 million, respectively. At June 30, 2008, therewas $0.3 million of total unrecognized compensation cost related to non-vestedstock option awards, which is expected to be recognized over a weighted-averageperiod of 3.65 years. There were no options that were exercised during the yearended June 30, 2008.

 

## ***Other Stock Based Incentive Awards***

##  

·                  Special performance shares – Weissued 62,200 performance shares on December 21, 2007 that vest on January 15,2009, subject to certain events or upon designation by the CompensationCommittee. Termination of employment, except for resignation or cause was notan event of forfeiture. The employees receiving special performance shares weresubsequently terminated by the Company and the risk of subsequent forfeiturewas not material. Consequently, we expensed the entire fair value of the grant$127,510 in fiscal year 2008 valuing the performance shares at the close ofbusiness on the date of grant. Subsequently, 9,750 shares have been forfeitedand the stock price has decreased from $2.05 to $0.57 and our expense has been reduced to a total of $29,897 in fiscalyear 2008.

·                  2007 performance shares – We issued239,900 performance shares on December 21, 2007 that vest on February 15,2011 subject to certain events or upon designation by the CompensationCommittee. Termination of employment for any cause is an event of forfeiture.We valued the 2007 performance shares granted at the close of business on thedate of grant, and recognize expense and accrue an incentive compensationliability, pro rata over the vesting period. In the year ended June 302008, we recognized compensation expense of $13,021 for these performanceshares.

·                  Restricted Stock grants – On March 27,2008 the Board of Directors granted 25,000 shares of restricted stock to eachnon-employee director of the Company. The Restricted Stock vests annually overa period of four years and unvested shares are forfeited if the director leavesthe Board of Directors prior to the vesting date. The Company recognized $6,188board compensation expense for the year ended June 30, 2008.

 

## ***Fair Value of Stock Based Compensation***

##  

The Company calculated the fair value of eachoption grant on the date of grant using the Black-Scholes option pricing modelwith the following weighted-average assumptions:

 

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| ** **                      | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|
| Expected Dividend Yield         |       | 0        | %          | 0        | %          |
| Expected Volatility             |       | 1.14     |       | 1.08     |       |
| Risk-Free Interest Rates        |       | 3.58     | %          | 4.83     | %          |
| Expected Option Life (in years) |       | 6.25     |       | 6.25     |       |

 

Because of differences in option terms andhistorical exercise patterns among the plans, we have segregated option awardsinto two homogenous groups for the purpose of determining fair values for itsoptions. Valuation assumptions are determined separately for the two groups,which represent, respectively, the 1994 Stock Incentive Plan and the Director’sStock Option Plan. No options have been issued as of June 30, 2008 underthe 2008 Stock Incentive Plan. The assumptions are as follows:

 

·                  We estimated volatility using ourhistorical share price performance over the last ten years. Management believesthe historical estimated volatility is materially indicative of expectationsabout expected future volatility.

·                  We use the simplified methodoutlined in SEC Staff Accounting Bulletin No. 107 to estimate expectedlives for options granted.

·                  The risk-free interest rate is basedon the U.S. Treasury yield curve in effect at the time of grant for theexpected term of the option.

·                  The expected dividend yield is basedon our current dividend yield and the best estimate of projected dividend yieldfor future periods within the expected life of the option.

 

**(10)**              Income Taxes

** **

The Company accounts for taxes under SFAS No. 109, “Accounting forIncome 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) from continuingoperations are as follows (in thousands):

 
| ** **                   | ** ** | **Year Ended June 30,** | ** ** |
|------------------------------|------------|----------------------------------------|------------|
| ** **                   | ** ** | **2008**                               | ** ** | **2007** | ** ** |
| Current:                     |       |                                   |       |   |   |
| Federal                      |       | $                                      | 286        |   | $ | (47 | ) |
| State and local              |       | 389                                    |       | (22 | ) |
| Foreign                      |       | —                                 |       | — |   |
|                         |       | 675                                    |       | (69 | ) |
| Deferred:                    |       |                                   |       |   |   |
| Federal                      |       | —                                 |       | — |   |
| State and local              |       | —                                 |       | — |   |
| Foreign                      |       | —                                 |       | — |   |
|                         |       |                                   |       |   |   |
| Income tax expense (benefit) |       | 675                                    |       | $ | (69 | ) |
|                              |            |                                        |            |  |  |  |  |

 

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A reconciliation of the reported income tax expense to the amount thatwould result by applying the U.S. federal statutory rate to the income (loss)before income taxes to the actual amount of income tax expense (benefit)recognized follows (in thousands):

 
| ** **                                | ** ** | **Year Ended June 30,** | ** ** |
|-------------------------------------------|------------|----------------------------------------|------------|
| ** **                                | ** ** | **2008**                               | ** ** | **2007** | ** ** |
| Expected expense (benefit)                |       | $                                      | (12,020    | ) | $ | (5,563 | ) |
| Change in  valuation allowance            |       | (9,988                                 | )          | 6,514 |   |
| Over-accrual of Federal Tax in prior year |       | 19                                     |       | (443 | ) |
| Adjustment to Fixed Asset Basis           |       | 3,636                                  |       | — |   |
| Debt Exchange                             |       | 17,746                                 |       | — |   |
| Bond Interest                             |       | 374                                    |       | — |   |
| Expiration of general business credits    |       | 200                                    |       | (764 | ) |
| Other, stock compensation items           |       | 708                                    |       | 187 |   |
| Total                                     |       | 675                                    |       | $ | (69 | ) |
|                                           |            |                                        |            |  |  |  |  |

 

The Company’s deferred tax assets as of June 30, 2008 and 2007consist of the following (in thousands):

 
| ** **                                                              | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax assets:                                                    |       |     |       |     |       |
| Net operating loss carryforwards                                        |       | 4,507    |       | $        | 13,014     |   |
| General business credit carryforwards                                   |       | —   |       | 200      |       |
| Alternative minimum tax credit  carryforwards                           |       | 926      |       | 640      |       |
| Accrued expenses                                                        |       | 163      |       | 401      |       |
| Capitalized start-up and organization costs                             |       | 392      |       | 485      |       |
| Deferred gain                                                           |       | 73       |       | 467      |       |
| Property and equipment, principally due to  differences in depreciation |       | —   |       | 470      |       |
| Other                                                                   |       | 9        |       | 5        |       |
| Total gross deferred tax assets                                         |       | 6,070    |       | 15,682   |       |
| Less - valuation allowance                                              |       | (5,549   | )          | (15,537  | )          |
| Net deferred tax assets                                                 |       | 521      |       | 145      |       |
| Deferred tax liabilities:                                               |       |     |       |     |       |
| Property and equipment, principally due to  differences in depreciation |       | 483      |       | —   |       |
| Other                                                                   |       | 38       |       | 145      |       |
| Total gross deferred tax liabilities                                    |       | 521      |       | 145      |       |
| Net deferred tax assets (liabilities)                                   |       | $        | —     |     | $          | — |   |
|                                                                         |            |          |            |          |            |  |  |

 

At June 30, 2008, the Company had accumulated net operating losscarryforwards of approximately $ 13.25 million for Federal income tax purposes,which are available to offset future regular taxable income. These netoperating loss carryforwards expire between the years 2021 and 2026.Utilization of these net operating losses is subject to limitations due to thechanges in stock ownership of the Company associated with the October 2007Exchange Offer.

 

The Company has $0.93 million of alternative minimum tax credit carryforwards available to offset future regular tax liabilities. The Company’sresearch and experimentation tax credit carry forwards from 2007 ofapproximately $0.20 million have expired.

 

In assessing the need for a valuation allowance, management considerswhether it is more likely than not that some portion or all of the net deferredtax assets will be utilized. Management considers the scheduled reversal ofdeferred tax liabilities, projected future taxable income, and tax planningstrategies in making this assessment. As of June 30, 2008, the Companyprovided a full valuation allowance of approximately $(5.55) million againstits net deferred tax assets.

 

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The valuation allowance decreased by approximately $9.988 million forthe year ended June 30, 2008. The valuation allowance increased byapproximately $6.514 million for the year ended June 30, 2007.

 

## ***Texas Margin Tax***

##  

The state of Texas adopted a new Texas Margin Tax, which is designed toreplace the previous franchise tax. Texas does not have a corporate income tax.The new tax is effective January 1, 2008. The Company has made anestimated tax payment of $3,000 for the anticipated liability under this newtax.

 

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

** **

The following are reconciliations of thedenominators of the basic and diluted net income (loss) per share computationsfor the years ended June 30, 2008 and 2007. There were no adjustments forthe numerators.

 
| ** **                                                           | ** ** | **June 30,** | ** ** |
|----------------------------------------------------------------------|------------|-------------------|------------|
| ** **                                                           | ** ** | **2008**          | ** ** | **2007** | ** ** |
| Weighted average outstanding common shares –  basic and diluted |       | 9,254,346         |       | 1,291,951 |   |

 

For fiscal years 2008 and 2007, 73,300 and107,694 respectively, of options to purchase shares of Common Stock wereexcluded for the computations of diluted net income because the impact of suchoptions are anti-dilutive.

 

For fiscal year 2007, $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 was anti-dilutive.

 

For fiscal year 2007, the $10,306,000 ofConvertible 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 was anti-dilutive.

 

For fiscal year 2007, the $12,000,000 ofPreferred 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.

 

**(12)**              Employee Benefit Plans

** **

We have a defined contribution retirementplan, which covers substantially all employees and officers. For the yearsended June 30, 2008 and 2007, we have contributed the required match of$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, 2008 and 2007.

 

## ***Cash Based Long Term Incentive Awards***

##  

The Compensation Committee of the Board ofDirectors adopted and implemented a Long-Term Cash Incentive Plan during thesecond quarter of fiscal year 2008. The Long-Term Cash Incentive Plan makescash incentive awards to employees upon the successful completion of certainevents and passage of time as established by the Committee. In the year ended June 30,2008, the Committee awarded Long-Term Cash Incentive Units valued at $344,900to employees. These units vest on February 15, 2011 and are subject tomaterial risk of forfeiture. Through June 30, 2008, expense recognized forthis plan totaled $139,451, cash paid to terminated employees was $75,200, andthe deferred liability was $64,251.

 

**(13)**              Commitments

** **

## ***ConstructionContract Contingency***

##  

In August 2007 we entered into a $14.0million modification to our existing VAFB construction contract. Themodification requires us to complete the construction on the redesigned facilityby September 30, 2009. The modification contains penalties if we do notmeet the contracted completion date. As a result we have a contingency of up to$3.0 million in penalties. The constructionprogram continues to meet program time and cost milestones and managementbelieves the project will be completed on time and within budget.

 

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## ***Leases***

##  

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

 
| ** **                              | ** ** | **Operating** | ** ** | **Payment Due**   | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|---------------|------------|------------------------|------------|------------|------------|
| **Year ending June 30,** | ** ** | **Leases**    | ** ** | **For Subleases** | ** ** | **Total**  | ** ** |
|                                    |       |          |       |                   |       |       |       |
| 2009                                    |       | $             | 650        |                   | $          | (72        | )          | $ | 578 |   |
| 2010                                    |       | 355           |       | —                 |       |       |       |
| 2011                                    |       | 70            |       | —                 |       |       |       |
| 2012                                    |       | 59            |       | —                 |       |       |       |
| 2013                                    |       | 9             |       | —                 |       |       |       |
| 2014 and thereafter                     |       | —        |       | —                 |       |       |       |
| Subtotal                                |       | $             | 1,143      |                   | $          | (72        | )          | 1,071 |   |
|                                         |            |               |            |                        |            |            |            |  |  |  |

 

Rent expense for the years ended June 30,2008 and 2007 was approximately $1.7 million and $4.6 million, respectively,including lease expenses for the ICC and VCC asset leases of $0.744 million in2008 and $3.8 million in 2007 (see Note 25 for Agreement to Termination of ICCand VCC Leases). For fiscal year 2008 the Company received sublease payments of$0.4 million.

 

In May 2005, the Company completed apurchase and sale lease-back of the payload processing facility in PortCanaveral, Florida for $4.8 million, resulting in net cash of $3.8 million anda gain of $0.5 million, which we carried as a deferred gain and are amortizingover the initial 68 month term of the lease-back. The value of the deferredgain at June 30, 2008 and 2007 was $0.2 million and $0.3 million,respectively.

 

**(14)**              Segment Information

** **

Based on our organization, weoperate in five business segments: Astrotech, Astrotech Engineering Services,Flight Services, BioSpace Technologies, Inc., and SPACETECH, Inc. Forfiscal year 2008, BioSpace and SPACETECH had no revenue or significantoperations. 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. Astrotech Engineering Services is primarily engaged inproviding engineering services and products to the Federal government includingNASA.

 

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 BioSpace Technologies and SPACETECH.

 

The accounting policies of thesegments are the same as those described in the summary of significantaccounting policies (Note 2). Information about the Company’s segments is asfollows (in thousands):

 

Year ended June 30, 2008:

 
| ** **           | ** ** | ** **  | ** ** | ** **                        | ** ** | **Net**    | ** ** | **Depreciation** | ** ** | ** ** | ** ** |
|----------------------|------------|-------------|------------|-----------------------------------|------------|------------|------------|------------------|------------|------------|------------|
| ** **           | ** ** | ** **  | ** ** | **Income (loss)**            | ** ** | **Fixed**  | ** ** | **And**          | ** ** | **Total**  | ** ** |
| ** **           | ** ** | **Revenue** | ** ** | **before income taxes** | ** ** | **Assets** | ** ** | **Amortization** | ** ** | **Assets** | ** ** |
| Flight Services      |       | $           | 4,357      |                              | $          | (2,472     | )          | $                | 262        |       | $          | 448 |   | $ | 1,380 |   |
| Engineering Services |       | 5,242       |       | 223                               |       | 35         |       | —           |       | 1,716      |       |
| Astrotech            |       | 15,810      |       | 5,130                             |       | 40,602     |       | 2,120            |       | 51,248     |       |
| Other                |       | 135         |       | (38,234                           | )          | 100        |       | 100              |       | 3,867      |       |
|                 |       | $           | 25,544     |                              | $          | (35,353    | )          | $                | 40,999     |       | $          | 2,668 |   | $ | 58,211 |   |

 

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Year ended June 30, 2007:

 
| ** **           | ** ** | ** **  | ** ** | ** **                        | ** ** | **Net**    | ** ** | **Depreciation** | ** ** | ** ** | ** ** |
|----------------------|------------|-------------|------------|-----------------------------------|------------|------------|------------|------------------|------------|------------|------------|
| ** **           | ** ** | ** **  | ** ** | **Income (loss)**            | ** ** | **Fixed**  | ** ** | **And**          | ** ** | **Total**  | ** ** |
| ** **           | ** ** | **Revenue** | ** ** | **before income taxes** | ** ** | **Assets** | ** ** | **Amortization** | ** ** | **Assets** | ** ** |
| Flight Services      |       | $           | 34,422     |                              | $          | (7,637     | )          | $                | 705        |       | $          | 3,612 |   | $ | 6,226 |   |
| Engineering Services |       | 5,965       |       | 909                               |       | —     |       | —           |       | 1,369      |       |
| Astrotech            |       | 12,136      |       | 1,989                             |       | 42,633     |       | 2,088            |       | 58,484     |       |
| Other                |       | 239         |       | (11,622                           | )          | 546        |       | 662              |       | 6,396      |       |
|                 |       | $           | 52,762     |                              | $          | (16,361    | )          | $                | 43,884     |       | $          | 6,362 |   | $ | 72,475 |   |

 

Foreign revenue for the years ended June 30,2008 and 2007 was approximately zero and $0.2 million, respectively. Theforeign revenue was mainly generated in China and Japan. Domestic revenue forthe years ended June 30, 2008 and 2007 was approximately $25.5 million and$52.8 million, respectively.

 

**(15)**              Related Party Transactions

** **

The Company engaged in certain transactionswith directors, executive officers, shareholders, and certain former officersduring fiscal years 2008 and 2007. Following is a description of thesetransactions:

 

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

##  

Astrium provides unpressurized payload andintegration efforts to SPACEHAB on a fixed price basis in addition to providingengineering services as required. For the years ended June 30, 2008 and2007, Astrium’s payload and integration services included in cost of revenuewas approximately $1.0 million and $13.8 million, respectively.

 

## ***Executive Credit Cards***

##  

Certain named executive officers of theCompany have company paid credit cards for ordinary business expenses. Althoughthe Company pays the amounts on the credit cards, the executive officer isobligated to substantiate the charges and reimburse the Company for anynon-business related charges. As of June 30, 2008 the Company had nooutstanding receivables on such executive credit cards.

 

## ***Directors Compensation***

##  

Our independent directors are paid an annualcash retainer fee upon their appointment or annual re-election to the Board ofDirectors and are granted annual equity based compensation grants. We amortizethe expense of these annual awards over the period between annual meetings ofshareholders. Meeting fees, expenses, and other costs are expensed andincurred. The director fees expensed in 2008 and 2007 were $0.3 million and$0.2 million, respectively.

 

**(16)**              Induced Conversionof Convertible Securities and Reverse Stock Split

** **

On October 5, 2007, we announced thesuccessful closing of our offer to exchange (the “Exchange Offer”) any and allof our outstanding 8.0% Convertible Subordinated Notes due 2007 (the “JuniorNotes”) and any and all of our outstanding 5.5% Senior Convertible Notes due2010 (the “Senior Notes”). As a result of the closing of the Exchange Offer,for the approximately $7.4 million in principal amount of Junior Notestendered, the holders received approximately 550,000 shares of common stock and8,927 shares of Series C Convertible Preferred Stock on a pre-reversesplit basis. Following the closing of the Exchange Offer, approximately $2.9million of Junior Notes remained outstanding pursuant to the original terms ofthe indenture governing the Junior Notes. On October 15, 2007, we redeemedthe outstanding Junior Notes, including accrued interest for cash. In addition,for the approximately $46.1 million in principal amount of outstanding SeniorNotes tendered, the holders received approximately 30.7 million shares ofcommon stock and 46,083 shares of Series C Convertible Preferred Stock ona pre-reverse split basis. Following the closing of the Exchange Offer,approximately $6.9 million of Senior Notes remained outstanding pursuant to anindenture governing the Senior Notes that was amended through the eliminationof substantially all of the indenture’s restrictive covenants.

 

In addition, as a result of the closing ofthe Restructuring and Exchange Agreement, effective as of August 31, 2007,among the Company and certain holders of Junior Notes and Senior Notes, theCompany issued to Astrium GmbH 1,333,334 shares of common stock and 6,540shares of Series C Convertible Preferred Stock

 

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in exchange for Astrium’s existing 1,333,334shares of Series B Convertible Preferred Stock on a pre-reverse splitbasis.

 

As a consequence of the Exchange Transaction,we recognized non-cash debt conversion expense of $30.2 million in the ninemonths ended March 31, 2008, and we increased our common stock by $98.4million.

 

In November 2007, we converted the61,550 shares of Series C convertible preferred stock into 89.9 millionshares of common stock on a pre-reverse split basis and affected a 1 for 10reverse stock split, reducing our issued and outstanding common stock to 13.6million shares. All share amounts have been stated to reflect this split forall periods presented.

 

**(17)**              Sales of EquitySecurities

** **

## ***Commitment Consideration Paid in Stock***

##  

On February 11, 2008, the Companyentered into a Stock Purchase Agreement with certain investors for the purchaseof 55,000 shares of the Company’s Series D convertible preferred stock fora total price of $5.5 million. Consummation of the transaction was contingentupon NASA awarding us a funded Space Act Agreement under the COTS Program andshareholder approval of the transaction. As consideration for investor commitmentto this transaction, the Company issued 150,150 shares of common stock uponentering into the transaction. The Stock Purchase Agreement relied upon theexception from registration pursuant to Rule 506 of Regulation Dpromulgated by the commission pursuant to the Securities Act of 1933. TheCompany believes that such issuance of securities qualifies for an exemptionunder Rule 506 because there are no more than 35 purchasers of securitiesand each Investor represents to the Company under the Stock Purchase Agreementat the time of execution and closing that it is an “accredited investor” withinthe meaning of Rule 501 of Regulation D.

 

The Company was not awarded a funded SpaceAct Agreement under the COTS Program and, except for the 150,150 commitment compensationpaid, the offering was terminated.

 

## ***Private Placement of Common Stock***

##  

On May 22, 2008, the Company enteredinto a Securities Purchase Agreement with certain investors, under which theinvestors agreed to subscribe for and purchase 1,329,786 shares of the Company’scommon stock for an aggregate purchase price of $625,000. The consummation ofthe transaction under the Securities Purchase Agreement was contingent uponcertain customary conditions precedent to each party’s obligation to close.$47,000 for subscribed common stock related to the Private Placement, which wasreceived in July, is reflected as reflected as issued and outstanding at June 30,2008.

 

The 1,329,787 shares of common stock issuedon June 5, 2008, under the Securities Purchase Agreement were sold inreliance on the exemption from registration pursuant to Rule 506 ofRegulation D promulgated by the Commission pursuant to the Securities Act of1933. The Company believes that such issuance of securities qualifies for anexemption under Rule 506, because there are no more than 35 purchasers ofsecurities and each Investor represents to the Company under the SecuritiesPurchase Agreement at the time of execution and closing that it is an “accreditedinvestor” within the meaning of Rule 501 of Regulation D.

 

**(18)**              Asset Write Down

** **

During the year ended June 30, 2007, weperformed an analysis of our remaining shuttle based assets due to STS-118being our last contracted shuttle mission. As a result, we have written downthe Flight Services Flight Unit 2 module asset and other shuttle based assets,as it has been determined that the asset is unlikely to generate significantfuture cash flows and revenue. Therefore, we wrote-down our Flight Unit 2module to a salvage value of $0.1 million, excluding depreciation expense for July andAugust 2007. This non-cash write-down resulted in a cost of revenueexpense of $10.4 million for the year ended June 30, 2007. The $10.4million is included in cost of revenue for the Flight Services segment becausecosts associated with the use of this asset, including depreciation expense,have historically been recorded here.

 

Additionally, during fiscal year ended June 30,2007, we wrote-down other assets and work in progress related to the modulesand the unpressurized carriers for $3.8 million. This amount is included inoperating expenses. Included in this $3.8 million write-down is $1.6 millionwrite-down of inventory that was being held for future use. This inventory wasfurther written down in June 2008 by an additional $0.2 million. Thewrite-down is based on current market conditions.

 

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

** **

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

 

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

 

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

** **

On October 13, 2006, the Companyconsummated 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 consolidated financial statements, we elected tonot present this discontinued operation as a separate component in ourconsolidated statements of operations for the three months ended December 31,2006. The gain on the sale is reflected in the interest and other incomesection on our consolidated financial statements.

 

**(21)**              Legal Proceedings

** **

In January 2004, the Company initiated aformal proceeding against NASA in which the Company was seeking damages in theamount of $87.7 million for the loss of its RDM as a result of the 2003 SpaceShuttle *Columbia* accident. In October 2004,NASA responded to this claim with the determination that its liability was $8.2million, including interest, and paid SPACEHAB this amount. SPACEHABsubsequently filed an appeal with the Armed Services Board of Contract Appeals,and over the past two years, the two parties have proceeded with preparationsfor a court hearing planned for July 2008. The Company also filed a tortclaim in November 2004, seeking damages of $79.7 million for the loss ofthe RDM, to which the court granted a motion in June 2006 to stay the caseuntil resolution of the Company’s contract claim appeal.

 

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

 

Except as above, the Company is not a partyto any pending or threatened proceedings, which in management’s opinion, wouldhave a material adverse effect on our business, financial condition, or resultsof operation.

 

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

** **

In December 2006 our Astrotechsubsidiary was awarded a contract with a governmental agency to modify one ofour payload processing facilities to specific requirements of a programmedmission. Under the terms of this $20.0 million fixed-price contract, we willown the improvements after completion of the contract obligations. We haveentered into a firm, fixed-price construction subcontract with J. P. DonovanConstruction, 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, 2008, net cash receipts of $6.3 million havebeen designated as restricted cash and $5.7 million has been designated as aliability (see Note 2).

 

A $14.2 million modification to this VAFBconstruction contract requires us to complete the construction on theredesigned facility by September 30, 2009. The modification containspenalties of up to $3.0 million if we do not meet the contract completion date.We have not established a reserve for this contingent liability.

 

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**(23)**              Adverse Event

** **

On January 30, 2007 Sea Launchexperienced a launch failure resulting in the loss of a satellite and damage tothe floating launch platform. A full inspection, evaluation, and repairoperations of the damage incurred and Sea Launch returned to operations in October 2007. We were paidunder our contract with Sea Launch upon launch of each mission; therefore,revenues  delayed until the resumption ofnormal operations. As a result of the launch failure, the Company lost revenueon at least three launch missions either through cancellation or scheduledelay. We submitted a claim under our business interruption insurance for$750,000, the limit of our policy. Our underwriter has neither accepted nordenied our claim but is evaluating the claim in terms of policy coverages.

 

**(24)**              Customer Deposits

** **

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

 

**(25)**              Agreement toTermination of ICC and VCC Leases

** **

On August 28, 2007, the Company andAstrium, GmbH mutually agreed to terminate the lease agreement dated as of February 28,2001 in regards to the Company’s lease of the ICC assets from Astrium, GmbH.Also, we mutually agreed to terminate the lease agreement dated as of July 3,2001 in regards to the Company’s lease of the VCC assets from Astrium, GmbH.The ICC and VCC assets are specifically designed cargo carrying equipment usedperiodically in the U.S. Space Shuttle. In order to terminate these two leases,we mutually agreed that the Company reimburse Astrium, GmbH $1.4 million forthe period March 1, 2007 through August 31, 2007 for the ICC and VCCassets and incur no financial obligations for either the ICC or VCC after August 31,2007.

 

**(26)**              NASDAQ DeficiencyLetter

** **

On April 7, 2008, we received a NASDAQStaff Determination letter indicating that we failed to comply with NASDAQMarketplace Rule 4310(c)(4) and our securities were, therefore,subject to delisting from The NASDAQ Capital Market. Marketplace Rule 4310(c)(4) requiresthat we maintain a $1.00 bid price. We were granted a grace period to regaincompliance with this Rule, which expires on October 6, 2008.

 

**(27)**              Early Termination ofLease

** **

On May 1, 2008, The Company and R&HInvestments reached an agreement upon early termination of the Company’s leaseat 12130 Highway 3, Building 1, Webster, Texas. The lease provided for rentalpayments of $26,538 monthly, which escalated annually through the leasetermination of February 2015. In addition, the Company was responsible forall maintenance, utilities, and taxes on the building through the lease terms.Under the terms of the agreement, the Company will pay rent through June 30,2008 and transfer ownership of 2.9 acres of vacant land owned by the Company toR&H Investments. The Company recognized lease termination expenses ofapproximately $0.4 million representing consideration paid and forfeitedleasehold improvements.

 

On May 26, 2005 we consummated the saleand lease back of our corporate offices in Webster (Houston), Texas. The saleresulted in net cash of approximately $0.9 million and a gain of approximately$1.2 million, which we carried as a deferred gain and were amortizing over theinitial term of the lease back. We leased back 100% of the facility for aninitial period of ten years, with two five-year options. We also retained the adjacent3.0 acre parcel for future development or sale.

 

The Company recognized a net gain on thelease termination of $0.6 million resulting from the remaining $1.0 milliondeferred gain on the building sale-leaseback transaction offset by leasetermination expenses of approximately $0.4 million representing considerationpaid and forfeited leasehold improvements.

 

**(28)**              Early Termination ofCost Plus Award Fee Contract

** **

On May 7, 2008, the Company received aletter from ARES Corporation  notifyingthe Company of ARES’s intent to terminate the Cost Plus Award Fee Subcontract No. SGS-0311403.00with the Company (the “Subcontract”) pursuant to section GP-07(7.2) of theGeneral Provisions as set forth in Attachment J-7 to the

 

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Subcontract. The provision referred to inARES’s correspondence provides for termination for “convenience.”

 

As stated in ARES’s letter “...the objective ofthe Subcontract was to assist NASA’s continued development and operation of theInternational Space Station...” The Company has consistently received excellentreviews for its performance under the Subcontract and has earned near maximumaward fees. Previously, 45 employees of the Company were engaged under theSubcontract, which resulted in revenues of $4.5 million for the current fiscalyear.

 

The Company continued under the current taskorders under the Subcontract until at least June 5, 2008. The Subcontractextended pursuant to its original term until September 30, 2008. TheCompany and ARES have not resolved certain issues relative to the earlytermination of the Subcontract, including, but not limited to certain amountsreceivable from ARES under this contract totaling $1.4 million. The Company isevaluating its contractual rights and other options with respect to ARES’sclaimed termination of the Subcontract, including ARES’s obligations withrespect to such claimed termination.

 

**(29)**              Subsequent Events

** **

## ***Executive Compensation***

##  

On July 18, 2008 the CompensationCommittee, with the concurrence of the independent Directors of the Company,granted cash and equity awards to the Chief Executive Officer and certaindirectors of the Company in recognition of the successful fiscal year 2008recapitalization of the Company.

 
| **Officer/Director**                                                         | ** ** | **Common Stock Award** | ** ** | **Cash Bonus** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------|------------|
| ** **                                                                   | ** ** | ** **                       | ** ** | ** **          | ** ** |
| Thomas B. Pickens, III  Chief Executive Officer,  Director and Chairman |       | 1,100,000                        |       | $                   | 350,000    |   |
| Barry A. Williamson  Director                                                |       | 200,000                          |       | $                   | 36,200     |   |
| Mark E. Adams  Director                                                      |       | 150,000                          |       | $                   | 27,500     |   |

 

The Company recognized compensation expensesof $1,002,500 and director fees of $63,700 in the period ended June 30,2008 for such awards.

 

In addition, the Compensation Committeegranted restricted stock and stock option awards to officers and employees ofthe Company that included risk of forfeiture prior to vesting. Such awardsencompassed the following:

 

 
| **Named Executive Officer**                                                          | ** ** | **Restricted Stock Awards(1)** | ** ** | **Stock Option Awards(2)** | ** ** |
|------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                     | ** ** | ** **                               | ** ** | ** **                           | ** ** |
| James D. Royston   President                                                                   |       | 200,000                                  |       | 75,000                               |       |
| Lance W. Lord  Chief Executive Officer, Astrotech  Space Operations, Inc. and Director    |       | 50,000                                   |       | 87,500                               |       |
| Brian K. Harrington  Senior Vice President,  Chief Financial Officer, Secretary  and Treasurer |       | 150,000                                  |       | 50,000                               |       |

 

Grants of Incentive Stock Options – 225,000(3)

Other Grants of Stock Options – 294,208(2)

 

----

(1)          The restricted stock vests 50% on January 15,2009, 25% on January 15, 2010, and 25% on January 15, 2011.

(2)          The stock options have an exercise price of$0.45 per share and vest on January 15, 2009 and terminate on July 17,2010.

(3)          The incentive stock options have an exerciseprice of $0.45 per share and vest 50% on January 15, 2009, 25% on January 15,2010, and 25% on January 15, 2011 and terminate on July 17, 2017.

 

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The 731,708 stock options granted toemployees and directors in July 2008 under the 2008 Stock Incentive Planwere valued at $0.2 million with an exercise price of $0.45 per share.  These options vest on various vest dates overthe next 36 months..

 

## ***Shares Subscribed***

##  

As of July 21, 2008, the Company hasreceived net proceeds of $47,000 for 100,000 shares of common stock inconnection with the Private Placement described in Note 17, in a transactionnot registered under the Securities Act of 1933. The common stock was issued onJune 5, 2008.

 

# **Item9.  Changes in and Disagreements withAccountants on Accounting and Financial Disclosure.**

# ** **

None to report for the period ended June 30, 2008.

 

# **Item9A.  Controls and Procedures.**

# ** **

Under the supervision and with the participation of our management,including our principal executive officer and principal financial officer, wehave evaluated the effectiveness of our design and operation of our disclosurecontrols and procedures as of the end of the period covered by this annualreport, and, based on the evaluation, our principal executive officer and principalfinancial officer have concluded that these controls and procedures areeffective. There have been no changes in our internal control over financialreporting that occurred during our last fiscal quarter that have materiallyaffected, or are reasonably likely to materially effect, our internal controlover financial reporting.

 

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

 

***Management’s Report On Internal Control Over Financial Reporting***

 

Our management is responsible for establishing and maintaining adequateinternal control over financial reporting, as such term is defined in ExchangeAct Rules 13a-15(f). Under the supervision and with the participation ofour management, including our principal executive and financial officers, weconducted an evaluation of the effectiveness of our internal control overfinancial reporting as of June 30, 2008 based on the frame work in theInternal Control-Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission. Based on our evaluation under theframework in Internal Control-Integrated Framework, our management concludedthat our internal control over financial reporting was effective as of June 30,2008.

 

This annual report does not include an attestation report of ourregistered public accounting firm regarding internal control over financialreporting. Management’s report was not subject to attestation by our registeredaccounting firm pursuant to temporary rules of the Securities and ExchangeCommission that permit us to provide only management’s report in this annualreport.

 

# **Item9B.  Other Information.**

# ** **

None to report for the periodended June 30, 2008.

 

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** **

**PART III**

** **

# **Item10.  Directors and Executive Officers ofthe Registrant.**

# ** **

The information required by this item will be contained in ourdefinitive Proxy Statement for our 2008 Annual Meeting of Stockholders and ishereby incorporated by reference thereto.

 

# **Item11.  Executive Compensation.**

# ** **

The information required by this item will be contained in ourdefinitive Proxy Statement for our 2008 Annual Meeting of Stockholders and ishereby incorporated by reference thereto.

 

# **Item12.  Security Ownership of CertainBeneficial Owners and Management and Related Stockholder Matters.**

# ** **

The information required by this item will be contained in ourdefinitive Proxy Statement for our 2008 Annual Meeting of Stockholders and ishereby incorporated by reference thereto.

 

# **Item13.  Certain Relationships and RelatedTransactions and Director Independence.**

# ** **

The information required by this item will be contained in ourdefinitive Proxy Statement for our 2008 Annual Meeting of Stockholders and ishereby incorporated by reference thereto.

 

# **Item14.  Principal Accounting Fees andServices.**

# ** **

The information required by this item will be contained in ourdefinitive Proxy Statement for our 2008 Annual Meeting of Stockholders and ishereby incorporated by reference thereto.

 

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** **

**PART IV**

** **

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

# ** **

| (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. |     |
|       |                                                                                                                                                                                          |     |
| ** ** | ** **                                                                                                                                                                                    | **Page** |
|       | Report of PMB  Helin Donovan LLP, Independent Registered Public Accounting Firm                                                                                                               | 35       |
|       | Consolidated  Balance Sheets                                                                                                                                                                  | 36       |
|       | Consolidated  Statements of Operations                                                                                                                                                        | 37       |
|       | Consolidated  Statements of Stockholders’ Equity and Comprehensive Income (Loss)                                                                                                         | 38       |
|       | Consolidated  Statements of Cash Flows                                                                                                                                                        | 39       |
|       | Notes to  Consolidated Financial Statements                                                                                                                                                   | 40       |
|       |                                                                                                                                                                                          |     |
| 2.         | Financial Statement Schedules                                                                                                                                                                 | 63       |
| 3.         | Exhibits                                                                                                                                                                                      | 64       |

 

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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 8.0% 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 with the  Securities and Exchange Commission on September 21, 2007                                                                                                                                                                                                                         |
|       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|       | 10.50      |       | Loan  Agreement dated as of February 6, 2008, between Astrotech Space  Operations, Inc. (“the Borrower”) and Green Bank, N.A. (the “Lender”)  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                                                                                                                                                                                                                      |

 

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

 

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** **

**SIGNATURES**

** **

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

 

SPACEHAB, Incorporated

 
|                          | By:    | /s/ Thomas B.  Pickens, III |
|-------------------------------|--------|----------------------------------|
|                          |   | Thomas B. Pickens, III      |
|                          |   | Chief Executive Officer          |
|                          |   |                             |
| Date: September 29, 2008 |   |                             |
|                          |   |                             |
|                          | By:    | /s/ Brian K. Harrington          |
|                          |   | Brian K. Harrington              |
|                          |   | Senior Vice President,           |
|                          |   | Chief Financial Officer and      |
|                          |   | Chief Accounting Officer         |
| Date: September 29, 2008 |   |                             |

 

Pursuant to the requirements of the Securities andExchange Act of 1934, this report has been signed below by the followingpersons on behalf of this registrant in the capacities and on the datesindicated.

 
| /s/ Thomas B. Pickens, III |   | Chairman of the Board and   |   | September 29, 2008 |
|---------------------------------|--------|-----------------------------|--------|-------------------------|
| Thomas B. Pickens, III     |   | Chief Executive Officer     |   |                    |
|                            |   |                        |   |                    |
| /s/ Mark Adams                  |   | Director                    |   | September 29, 2008 |
| Mark Adams                      |   |                        |   |                    |
|                            |   |                        |   |                    |
| /s/ Lance W. Lord               |   | Director                    |   | September 29, 2008 |
| Lance W. Lord                   |   |                        |   |                    |
|                            |   |                        |   |                    |
| /s/ R. Scott Nieboer            |   | Director                    |   | September 29, 2008 |
| R. Scott Nieboer                |   |                        |   |                    |
|                            |   |                        |   |                    |
| /s/ John A. Oliva               |   | Director                    |   | September 29, 2008 |
| John A. Oliva                   |   |                        |   |                    |
|                            |   |                        |   |                    |
| /s/ William F. Readdy           |   | Director                    |   | September 29, 2008 |
| William F. Readdy               |   |                        |   |                    |
|                            |   |                        |   |                    |
| /s/ Barry A. Williamson         |   | Director                    |   | September 29, 2008 |
| Barry A. Williamson             |   |                        |   |                    |
|                            |   |                        |   |                    |
| /s/ Brian K. Harrington         |   | Senior Vice President,      |   | September 29, 2008 |
| Brian K. Harrington             |   | Chief Financial Officer and |   |                    |
|                            |   | Chief Accounting Officer    |   |                    |

 

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