** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM10-K/A**

(Amendment No. 1)
| **(Mark One)** |       |                                                                                                                                                                                                                                                                                                                                      |
|----------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **     |       |                                                                                                                                                                                                                                                                                                                                      |
| **x**          | ** ** | **ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                 |
| ** **     | ** ** | **For  the fiscal year ended June 30, 2007**                                                                                                                                                                                                                                                                                              |
| ** **     | ** ** | ** **                                                                                                                                                                                                                                                                                                                                |
| **o**          | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                             |
| ** **     | ** ** | **For  the transition period from                           to                         ** |

 

**Commission File No. 0-27206**

 

**SPACEHAB,Incorporated**

(Exact name of registrant asspecified in this charter)

 

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

 

**12130 Highway 3, Building 1**

**Webster, Texas 77598-1504**

(Address of principalexecutive offices) (Zip code)

 

**(713) 558-5000**

(Registrant’s telephonenumber, including area code)

 

**Securities Registered pursuant to Section 12(b) of theAct:**

** **

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

 

**Securities registered pursuant to Section 12(g) of theAct: None**

** **

Indicate by check mark if theregistrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act. YES o NO x

 

Indicate by check mark if theregistrant is not required to file reports pursuant to Section 13 or Section15(d) of the Act. YES o NO x

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

YES x NO o

 

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

 

Indicate by check markwhether the registrant is a large accelerated filer an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

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

 

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

YES o NO x

 

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

 

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

 

DOCUMENTS INCORPORATED BYREFERENCE:

 

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

 

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**EXPLANATORY NOTE**

** **

SPACEHAB,Incorporated, referred to herein as the “Company”, is amending its Fiscal Year2007 Form 10-K to add information required in PART III. The required PART IIIinformation was intended to be included in our definitive Proxy Statement forour 2007 Annual Meeting of Stockholders and was so referenced in Form 10-K. Wehave not yet filed our definitive Proxy Statement for our 2007 Annual Meetingof Stockholders.

 

Note:  There are no other changes to the originalForm 10-K filing other than those outlined in this document. This Form 10-K/Adoes not reflect events occurring after the filing of the original Form 10-K,or modify or update the disclosures therein in any way other than as requiredto reflect the amendment set forth below.

 

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**PART III**

 

# **Item 10. Directors, Executive Officers andCorporate Governance.**

#  

A Board ofseven directors was elected at the 2006 Annual Meeting. The Company’s articlesof incorporation authorize the Board of Directors from time to time todetermine the number of its members. Vacancies in unexpired terms and anyadditional director positions created by Board action may be filled by actionof the existing Board of Directors at that time, and any director who isappointed in this fashion will serve until the next Annual Meeting ofShareholders or until a successor is duly elected and qualified. On December12, 2006, Michael E. Kearney resigned as a director and Chief Executive Officerof the Company and on April 4, 2007, Mark Adams was elected by the remainingmembers of the Board of Directors as a director of the Company.

 

On July 31,2007, Dr. Edward David resigned as a director of the Company; on August 28,2007, Dr. Stefan Graul, the former Series B Preferred Stock designated directorresigned from the Board of Directors, and on October 16, 2007 Myron J. Goinsresigned as a director of the Company.

 

The followingtable shows information as of November 15, 2007 regarding members of theCompany’s Board of Directors.

 
| **Directors**          | ** ** | **Principal Occupation and Directorships**                                                                                                 | ** ** | **Age as of  November  15, 2007** | ** ** | **Director  Since** |
|------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|---------------------|
| ** **             | ** ** | ** **                                                                                                                                                | ** ** | ** **                                       | ** ** | ** **          |
| Thomas B. Pickens, III |       | Chief Executive Officer of SPACEHAB, Inc.; Managing Partner and founder of Tactic  Advisors, Inc.; President and  Founder of T.B. Pickens & Co.       |       | 50                                               |       | 2004                |
|                   |       |                                                                                                                                                      |       |                                             |       |                |
| Mark Adams             |       | Founder, President and CEO, Advocate MD Financial Group, Inc.                                                                                             |       | 46                                               |       | 2007                |
|                   |       |                                                                                                                                                      |       |                                             |       |                |
| Barry A. Williamson    |       | Attorney; Director of Wilson Holdings, Inc.; Executive Board Member  of Austin Smiles                                                                     |       | 50                                               |       | 2004                |
|                   |       |                                                                                                                                                      |       |                                             |       |                |
| Roscoe M. Moore, III   |       | Chief Strategic and Technical Officer of SPACEHAB, Inc.; President and Founder of PeerSat; Director  and Chairman of Washington Space Business Roundtable |       | 35                                               |       | 2004                |

#  

# **Continuing Directors**

#  

# **Thomas B. Pickens, III**

#  

Since January2007, Mr. Pickens has served as SPACEHAB’s Chief Executive Officer. He is thePresident and Founder of T.B. Pickens & Co., a company that providesconsulting services to corporations, public institutions, and start-uporganizations, and he is also the Managing Partner and Founder of TacticAdvisors, Inc., a company specializing in corporate turnarounds on behalf ofcreditors and investors that have aggregated to over $20 billion in value. From1991 to 2002, Mr. Pickens was the Founder and Chairman of U.S. Utilities, Inc.,a company which operated 114 water and sewer utilities on behalf of variouscompanies affiliated with Mr. Pickens. From 1995 to 1999, Mr. Pickens directedover 20 direct investments in various venture capital investments and wasFounder and Chairman of the Code Corporation. From 1988 to 1993, Mr. Pickenswas the Chairman of Catalyst Energy Corporation and was Chairman of UnitedThermal Corporation (NYSE). Mr. Pickens was also the President of Golden BearCorporation, Slate Creek Corporation, Eury Dam Corporation, Century PowerCorporation, and Vidilia Hydroelectric Corporation. From 1986 to 1988 Mr.Pickens founded Beta Computer Systems, Inc., Sumpter Partners and was theGeneral Partner of Grace Pickens Acquisition L.P.

 

# **Mark Adams**

#  

Mr. Adams isthe founder of Advocate, MD Financial Group, Inc., a leading Texas-basedmedical liability insurance holding company, and since its founding in July2003, has served as its Chairman, President, and 

 

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ChiefExecutive Officer. Mr. Adams also serves as Chairman of the Board of Advocate,MD Insurance of the Southwest, Inc., a wholly-owned subsidiary of Advocate, MDFinancial Group, Inc. He is also a founding partner in several other companiesincluding the Endowment Development Group, a Houston-based life insurancecompany specializing in placing large multimillion dollar life insurancepolicies throughout the U.S. market, Cattlemen’s Restaurant Group and VivaChocolato!. Beginning his career with global public companies such as Xerox andJohnson & Johnson, Mr. Adams then spent the next 12 years at BostikAdhesives where he served in senior management, sales and strategic businessroles for their worldwide markets in North America, Latin America, Asia, andEurope. Mr. Adams then served as Global Sales Director for Bostik and GeneralManager of Nitta-Findley Company based in Osaka, Japan and in 2000 joined WardAdhesives, Inc. as a minority owner, General Manager, and Vice President ofSales and Marketing where he led the company to unprecedented growth in salesand net income.

 

# **Barry A. Williamson**

#  

SPACEHAB’sChairman of the Board since 2006, Mr. Williamson is an attorney practicing inAustin, Texas and is a director of Wilson Holdings, Inc. Mr. Williamson is anExecutive Board Member and past Chairman of the Board of Austin Smiles, anot-for-profit organization that provides reconstructive plastic surgery forchildren with complex birth defects. In 1988, he worked for the Reaganadministration as the principal advisor to the U.S. Secretary of Energy in theformulation of a national energy policy. During the administration of formerPresident George H.W. Bush, Mr. Williamson served as Director of the MineralsManagement Service for the U.S. Department of Interior. In 1992, Mr. Williamsonwas elected to the Texas Railroad Commission and served as Chairman from 1994to 1995.

 

# **Roscoe M. Moore, III**

#  

Mr. Moorejoined the Board of Directors in December 2004. In 2007, he was named SPACEHAB’sExecutive Vice President and Chief Strategic and Technical Officer. He is alsothe President and Founder of PeerSat, a company which employs Internet technologiesto deliver satellite-based multimedia content to end-users. From December 1998to November 2002, he was a Venture Capital Associate with SpaceVest VentureCapital, in which he sourced and managed investments in entrepreneurial spaceand satellite companies. Mr. Moore is an Astronautical Engineer and an attorneywith 17 years of private industry and federal government experience incommercializing space technologies for use by private and government end-users.As an Air Force Officer he evaluated foreign ballistic missile and spacetechnology, and he worked as a Nuclear Missile Treaty Inspector in Votkinsk,Russia. Upon leaving U.S. Air Force active duty in 1998, he was appointed bythe U.S. Secretary of Transportation to the Commercial Space TransportationAdvisory Committee to assist in planning commercial space industry regulations,and was appointed by the U.S. Department of State to participate as a U.S.Delegate at the 2000 World Radio-communication Conference. For the past sixyears Mr. Moore has served on the Board of Directors of the Washington SpaceBusiness Roundtable, a not-for-profit organization, and was elected Chairman ofthe Board of Directors in 2004.

 

# **Executive Officers and Key Employees of theCompany who are Not Nominees**

#  

Set forthbelow is a summary of the background and business experience of the executiveofficers of the Company who are not nominees for the Board of Directors.

 
| **Name**            | ** ** | **Age**    | ** ** | **Position(s)**                                                          | ** ** | **With  Company********Since** |
|---------------------|------------|------------|------------|--------------------------------------------------------------------------|------------|--------------------------------|
| ** **          | ** ** | ** ** | ** ** | ** **                                                               | ** ** | ** **                     |
| James D. Royston    |       | 44         |       | President                                                                |       | 2000                           |
|                |       |       |       |                                                                     |       |                           |
| Brian K. Harrington |       | 61         |       | Senior Vice President, Chief Financial Officer, Secretary and  Treasurer |       | 2004                           |
|                |       |       |       |                                                                     |       |                           |
| Michael J. Bowker   |       | 47         |       | Senior Vice President and Chief Operating Officer                        |       | 2007                           |

 

The executiveofficers and key employees named above will serve in such capacities until thenext annual meeting of the Company’s Board of Directors, or until theirrespective successors have been duly elected and have been qualified, or untiltheir earlier death, resignation, disqualification, or removal from office.

 

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# **James D. Royston**

#  

In June 2007,Mr. Royston was appointed to the position of President of SPACEHAB, Inc,responsible for advancing the company’s global space commerce initiatives. Mr.Royston joined SPACEHAB in 2000 and most recently served as Senior VicePresident and General Manager of Astrotech Space Operations. A former RWDTechnologies Inc, executive (NASDAQ -RWDT), Mr. Royston served as the company’se-Learning Director, where he managed company operations, strategic planning,and growth strategies. Mr. Royston also served as the Director of theInformation Management Project Office for United Space Alliance at NASA’sKennedy Space Center (KSC). His aerospace experience also includes acting asthe KSC Operations Director for Orbital Sciences Corporation, overseeing allcontract and business development activities, as well as managing theInformation Systems for NASA’s Hubble Space Telescope Program. He also servedas a Program Manager at NASA Headquarters in Washington, D.C.

 

# **Brian K. Harrington**

#  

Mr. Harringtonjoined SPACEHAB in January 2004 and serves as the Company’s Senior VicePresident, Finance and Chief Financial Officer. Before joining the Company, hewas a financial consultant in private practice for six years. Prior to workingin private practice, he served from 1989 to 1998 as Chief Financial Officer andSenior Vice President of Kirby Corporation (NYSE:KEX). His corporate andconsulting experience includes acquisitions, bank financings, public andprivate placement of debt, public equity transactions, divestures, andrecapitalizations. A Certified Public Accountant, Mr. Harrington began hiscareer in the U.S Army, First Armored Division, where he served as DeputyDivision Finance Officer during the Viet Nam conflict.

 

# **Michael J. Bowker**

#  

Michael J.Bowker has been a principal in the aerospace industry for more than twodecades. Former Vice President of Business Development for SPACEHAB, Mr. Bowkerreturned to the SPACEHAB team as its Chief Operating Officer in 2007. Mr.Bowker’s in-depth knowledge of SPACEHAB and its subsidiaries began in 1998 whenhe oversaw the Company’s marketing, sales and strategic partnership initiativesas Director of Business Development. He was later promoted to the VicePresident role, further leading SPACEHAB to achieve alliances with Astrium inGermany, France, and Great Britain; Boeing; United Space Alliance; and, Embraerin Brazil. From July 2002 to January 2007, until rejoining SPACEHAB in June2007, Mr. Bowker led Astrium North America as its President and CEO where hedirected all major marketing and business development efforts includingsecuring several multi-million dollar aerospace contracts. Mr. Bowker alsoworked for United Space Alliance as their Business Development Director,Rockwell International in their Space Systems Division and NASA’s Kennedy SpaceCenter in their Systems Engineering and Integration office.

 

# **The Board of Directors and its Committees**

#  

# **Director Nomination Process**

#  

SPACEHAB’sdirector nominees are approved by the Board after considering therecommendation of the Corporate Governance and Nominating Committee. A copy ofthe Corporate Governance and Nominating Committee’s charter is available in the“Investor Info” section of the Company’s website at www.spacehab.com.

 

The CorporateGovernance and Nominating Committee has established certain criteria itconsiders as guidelines in considering nominations for the Board of Directors.The criteria include

 

•                  thecandidate’s independence;

•                  thecandidate’s depth of business experience;

•                  thecandidate’s availability to serve;

•                  thecandidates integrity and personal and professional ethics;

•                  thebalance of the business experience on the Board as a whole; and

•                  theneed for specific expertise on the Board.

 

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The criteriaare not exhaustive and the Corporate Governance and Nominating Committee andthe Board of Directors may consider other qualifications and attributes whichthey believe are appropriate in evaluating the ability of an individual toserve as a member of the Board of Directors. The Corporate Governance andNominating Committee’s goal is to assemble a Board of Directors that brings tothe Company a variety of perspectives and skills derived from high qualitybusiness and professional experience. In order to ensure that the Boardconsists of members with a variety of perspectives and skills, the CorporateGovernance and Nominating Committee has not set any minimum qualifications andalso considers candidates with appropriate non-business backgrounds. Other thanensuring that at least one member of the Board is a financial expert and amajority of the Board members meet all applicable independence requirements,the Corporate Governance and Nominating Committee does not have any specificskills that it believes are necessary for any individual director to possess.Instead, the Corporate Governance and Nominating Committee evaluates potentialnominees based on the contribution such nominee’s background and skills couldhave upon the overall functioning of the Board of Directors.

 

For purposesof the 2008 Annual Meeting, the Corporate Governance and Nominating Committeewill consider any nominations received by the Secretary from a Shareholder ofrecord on or before the 120th calendar day before the one-year anniversary dateof the release of these proxy materials to Shareholders. Any such nominationmust be accompanied in writing by all information relating to such person thatis required under the federal securities laws, including such person’s writtenconsent to be named in the Proxy Statement as a nominee and to serving as adirector, if elected, and to a background check. The nominating Shareholdermust also submit their name and address, as well as that of the beneficialowner if applicable, and the class and number of shares of SPACEHAB CommonStock that are owned beneficially and of record by such Shareholder and suchbeneficial owner. Finally, the nominating Shareholder must discuss the nominee’squalifications to serve as a director.

 

# **Committees of the Board of Directors**

#  

The Committeesof the Board of Directors consist of the Audit Committee, the CompensationCommittee, and the Corporate Governance and Nominating Committee. Informationconcerning the committees is set forth below.

 

*The AuditCommittee*, which is composed solely of independentdirectors that meet the requirements of NASD and SEC rules, operates under awritten charter adopted by the Audit Committee and approved by the Board of Directorson May 13, 2004. The charter is available on the Company’s website which iswww.spacehab.com. The Audit Committee is responsible for appointing andcompensating a firm of independent registered public accountants to audit theCompany’s financial statements, as well as oversight of the performance andreview of the scope of the audit performed by the Company’s independentregistered public accountants. The Audit Committee also reviews audit plans andprocedures, changes in accounting policies, and the use of the independentregistered public accountants for non-audit services. As of the end of fiscalyear 2007, the Audit Committee consisted of Mr. Goins (Chairman), Mr.Williamson, and Mr. Adams. During fiscal year 2007, the Audit Committee metseven times. Mr. Goins has since resigned from the Board of Directors.

 

*AffirmativeDeterminations Regarding Director Independence and Financial Experts*

 

The Board ofDirectors has determined each of the following directors to be an “independentdirector” as such term is defined by Rule 4200(a) (15) of the NASD:

 
| Mark Adams |   | Barry  A. Williamson |
|------------|--------|----------------------|

 

The Board ofDirectors has also determined that each member of the Audit Committee, theCompensation Committee, and the Corporate Governance and Nominating Committeeduring the past fiscal year and proposed for the upcoming fiscal year meets theindependence requirements applicable to those committees prescribed by NASD andSEC rules.

 

The Board ofDirectors does not have an audit committee financial expert serving on itsaudit committee since the resignation of Myron J. Goins. The Company isconducting a search for a qualified replacement.

 

*TheCompensation Committee,* which is composed solely ofindependent directors that meet the requirements of NASD and SEC rules, operatesunder a written charter adopted by the Compensation Committee and approved bythe Board of Directors on May 13, 2004, and amended on May 12, 2005. The 

 

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charter isavailable on the Company’s website which is www.spacehab.com. The CompensationCommittee is responsible for determining the compensation and benefits of theChief Executive Officer and all executive officers of the Company andestablishing general policies relating to compensation and benefits ofemployees of the Company. The Compensation Committee administers the Company’s1994 Stock Incentive Plan, the 1995 Directors’ Stock Option Plan, and theEmployee Stock Purchase Plan in accordance with the terms and conditions setforth in those plans. The Compensation Committee also has the authority toretain, approve fees and other terms for, and terminate any compensationconsultant, outside counsel, accountant or other advisor hired to assist theCompensation Committee in the discharge of its responsibilities. As of the endof fiscal year 2007, the Compensation Committee consisted of Mr. Williamson(Chairman), Dr. David, and Mr. Goins. During fiscal year 2007, the CompensationCommittee met three times. Dr. David and Mr. Goins have since resigned from theBoard of Directors.

 

*The Corporate Governance and Nominating Committee*was created by the Board of Directors on February 17, 2004. The CorporateGovernance and Nominating Committee’s charter was adopted by the committee andapproved by the Board on May 13, 2004. The charter is available on the Company’swebsite which is www.spacehab.com. The primary purpose of the CorporateGovernance and Nominating Committee is to provide oversight on the broad rangeof issues surrounding the composition and operation of the Board of Directors,including identifying individuals qualified to become Board members andrecommending to the Board director nominees for the next Annual Meeting ofShareholders. Directors who are members of the Corporate Governance and NominatingCommittee are independent directors that meet the requirements of NASD and SECrules. As of the end of fiscal year 2007 the Corporate Governance andNominating Committee consisted of Mr. Adams (Chairman), Dr. David, and Mr.Goins. During fiscal year 2007, the Corporate Governance and NominatingCommittee met three times. Dr. David and Mr. Goins have since resigned from theBoard of Directors.

 

# **Code of Ethics and Business Conduct**

#  

The Company’sCode of Ethics and Business Conduct applies to all directors, officers, andemployees of SPACEHAB. The key principles of this code include acting legallyand ethically, speaking up, getting advice, and dealing fairly with the Company’sShareholders. The Code of Ethics and Business Conduct is available on theCompany’s website at www.spacehab.com and is available to the Company’sShareholders upon request. The Code of Ethics and Business Conduct meets therequirements for a “Code of Conduct” under the National Association ofSecurities Dealers, Inc. (“NASD”) rules and the SEC rules for financialofficers.

 

# **Section 16(a) Beneficial Ownership ReportingCompliance**

#  

Section 16(a)of the Securities Exchange Act of 1934 requires the Company’s directors andexecutive officers and persons who beneficially own more than 10% of theCompany’s Common Stock to file reports of ownership and changes in ownershipwith the SEC. Such directors, executive officers, and greater than 10%Shareholders are required by SEC regulation to furnish to the Company copies ofall Section 16(a) forms they file. Due dates for the reports are specified bythose laws, and the Company is required to disclose in this document anyfailure in the past fiscal year to file by the required dates. Based solely onwritten representations of the Company’s directors and executive officers andon copies of the reports that they have filed with the SEC, the Company’sbelief is that all of SPACEHAB’s directors and executive officers complied withall filing requirements applicable to them with respect to transactions in theCompany’s equity securities during fiscal year 2006.

 

# **Item 11. Executive Compensation**

#  

# **Compensation Discussion and Analysis**

#  

# **Overview**

#  

SPACEHAB is adeveloper and operator of space flight hardware assets, a provider of mannedand unmanned payload processing services, and an innovator in space commerceand developing space utilization applications. In anticipation of the planned2010 space shuttle retirement, our Company began developing new products andservices within our strategic focus on the commercial exploitations of space.

 

Achieving ourCompany’s aspirations requires a highly skilled and highly motivated employeeteam. Thus, our compensation system is designed to be highly competitive withthose of other companies that compete 

 

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for highlyskilled technical employees and executives. Our performance-based compensationsystem is intended to include incentives for innovation and entrepreneurialspirit.

 

# **Guiding Principles**

#  

TheCompensation Committee strives to achieve our strategic objectives by designingour compensation program to offer competitive base compensation to attract andretain experienced, and highly qualified executive officers while offeringincentives to foster the innovation and entrepreneurial spirit necessary forexecuting our business strategy and rewards for successful achievement ofperformance goals. In designing our executive compensation program, we areguided by five principles:

 

•                  Establish targetcompensation levels that are competitive within the industries and the marketsin which we compete for executive talent;

•                  Structureexecutive compensation so that our executives share in SPACEHAB’s successes andfailures by correlating compensation with target levels based upon businessperformance;

•                  Link pay toperformance by making a substantial percentage of total executive compensationvariable, or “at risk”, through an annual determination of performance-basedincentive compensation;

•                  Align asignificant portion of executive pay with stockholder interests through equityawards; and

•                  Maintain acompany-wide entrepreneurial atmosphere by eliminating special “executive only”benefits or prerequisites.

 

# **Operation of the Compensation Committee**

#  

TheCompensation Committee of the Board of Directors administers our executivecompensation program. The Committee establishes and monitors the Company’soverall compensation strategy to ensure that executive compensation supportsthe Company’s business objectives. In carrying out its responsibilities, theCompensation Committee reviews and determines the compensation (includingsalary, annual incentives, short-term incentives, long-term incentives andother benefits) of the Company’s Chief Executive Officer (“CEO”) and certainnamed executive officers (“NEOs”). References to “CEO” in the CompensationDiscussion and Analysis are to Michael Kearney and Thomas B. Pickens, each ofwhom were the Company’s Chief Executive Officer during part of our fiscal year2007.

 

For a morecomplete discussion of the responsibilities of the Compensation Committee, seethe Committees of the Board of Directors on page 6, and the charter for theCompensation Committee posted on our website at www.spacehab.com.

 

# **The Compensation Program**

#  

The keycomponents of our current compensation program for SPACEHAB executive officersare:

 

•                  Base salary;

•                  Short-term(annual) cash incentives;

•                  Long-termperformance-based and other equity awards; and

•                  Other benefits.

 

To remaincompetitive, the Committee periodically benchmarks our executive compensationprogram to determine how well actual compensation targets and levels compare toour overall philosophy and target markets. The primary focus of thebenchmarking process is on public companies in the aerospace, defense and governmentcontractor industries of similar or otherwise comparable size and complexity.Our benchmarking peer group consists of SpaceDev, Inc.; Integral Systems, Inc.;Axsys Technologies; Ceradyne Inc.; First Aviation Services; Herley Industries,Inc.; Allied Defense Group; Sypris Solutions, Inc.; and Orbital SciencesCorporation. This benchmarking considers information from proxy data for ourCEO and NEOs and was last updated and presented to the Compensation Committeeat its August 6, 2006 meeting. Given our size and recent changes in ourbusiness and revenue mix, the actual companies used in the benchmarking processmay vary from year to year, but generally the comparisons consider practices ofother comparable companies with revenues that generally, for Fiscal Year 2007,range from $10 million to $700 million.

 

TheCompensation Committee retains an outside consultant, Strategic CompensationResearch Associates (“SCRA”), to assist the Committee and to insure that thetotal compensation, not just base salaries, paid to its executive officers arefair and equitable and are determined in accordance with the Guiding Principles

 

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discussedabove. The Compensation Committee met on August 6, 2006 to approve base salariesfor Mr. Kearney, then CEO of the Company, and to review and approve salariesfor the other NEOs at that time. The Board of Directors, with the advice of theCompensation Committee and its compensation consultant, met on March 22, 2007to approve the base salary for Mr. Pickens who assumed the role of CEO onJanuary 1, 2007 upon Mr. Kearney’s retirement. The Board of Directors met onDecember 12, 2006, December 29, 2006, and June 7, 2007 to approve theappointment of other NEOs and to approve base salaries upon those appointments.

 

# **Other Considerations in Determining ExecutiveCompensation**

#  

We believethat our Executive Compensation Program provides consistency and predictabilityamong our senior management that focuses and compensates them on the overallgoals of the Company. Each element of our Executive Compensation Program isstructured towards specific objectives and accordingly, individual awards arenot influenced by gains realized in prior years or awards in other componentsof Executive Compensation. In accordance with this philosophy, incentiveobjectives, once determined, are not adjusted for individual executives andstock options once granted, are not repriced except pursuant to the terms ofthe plan. Unique individual situations, when deemed appropriate by theCompensation Committee, are considered through terms of employment agreements,bonus payments other than bonus pursuant to the Short Term Cash Incentive Planor individual grants of stock options.

 

# **Role of the Compensation Committee and CEO inDetermining Executive Compensation**

#  

For fiscalyear 2007, our CEO, Mr. Kearney provided to the Compensation Committee hisrecommendations with respect to potential compensation for the named executiveofficers who report to him. The Compensation Committee reviewed and gaveconsiderable weight to these recommendations because of Mr. Kearney’s directknowledge of the other executives’ performance and contributions. TheCompensation Committee ultimately used its collective judgment to determine thebase salaries, the bonus formulae, financial performance goals and amounts ofthe resulting target bonuses under the Bonus Plan and the size of each stockoption grant, in each case for the named executive officers. Mr. Pickens, whobecame our CEO in January 2007 was awarded his compensation based on thecollective judgment of the Compensation Committee and upon the advice andconsultation of SCRA, the Compensation Committee retained compensationconsultant. Mr. Pickens was not present at any meeting of the CompensationCommittee where his compensation was discussed or determined.

 

# **Base Salary**

#  

Base salary isdesigned to compensate our NEOs in part for their roles and responsibilities,and also to provide a stable and fixed level of compensation that serves as aretention tool throughout the executive’s career. The Company has employmentagreements with most, but not all, of its NEOs that provide for a minimum basesalary. These initial base salaries were set considering each executive’s rolesand responsibilities at the time he or she joined the Company or the agreementswere later negotiated, considering the skills and future potential of the NEOwith the Company, along with salary levels for similar positions in our targetmarket. Typically, the Compensation Committee reviews the base salaries of eachNEO annually. Adjustments are made based on individual performance, changes inroles and responsibilities, and external market data for similar positions.Salaries are targeted at approximately the 50th percentile for similarpositions within our market, based on the Compensation Committee’s ongoingreview of the benchmarking results.

 

In general,base salary has been the largest component of our overall compensation package.Short-term cash incentives, discussed below, are targeted at a fraction of basesalary amounts and are scaled in accordance with the achievement of performancegoals. Long-term equity incentives have had little value over recent years dueto the decline in the Company’s stock prices resulting from disruptions in thespace shuttle program. Due to the impact of these industry disruptions on ourshort-term cash incentives and long-term equity incentives, base salarycurrently plays a more substantial role in our overall executive compensationstructure than it is intended.

 

# **Short-term Cash Incentives**

#  

We provideannual incentive awards under our Key Employee Incentive Bonus Plan (the “BonusPlan”) usually in cash. These short-term cash incentives are designed to rewardthe achievement of specific, preset 

 

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financialresults measured over the fiscal year in which that compensation is earned.Generally, we compute the Bonus Plan after the end of each fiscal year and makethe cash awards during the first quarter of the next fiscal year. The BonusPlan encompasses all employees of the Company based upon maximum award levelsstated as a percentage of base salary (“Payout Percentage”). The maximum awardlevels are set within our salary-grade structure for each salary grade rangingfrom 2% for all employees below our “Director Level” (the salary-grade leveljust below Vice President) and range from 25% for Director Level to 50% forChief Executive Officer.

 

The Bonus Plangenerally encompasses four “Bonus Objectives” set by the Compensation Committeeat the beginning of the fiscal year. Each Bonus Objective carries a weight,(generally 25%) of the total Payout Percentage of the Bonus Plan. The sum ofthe Payout Percentage for each of the Bonus Objectives, ranging from 0 to 100%,then is applied to the award levels, discussed in the preceding paragraph, foreach employee to determine the Bonus Award. For fiscal year 2007, theCompensation Committee had established the following four Bonus Objectives:

 

•                  Positive NetIncome – A Payout Percentage of 25% would be awarded if the Companyachieved positive net income for fiscal year 2007.

•                  OperatingIncome Performance – A Payout Percentage of 5% would be awarded if adjustedoperating income exceeded $235,000 and an additional 5% would be awarded foreach additional increment of $235,000, up to a total Payout Percentage of 25%.

•                  Cash FlowPerformance – A Payout Percentage of 5% would be awarded if adjusted cashflow from operations exceeded $242,000 and an additional 5% would be awardedfor each additional increment of $242,000, up to a total Payout Percentage of25%.

•                  Backlog –A Payout Percentage of 5% would be awarded if the Company’s June 30, 2007backlog exceeded $2,845,000 and an additional 5% would be awarded for eachadditional increment of $2,845,000, up to a total Payout Percentage of 25%.

 

Given thevagaries of the marketplace and the possibility of unforeseen developments, theCompensation Committee has discretionary authority to adjust such awards toreflect actual performance in light of such developments or to make otherdiscretionary adjustments to the overall Payout Percentage or to individualemployee bonuses. Bonus maximum award levels range from 30% to 50% of basesalaries for our NEOs. On average, we target our short term cash incentives tocomprise approximately 15% of the total compensation package of our NEOs.

 

For fiscalyear 2007, the Company reported negative net income and failed to achieve therequired threshold in each of the other three Bonus Objectives and,accordingly, no payments were made under the Bonus Plan. Since there were nopayouts under the Bonus Plan, short-term cash incentives were not a componentof executive compensation for fiscal year 2007.

 

# **Long-term Non-cash Incentive Awards**

#  

Our long-termincentive awards are used to link Company performance and increases inShareholder value to the total compensation for our NEOs. These awards are alsokey components of our ability to attract and retain our NEOs. The annualizedvalue of the awards to our NEOs is intended to be the largest component of ouroverall compensation package. On average, and assuming performance is ontarget, these awards currently represent over 10% of the total compensationpackage, consistent with our emphasis on linking executive pay to Shareholdervalue.

 

OurShareholder-approved incentive plans allow for the granting of stock optionsbased upon SPACEHAB’s stock prices in the public markets. Stock options aregranted with an exercise price not less than the market price of our commonstock on the grant date. Options generally vest over a period of four yearswith 25% becoming exercisable on each anniversary of the grant date as long asthe recipient is still employed by the Company on the date of vesting, and generallyexpire after ten years. Stock options only have value if the Company’s stockprice appreciates after the options are granted.

 

Stock optionsare generally granted annually at about the same time as awards of the KeyEmployee Incentive Bonus Plan. Awards are made to all employees, includingNEOs, at the Director Level or higher. The target awards are set for NEOs andother employees of the Company based upon salary-grade levels within ourcompensation system and range from 4,000 shares for Director Level to 41,000shares for the

 

10

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ChiefExecutive Officer. The Company’s NEOs, other than the Chief Executive Officerreceive 12,000 to 20,000 shares. Stock option awards were made in August 2006in amounts for our NEOs as set forth in the table labeled Fiscal Year 2007Grants of Plan-Based Awards on page 13.

 

# **Benefits**

#  

Our benefitprograms are established based upon an assessment of competitive market factorsand a determination of what is needed to attract and retain high caliberexecutives. SPACEHAB’s primary benefits for executives include participation inthe Company’s broad-based plans: the 401(k) Plan, the employee stock purchaseplan, the Company’s health, dental and vision plans and term life anddisability insurance plans. The Company also provides certain executives,including some NEOs, with supplemental disability insurance. This plan offersadditional income protection to Senior Vice Presidents and above and isprovided to supplement the monthly benefit amounts that are capped in thegeneral disability policy. The Company provides 1.5 times the NEO’s annual basesalary to a maximum of $300,000 in term life insurance and pays the premium forsuch insurance. The fair value of premiums paid in excess of IRS limitationsare included as other income reported for the NEO.

 

# **Indemnification Agreements**

#  

The Companyhas entered into indemnification agreements with each of its NEOs. Theagreements provide that the Company shall indemnify and hold harmless eachindemnitee from liabilities incurred as a result of such indemnitee’s status asan officer, or employee of the Company, subject to certain limitations.

 

# **Post-Termination Compensation**

#  

TheCompensation Committee believes that severance benefits and change of controlbenefits are necessary in order to attract and retain the caliber and qualityof executive that the Company needs in its most senior positions. Thesebenefits are particularly important in an industry subject to rapid technicalchange and influenced by changes in political priorities, providing forcontinuity of senior management and helping executives focus on results andstrategic initiatives.

 

Each of ourNEOs, with the exception of our Chief Executive Officer and our ChiefTechnology Officer, have employment agreements that provide for severancepayments and benefits if termination occurs without “cause” or if the executiveleaves for “good reason”. There is also additional compensation provided forour Chief Financial Officer in circumstances following such termination after a“Change in Control,” as defined in the employment agreement. Our ChiefFinancial Officer’s employment agreement terminates on December 31, 2007 andhas not been renewed. Additional information regarding the severance and changein control payments, including a definition of key terms and a quantificationof benefits that would have been received by our NEOs had termination occurredon June 30, 2007, is found under Potential Payments upon Termination or Changein Control beginning on page 15.

 

During fiscalyear 2007 several of our executive officers were terminated as defined in theiremployment agreements. A summary of their termination benefits is provided onpage 16.

 

# **Stock Ownership Guidelines**

#  

The Companyhas not established stock ownership guidelines.

 

# **Tax Deductibility Policy**

#  

TheCompensation Committee considers the deductibility of compensation for federalincome tax purposes in the design of the Company’s compensation programs. Webelieve that all of the incentive compensation paid to our NEOs for fiscal year2007 qualifies as “performance-based compensation” and thus, is fullydeductible by the Company for federal income tax purposes. While we generallyseek to ensure the deductibility of the incentive compensation paid to ourNEOs, the Compensation Committee intends to retain the flexibility necessary toprovide cash and equity compensation in line with competitive practice, ourcompensation philosophy, and the best interest of our Shareholders even ifthese amounts are not fully tax deductible.

 

# **Compensation Committee Interlocks and InsiderParticipation**

#  

The Company’sCompensation Committee consists of Barry A. Williamson (Chairman) and MarkAdams. Mr. Adams is President and Chief Executive Officer of Advocate MDFinancial Group, Inc. (“Advocate”). 

 

11

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Mr. Pickensserves on the Board of Directors of Advocate; however, Mr. Pickens is not amember of the Compensation Committee of Advocate.

 

Tejas, Inc., acompany related to the Company by Mr. Williamson as a member of the Board ofDirectors, has owned significant common stock holdings of the Company from timeto time. Tejas, Inc. does not currently have beneficial ownership of fivepercent or more of the Company’s common stock. PMB Helin Donovan LLP, theCompany’s independent auditor also audits Tejas, Inc.

 

PMB HelinDonovan LLP is the independent auditor for Wilson Holding, Inc., a company withMr. Williamson as a common board member with the Company.

 

# **Compensation Committee Report**

#  

TheCompensation Committee of the Board of Directors of SPACEHAB, Incorporatedoversees the Company’s compensation program on behalf of the Board ofDirectors. In fulfilling its oversight responsibilities, the CompensationCommittee reviewed and discussed with management the Compensation Discussionand Analysis set forth herein and in the Proxy Statement.

 

In reliance onthe review and discussions referred to above, the Compensation Committeerecommended to the Board of Directors that the Compensation Discussion andAnalysis be incorporated in the Company’s Annual Report on Form 10-K for thefiscal year ended June 30, 2007 and the Company’s Proxy Statement to be filedin connection with the Company’s 2007 Annual Meeting of Stockholders.

 

Compensation Committee:

Barry A. Williamson, Chairman

Mark Adams

 

# **Executive Compensation**

#  

The SummaryCompensation Table provides compensation information about our principalexecutive officer, principal financial officer and the most highly compensatedexecutive officers other than the principal executive officer and principalfinancial officer. Additionally, the table also lists our former principalexecutive officer and three former executives who served as executive officersduring part of fiscal year 2007, but who were not executive officers at fiscalyear-end whose total compensation earned for the portion of the year servedwould otherwise make such former executives one of the three most highlycompensated executives for fiscal year 2007.

 

# **Fiscal Year 2007 Summary Compensation Table**

| **Name and Principal Position**              | ** ** | **Year** | ** ** | **Salary ($)** | ** ** | **Bonus  ($)(1)** | ** ** | **Option  Awards  ($)(2)** | ** ** | **All Other  Compensation  ($)(3)** | ** ** | **Total  ($)** | ** ** |
|-------------------------------------------------------------|------------|----------|------------|---------------------|------------|-------------------|------------|----------------------------|------------|------------------------------------------|------------|----------------|------------|
| Thomas B. Pickens, III  Chief Executive Officer             |       | 2007     |       | 178,615             |       | 0                 |       | 0                          |       |                                     |       | 178,615        |       |
| Brian K. Harrington  Chief Financial Officer                |       | 2007     |       | 225,000             |       | 0                 |       | 23,000                     |       | 11,280                                   |       | 259,280        |       |
| James D. Royston  President                                 |       | 2007     |       | 183,649             |       | 0                 |       | 23,000                     |       | 2,578                                    |       | 209,227        |       |
| Michael J. Bowker  Chief Operating Officer                  |       | 2007     |       | 6,846               |       | 0                 |       | 0                          |       | 342                                      |       | 7,188          |       |
| Roscoe M. Moore, III  Chief Strategic and Technical Officer |       | 2007     |       | 14,134              |       | 72,917            |       | 0                          |       | 337                                      |       | 87,388         |       |
| Nicholas G. Morgan  Former Chief Accounting Officer         |       | 2007     |       | 111,065             |       | 0                 |       | 13,800                     |       | 5,553                                    |       | 130,418        |       |
| Michael E. Kearney  Former Chief Executive Officer          |       | 2007     |       | 338,085             |       | 0                 |       | 47,150                     |       | 3,195                                    |       | 388,430        |       |
| Michael E. Bain  Former Chief Operating Officer             |       | 2007     |       | 235,007             |       | 0                 |       | 23,000                     |       | 7,415                                    |       | 265,422        |       |
| E. Michael Chewning  Former Senior Vice President           |       | 2007     |       | 164,502             |       | 0                 |       | 23,000                     |       | 1,061                                    |       | 188,563        |       |

 

----

(1)          See narrative on Short Term Cash Incentives.

(2)          See narrative on Long Term Incentive Awards.

(3)          See Schedule of All Other Compensation.

 

12

----

 

**Schedule of All Other Compensation**

 
| **Named Executive Officer** | ** ** | **401(K) Plan Company  Matching Contributions  ($)** | ** ** | **Supplemental  Disability Insurance  Premium ($)** | ** ** | **Total  ($)** | ** ** |
|---------------------------------------|------------|---------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|----------------|------------|
| Thomas B. Pickens, III                |       | 0                                                                   |       | 0                                                             |       | 0              |       |
| Brian K. Harrington                   |       | 10,000                                                              |       | 1,280                                                         |       | 11,280         |       |
| James D. Royston                      |       | 1,837                                                               |       | 741                                                           |       | 2,578          |       |
| Michael J. Bowker                     |       | 342                                                                 |       | 0                                                             |       | 342            |       |
| Roscoe M. Moore, III                  |       | 337                                                                 |       | 0                                                             |       | 337            |       |
| Nicholas G. Morgan                    |       | 5,553                                                               |       | 0                                                             |       | 5,553          |       |
| Michael E. Kearney                    |       | 2,465                                                               |       | 730                                                           |       | 3,195          |       |
| Michael E. Bain                       |       | 6,750                                                               |       | 665                                                           |       | 7,415          |       |
| E. Michael Chewning                   |       | 0                                                                   |       | 1,061                                                         |       | 1,061          |       |

#  

# **Fiscal Year 2007 Grants of Plan-Based Awards**

#  

The followingtable shows additional information regarding: (i) the target and maximum levelof annual cash incentive awards for our executive officers for performanceduring fiscal year 2007, as established by the Compensation Committee in August2006 under our Key Employee Incentive Bonus Plan; and (ii) stock option awardsgranted in August 2006 that were awarded to help retain the NEOs and focustheir attention on building Shareholder value. The actual amount of the annualcash incentive award received by each NEO for performance during fiscal year2007 is shown in the Fiscal Year 2007 Summary Compensation Table.

 
| ** **             | ** ** | ** **          | ** ** | **Estimated Possible Payouts** | ** ** | ** **                      | ** ** | ** **                            | ** ** | **Grant Date** | ** ** |
|------------------------|------------|---------------------|------------|------------------------------------------|------------|---------------------------------|------------|---------------------------------------|------------|---------------------|------------|
| ** **             | ** ** | ** **          | ** ** | **Under Non-Equity Incentive**           | ** ** | **All Other Stock**   | ** ** | ** **                            | ** ** | **Fair Value** | ** ** |
| ** **             | ** ** | ** **          | ** ** | **Plan Awards**                     | ** ** | **Awards: Number of** | ** ** | ** **                            | ** ** | **of Stock**   | ** ** |
| ** **             | ** ** | ** **          | ** ** | **Target**                               | ** ** | **Maximum**                     | ** ** | **Shares of Stock or** | ** ** | **Exercise**        | ** ** | **and Option** | ** ** |
| **Name**               | ** ** | **Grant Date** | ** ** | **($)(1)**                               | ** ** | **($ )(1)**                | ** ** | **Units (#)(2)**                 | ** ** | **Price**           | ** ** | **Awards** | ** ** |
| Thomas B. Pickens, III |       | 12/12/2006          |       | ––                             |       | ––                    |       | 5,000                                 |       | $                   | 0.72       |   | –– |   |
| Brian K. Harrington    |       | 8/9/2006            |       | 39,375                                   |       | 78,750                          |       | 20,000                                |       | $                   | 1.15       |   | 19,632 |   |
| Roscoe M. Moore, III   |       | 12/12/2006          |       | 2,120                                    |       | 4,240                           |       | 5,000                                 |       | $                   | 0.72       |   | –– |   |
| Nicholas G. Morgan     |       | 8/9/2006            |       | 16,660                                   |       | 33,320                          |       | 12,000                                |       | $                   | 1.15       |   | 11,779 |   |
| Michael E. Kearney     |       | 8/9/2006            |       | 0                                        |       | 0                               |       | 41,000                                |       | $                   | 1.15       |   | 40,246 |   |
| Michael E. Bain        |       | 8/9/2006            |       | 0                                        |       | 0                               |       | 20,000                                |       | $                   | 1.15       |   | 19,632 |   |
| E. Michael Chewning    |       | 8/9/2006            |       | 0                                        |       | 0                               |       | 20,000                                |       | $                   | 1.15       |   | 19,632 |   |
| James D. Royston       |       | 8/9/2006            |       | 32,139                                   |       | 64,277                          |       | 20,000                                |       | $                   | 1.15       |   | 19,632 |   |
| Michael J. Bowker      |       | ––        |       | 1,198                                    |       | 2,396                           |       | ––                          |       | ––        |       | –– |   |

 

----

(1)          Estimated target bonus percentage is 50% of maximum amount availablewithin individual’s bonus bracket.

(2)          Mr. Pickens, Mr. Bowker and Mr. Moore joined the Company as employeesafter fiscal year 2007 awards were granted.

 

# **Employment Agreements**

#  

At the closeof fiscal year 2007, the Company had employments agreements with Mr.Harrington, Mr. Royston and Mr. Bowker. Mr. Pickens, Mr. Moore and Mr. Morgando not have employment agreements. Mr. Kearney, Mr. Bain and Mr. Chewning hademployment agreements at the time of their termination of employment. Eachemployment agreement sets forth, among other things, the NEO’s minimum basesalary, bonus opportunities and provisions with respect to certain payments andother benefits upon termination of employment under certain circumstances (suchas without “Cause” or leaving employment of “Good Reason,” as defined in theagreements) or , in certain agreements, after a change in control of theCompany. Please see Potential Payments Upon Termination or Change in Controlbeginning on page 15 for a description of such provisions and for a descriptionof post termination payments paid to Mr. Kearney, Mr. Bain and Mr. Chewning.

 

13

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The minimumbase salary set in the employment agreement for Mr. Harrington is $200,000, forMr. Royston $180,000, and for Mr. Bowker $178,000. The Compensation Committeeincreased Mr. Harrington’s base salary to $225,000 in August, 2005. TheCompensation Committee has established a base salary of $350,000 for Mr.Pickens, $175,000 for Mr. Moore and $116,000 for Mr. Morgan. Mr. Kearney, Mr.Bain and Mr. Chewning were paid their salary pro rata through the date of theirtermination of employment from the Company.

 

The NEOsparticipate in the Key Employee Incentive Bonus Plan in accordance with theterms of the plan which includes all employees of the Director Level and above.In accordance with that Plan, Mr. Pickens receives a maximum bonus of 50%, Mr.Royston 35%, Mr. Harrington 35%, and Mr. Moore 35%. In accordance with theplan, Mr. Bowker and Mr. Morgan receive 30%.

 

# **Awards**

#  

In August 2006the Compensation Committee awarded stock options to the Company’s NEOs inaccordance with the Annual Stock Option Grant Program. The CompensationCommittee also awarded bonuses to employees other than NEOs under the KeyEmployee Incentive Bonus Plan for fiscal year 2006. Mr. Royston was awarded abonus of $4,981.97 at this time. The Company failed to achieve any of the fourBonus Objectives in the Key Employee Incentive Bonus Plan for fiscal year 2007and, accordingly, no bonuses were awarded. The Compensation Committee also didnot award stock option grants under the Annual Stock Option Grant Program forfiscal year 2007.

 

Recognizingthe Company’s restructuring and recapitalization initiatives at the beginningof fiscal year 2007, the Compensation Committee has not established Bonus Objectivesunder the Key Employee Incentive Bonus Plan for fiscal year 2008.

 

# **Salary and Bonus in Proportion to TotalCompensation**

#  

As noted inthe Compensation Discussion and Analysis beginning on page 7, we believe that asubstantial portion of each NEO’s compensation should be in the form ofperformance based awards, including stock option awards. During fiscal year2007, the Company failed to achieve any of its Bonus Objectives and,accordingly, no Incentive Bonus Awards were made. Total compensation of ourNEOs due to no achievement of the Incentive Bonus Objectives, was substantiallyall in the form of base salary and benefits. The Compensation Committeebelieves that our current compensation program is out of line with the changingindustry environment of the space industry and the required entrepreneurialcommitment of its NEOs and has engaged its compensation consultant to assistthe committee in developing a new equity incentive based compensation structurefor fiscal year 2008 and later years.

 

14

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# **Outstanding Equity Awards at Fiscal Year 2007End**

#  

The followingtable shows certain information about unexercised options at June 30, 2007.

 

**Schedule of Outstanding Equity Awards**

 
| ** **             | ** ** | **Option Awards**                                                                                | ** ** |
|------------------------|------------|-------------------------------------------------------------------------------------------------------|------------|
| **Name**               | ** ** | **Number of Securities  Underlying Unexercised  Options (#) Exercisable(1)** | ** ** | **Number of Securities  Underlying Unexercised  Options (#) Unexercisable(2)** | ** ** | **Option  Exercise Price  ($)** | ** ** | **Option  Expiration Date** | ** ** |
| Thomas B. Pickens, III |       |                                                                                                  |       |   |   |   |   |   |   |
| Brian K. Harrington    |       | 0                                                                                                     |       | 20,000 |   | 1.15 |   | 8/9/2016 |   |
|                   |       | 5,000                                                                                                 |       | 15,000 |   | 1.43 |   | 8/3/2015 |   |
|                   |       | 10,000                                                                                                |       | 10,000 |   | 2.41 |   | 8/16/2014 |   |
|                   |       | 5,000                                                                                                 |       | 5,000 |   | 1.75 |   | 1/6/2014 |   |
| James D. Royston       |       | 0                                                                                                     |       | 20,000 |   | 1.15 |   | 8/9/2016 |   |
|                   |       | 3,000                                                                                                 |       | 9,000 |   | 1.43 |   | 8/3/2015 |   |
|                   |       | 6,000                                                                                                 |       | 6,000 |   | 2.41 |   | 8/16/2014 |   |
|                   |       | 3,000                                                                                                 |       | 1,000 |   | 1.02 |   | 8/7/2013 |   |
|                   |       | 3,000                                                                                                 |       | 0 |   | 0.70 |   | 9/17/2012 |   |
| Michael J. Bowker      |       | 0                                                                                                     |       | 0 |   | 0 |   | 0 |   |
| Roscoe M. Moore, III   |       | 0                                                                                                     |       | 0 |   | 0 |   | 0 |   |
| Nicholas G. Morgan     |       | 0                                                                                                     |       | 12,000 |   | 1.15 |   | 8/9/2016 |   |
|                   |       | 3,000                                                                                                 |       | 9,000 |   | 1.43 |   | 8/3/2015 |   |
|                   |       | 2,000                                                                                                 |       | 2,000 |   | 2.41 |   | 8/16/2014 |   |
|                   |       | 2,000                                                                                                 |       | 1,000 |   | 1.02 |   | 8/7/2013 |   |
|                   |       | 2,000                                                                                                 |       | 0 |   | 0.70 |   | 9/17/2012 |   |
| Michael E. Kearney     |       | 0                                                                                                     |       | 0 |   | 0 |   | 0 |   |
| Michael E. Bain        |       | 0                                                                                                     |       | 0 |   | 0 |   | 0 |   |
| E. Michael Chewning    |       | 0                                                                                                     |       | 0 |   | 0 |   | 0 |   |

 

----

(1)          All exercisable options will expire 90 days after the date oftermination.

(2)          Options vest ratable over a four year period. The following tableprovides information with respect to the vesting of each NEO’s outstandingunexercisable options that are set forth in the above table:

 

**Schedule of Vesting of Stock Option Grants**

 
| **Name**            | ** ** | **Award Type** | ** ** | **1/6/2008** | ** ** | **8/3/2007** | ** ** | **8/7/2007** | ** ** | **8/9/2007** | ** ** | **8/16/2007** | ** ** | **8/3/2008** | ** ** | **8/9/2008** | ** ** | **8/16/2008** | ** ** | **8/3/2009** | ** ** | **8/9/2009** | ** ** | **8/9/2010** | ** ** |
|---------------------|------------|---------------------|------------|--------------|------------|--------------|------------|--------------|------------|--------------|------------|---------------|------------|--------------|------------|--------------|------------|---------------|------------|--------------|------------|--------------|------------|--------------|------------|
| Brian K. Harrington |       | Stock Options       |       | 5,000        |       | 5,000        |       | 0            |       | 5,000        |       | 5,000         |       | 5,000        |       | 5,000        |       | 5,000         |       | 5,000        |       | 5,000        |       | 5,000        |       |
| James D. Royston    |       | Stock Options       |       | 0            |       | 3,000        |       | 1,000        |       | 5,000        |       | 3,000         |       | 3,000        |       | 5,000        |       | 3,000         |       | 3,000        |       | 5,000        |       | 5,000        |       |
| Nicholas G. Morgan  |       | Stock Options       |       | 0            |       | 3,000        |       | 1,000        |       | 3,000        |       | 1,000         |       | 3,000        |       | 3,000        |       | 1,000         |       | 3,000        |       | 3,000        |       | 3,000        |       |

#  

# **2007 Option Exercises and Stock Vested**

#  

During fiscalyear 2007 there were no stock options exercised or stock awards realized.

 

# **Pension Benefits**

#  

All employeesof the Company, including NEOs are eligible to participate in the SPACEHAB401(k) plan. In accordance with this plan, employees are eligible to contributeup to 25% of their base salary subject to Internal Revenue Service limitationsinto the plan with all such contributions being fully vested upon contribution.The Company will match, dollar for dollar, up to 5% of the employee’scontributions. Employer contributions into the plan vest pro-rata after 3 yearsof vesting service and are fully vested thereafter. The Company has noadditional Pension Benefits for its NEOs.

 

The Companyhas no Nonqualified Deferred Compensation Plans and none of the NEOs haveaccrued any benefits or rights to payments other than the SPACEHAB 401(k) Planand potential payments upon termination discussed below.

 

# **Potential Payments Upon Termination or Changein Control**

#  

As noted underCompensation Discussion and Analysis – Post-Termination Compensation on page11, we have entered into employments agreements with some of our NEOs thatprovide for payments and other benefits in connection with the officer’stermination for a qualifying event or circumstance and, in some 

 

15

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agreements,for enhanced payments in connection with such termination after a Change inControl (as defined in the applicable agreement). A description of the terms withrespect to each of these types of terminations follows.

 

# **Termination Other Than After a Change inControl**

#  

The employmentagreements for Mr. Royston, Mr. Bowker, Mr. Kearney, Mr. Bain and Mr. Chewningprovide or provided for payments of certain benefits, as described below, uponthe termination of the employment of the NEO. The NEO’s rights upon terminationof his or her employment depend upon the circumstances of the termination.Central to an understanding of the rights of each NEO under the employmentagreements is an understanding of the definitions of “Cause” and “Good Reason”that are used in those agreements. For purposes of the employment agreements,the Term of Employment may be terminated at any time by the Company upon thefollowing:

 

•                  Death of theNEO;

•                  In the event ofphysical or mental disability where the NEO is unable to perform his/herduties;

•                  For Cause or “MaterialBreach” where Cause is defined as conviction of certain crimes and/or felonies,and Material Breach is defined to include certain specified failures to performduties or uphold fiduciary responsibilities;

•                  In the event ofcontinuous poor or unacceptable performance of duties; or

•                  Otherwise at thediscretion of the Company and subject to the termination obligations set forthin the employment agreement.

 

The NEO mayterminate the Term of Employment at any time upon the following:

 

•                  Upon the deathof the NEO;

•                  In the event ofphysical or mental disability where the NEO is unable to perform his/herduties;

•                  Upon the Company’smaterial reduction in the NEO’s authority, perquisites, position, title orresponsibilities; or

•                  Otherwise at thediscretion of the NEO and subject to the termination obligations set forth inthe employment agreement.

 

The benefitsto be provided to the NEO in each of these situations are described in thetables below, which assume that the termination had taken place on June 30,2007, the last day of our most recent fiscal year.

 

# **Termination after a Change in Control**

#  

The provisionsin Mr. Harrington’s employment agreement with respect to a termination after aChange in Control function in a similar manner to the severance provisionsdescribed above, except that Mr. Harrington becomes entitled to benefits underthese provisions only if his employment is terminated within twelve monthsfollowing a Change in Control. A Change in Control for this purpose is definedto mean (i) the acquisition by any person or entity of the beneficial ownershipof securities representing 20% or more of the outstanding securities of theCompany having the right under ordinary circumstances to vote at an election ofthe Board of Directors of the Company; (ii) the date on which one-third or moreof the members of the Board of Directors of the Company consists of personsother than directors nominated by a majority of the directors on the Board ofDirectors at the time of their election; and (iii) the consummation of certaintypes of transactions, including mergers and the sale or other disposition ofall, or substantially all, of the Company’s assets.

 

As with theseverance provisions described above, the rights to which Mr. Harrington isentitled under the Change in Control provision upon a termination of employmentare dependent on the circumstances of the termination. The definitions of Causeand other reasons for termination are the same in this termination scenario asin a termination other than after a Change in Control.

 

# **Payment Obligations Under EmploymentAgreements Upon Termination of Employment of NEO**

#  

The followingtables set forth our payment obligations under the employment agreements underthe circumstances specified upon a termination of the employment of our NEOs.Unless otherwise noted, the descriptions of the payments below are applicableto all of the tables relating to potential payments upon termination or aChange in Control.

 

16

----

 

EquityAcceleration – The Company has no agreements to accelerate the vesting ofoutstanding equity awards upon termination, including termination pursuant to aChange in Control. The Compensation Committee oversees the Executive StockOption Plan and is charged with the responsibility of reviewing and grantingexceptions to previously issued equity grants on a case by case basis.

 

Health CareBenefits – The employment agreements generally provide that, after resignationfor Good Reason or termination without Cause, our Company will continueproviding medical, dental, and vision coverage to the NEO and the NEO’sdependents at least equal to that which would have been provided if the NEO’semployment had not terminated, if such coverage continues to be available toour Company, until the earlier of (a) the date the NEO becomes eligible for anycomparable medical, dental, or vision coverage provided by any other employerof (b) the end date of an enumerated period following the NEO’s date oftermination. For each of the NEOs employed by the Company as of June 30, 2007with employment agreements outstanding, this date is six months after the dateof termination, except for Mr. Harrington, who in the event of a Change inControl, would be eligible for continued benefits for twelve months.

 

# **Brian K. Harrington**

 
| **Benefits and Payments Upon Termination** | ** ** | **Resignation for  Good Reason  or Termination  Without Cause  (1)** | ** ** | **Termination  for Other Than  Good Reason  or Termination  With Cause** | ** ** | **Resignation  for Good  Reason or  Termination  Without  Cause After  Change-in-  Control(2)** | ** ** | **Disability** | ** ** | **Death** | ** ** |
|----------------------------------------------------------------|------------|------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------|------------|----------------|------------|-----------|------------|
| **Compensation: Harrington**                                   |       |                                                                                     |       |                                                                                              |       |                                                                                                           |       |           |       |      |       |
| Base Salary                                                    |       | 112,500                                                                                  |       | 0                                                                                                 |       | 225,000                                                                                                        |       | 112,500        |       | 112,500   |       |
| Bonus                                                          |       | 0                                                                                        |       | 0                                                                                                 |       | 0                                                                                                              |       | 0              |       | 0         |       |
|                                                           |       |                                                                                     |       |                                                                                              |       |                                                                                                           |       |           |       |      |       |
| **Equity:**                                                    |       |                                                                                     |       |                                                                                              |       |                                                                                                           |       |           |       |      |       |
| Options                                                        |       | 0                                                                                        |       | 0                                                                                                 |       | 0                                                                                                              |       | 0              |       | 0         |       |
|                                                           |       |                                                                                     |       |                                                                                              |       |                                                                                                           |       |           |       |      |       |
| **Benefits and Perquisites:**                                  |       |                                                                                     |       |                                                                                              |       |                                                                                                           |       |           |       |      |       |
| Post-Termination Health Care                                   |       | 6008                                                                                     |       | 0                                                                                                 |       | 12,016                                                                                                         |       | 6008           |       | 6008      |       |
| Life Insurance Premiums                                        |       | 0                                                                                        |       | 0                                                                                                 |       | 0                                                                                                              |       | 0              |       | 0         |       |
| Accrued Vacation Pay(3)                                        |       | 25,961                                                                                   |       | 25,961                                                                                            |       | 25,961                                                                                                         |       | 25,961         |       | 25,961    |       |
|                                                           |       |                                                                                     |       |                                                                                              |       |                                                                                                           |       |           |       |      |       |
| **Total:**                                                     |       | 144,469                                                                                  |       | 25,961                                                                                            |       | 262,977                                                                                                        |       | 144,469        |       | 144,469   |       |

 

----

(1)          Assumes six months of base salary and benefits after termination.

(2)          Assumes 12 months of base salary, average cash bonus from two prioryears and 12 months of benefits in such a termination.

(3)          Assumes 280 days of accrued vacation upon termination.

 

17

----

 

# **James Royston**

 
| **Benefits and Payments Upon Termination** | ** ** | **Resignation for  Good Reason  or Termination  Without Cause  (1)** | ** ** | **Termination  for Other Than  Good Reason  or Termination  With Cause** | ** ** | **Resignation  for Good  Reason or  Termination  Without  Cause After  Change-in-  Control(2)** | ** ** | **Disability** | ** ** | **Death** | ** ** |
|----------------------------------------------------------------|------------|------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------|------------|----------------|------------|-----------|------------|
| **Compensation: Royston**                                      |       |                                                                                     |       |                                                                                              |       |                                                                                                           |       |           |       |      |       |
| Base Salary                                                    |       | 90,000                                                                                   |       | 0                                                                                                 |       | 90,000                                                                                                         |       | 90,000         |       | 90,000    |       |
| Bonus                                                          |       | 0                                                                                        |       | 0                                                                                                 |       | 0                                                                                                              |       | 0              |       | 0         |       |
|                                                           |       |                                                                                     |       |                                                                                              |       |                                                                                                           |       |           |       |      |       |
| **Equity:**                                                    |       |                                                                                     |       |                                                                                              |       |                                                                                                           |       |           |       |      |       |
| Options                                                        |       | 0                                                                                        |       | 0                                                                                                 |       | 0                                                                                                              |       | 0              |       | 0         |       |
|                                                           |       |                                                                                     |       |                                                                                              |       |                                                                                                           |       |           |       |      |       |
| **Benefits and Perquisites:**                                  |       |                                                                                     |       |                                                                                              |       |                                                                                                           |       |           |       |      |       |
| Post-Termination Health Care                                   |       | 4242                                                                                     |       | 0                                                                                                 |       | 4242                                                                                                           |       | 4242           |       | 4242      |       |
| Life Insurance Premiums                                        |       | 0                                                                                        |       | 0                                                                                                 |       | 0                                                                                                              |       | 0              |       | 0         |       |
| Accrued Vacation Pay(3)                                        |       | 20,769                                                                                   |       | 20,769                                                                                            |       | 20,769                                                                                                         |       | 20,769         |       | 20,769    |       |
|                                                           |       |                                                                                     |       |                                                                                              |       |                                                                                                           |       |           |       |      |       |
| **Total:**                                                     |       | 115,011                                                                                  |       | 20,769                                                                                            |       | 115,011                                                                                                        |       | 115,011        |       | 115,011   |       |

 

----

(1)          Assumes six months of base salary and benefits after termination.

(2)          Mr. Royston has no special provision on change in control.

(3)          Assumes 280 days of accrued vacation upon termination.

 

# **Michael Bowker**

| **Benefits and Payments Upon Termination** | ** ** | **Resignation for  Good Reason  or Termination**

**Without Cause  (1)** | ** ** | **Termination  for Other Than  Good Reason  or Termination  With Cause** | ** ** | **Resignation  for Good  Reason or  Termination  Without  Cause After  Change-in-  Control(2)** | ** ** | **Disability** | ** ** | **Death** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------|------------|----------------|------------|-----------|------------|
| **Compensation: Bowker**                                       |       |                                                                                         |       |                                                                                              |       |                                                                                                           |       |           |       |      |       |
| Base Salary                                                    |       | 89,000                                                                                       |       | 0                                                                                                 |       | 89,000                                                                                                         |       | 89,000         |       | 89,000    |       |
| Bonus                                                          |       | 0                                                                                            |       | 0                                                                                                 |       | 0                                                                                                              |       | 0              |       | 0         |       |
|                                                           |       |                                                                                         |       |                                                                                              |       |                                                                                                           |       |           |       |      |       |
| **Equity:**                                                    |       |                                                                                         |       |                                                                                              |       |                                                                                                           |       |           |       |      |       |
| Options                                                        |       | 0                                                                                            |       | 0                                                                                                 |       | 0                                                                                                              |       | 0              |       | 0         |       |
|                                                           |       |                                                                                         |       |                                                                                              |       |                                                                                                           |       |           |       |      |       |
| **Benefits and Perquisites:**                                  |       |                                                                                         |       |                                                                                              |       |                                                                                                           |       |           |       |      |       |
| Post-Termination Health Care                                   |       | 6008                                                                                         |       | 0                                                                                                 |       | 6008                                                                                                           |       | 6008           |       | 6008      |       |
| Life Insurance Premiums                                        |       | 0                                                                                            |       | 0                                                                                                 |       | 0                                                                                                              |       | 0              |       | 0         |       |
| Accrued Vacation Pay(3)                                        |       | 20,538                                                                                       |       | 20,538                                                                                            |       | 20,538                                                                                                         |       | 20,538         |       | 20,538    |       |
|                                                           |       |                                                                                         |       |                                                                                              |       |                                                                                                           |       |           |       |      |       |
| **Total:**                                                     |       | 115,546                                                                                      |       | 20,538                                                                                            |       | 115,546                                                                                                        |       | 115,546        |       | 115,546   |       |

 

----

(1)          Assumes six months of base salary and benefits after termination.

(2)          Mr. Bowker has no special provision on change in control.

(3)          Assumes 280 days of accrued vacation upon termination.

 

18

----

 

# **Director Compensation**

#  

# **Overview**

#  

Our directorcompensation program consists of cash-based as well as equity-basedcompensation. The Board of Directors recognizes that cash compensation is anintegral part of the compensation program and has instituted a fixed and variablefee structure to provide compensation relative to the required time commitmentof each director. The equity component of our director compensation program isdesigned to build an ownership stake in the Company while conveying anincentive to directors relative to the returns recognized by our stockholders.

 

# **Cash-Based Compensation**

#  

Our directorsreceive an annual stipend of $20,000 paid upon the annual election of eachnon-employee director or upon joining the Board of Directors. The Chairman ofthe Audit Committee receives an annual stipend of $25,000 recognizing theadditional duties and responsibilities of that role. In addition, eachnon-employee director receives a meeting fee of $1,000 for each meeting of theBoard of Directors attended and $500.00 for each committee meeting attended,except that members of the Audit Committee are compensated at $750.00 permeeting. All directors are reimbursed ordinary and reasonable expenses incurredin exercising their responsibilities in accordance the Company’s Travel andEntertainment Expense Reimbursement policy applicable to all employees of theCompany.

 

On October 17,2007, Barry A. Williamson, Chairman of the Board of Directors since December12, 2006, was awarded cash based compensation of $60,000 for his services uponcompletion of a review and recommendation of an appropriate compensationpackage by the compensation consultant engaged by the Compensation Committee.

 

# **Equity-Based Compensation**

#  

Under theDirector’s Stock Option Plan, each non-employee director receives an option topurchase 10,000 shares of common stock issued upon his first election to theBoard of Directors and an option to purchase an additional 5,000 shares ofcommon stock upon each annual re-election to the Board of Directors. The Director’sStock Option Plan is administered by the terms of the plan without therequirement for specific Compensation Committee or Board of Directors actionupon grant. Stock options granted under the plan are priced at the closingmarket price of the Company’s stock on the day of grant, vest after 1 year,terminate in 7 years and do not expire upon termination of the director’s termon the Board of Directors.

 

# **Pension and Benefits**

#  

Ournon-employee directors are not eligible to participate in the Company’sbenefits plans, including the 401(k) plan.

 

# **Indemnification Agreements**

#  

The Company isparty to indemnification agreements with each of its directors that requiresthe Company to indemnify the directors to the fullest extent permitted byWashington state law. The Company’s certificate of incorporation also requiresthe Company to indemnify both the directors and officers of the Company to thefullest extent permitted by Washington state law.

 

19

----

 

# **Fiscal Year 2007 Non-Employee DirectorCompensation Table**

 
| **Name**                | ** ** | **Fees Earned or  Paid in Cash  ($)** | ** ** | **Option  Awards  ($)** | ** ** | **All Other  Compensation  ($)** | ** ** | **Total  ($)** | ** ** |
|-------------------------|------------|-----------------------------------------------------------|------------|-------------------------|------------|---------------------------------------|------------|----------------|------------|
| Thomas B. Pickens, III  |       | 25,500                                                    |       | 3,600                   |       |                                  |       | 29,100         |       |
| Barry A. Williamson(1)  |       | 6,500                                                     |       | 3,600                   |       |                                  |       | 10,100         |       |
| Mark Adams              |       | 2,000                                                     |       | 0                       |       |                                  |       | 2,000          |       |
| Myron J. Goins          |       | 33,500                                                    |       | 7,200                   |       |                                  |       | 40,700         |       |
| Roscoe M. Moore, III    |       | 31,500                                                    |       | 3,600                   |       |                                  |       | 35,100         |       |
| Dr. Edward David        |       | 31,000                                                    |       | 3,600                   |       |                                  |       | 34,600         |       |
| Dr. Stefan Graul        |       | ––                                              |       | 0                       |       |                                  |       |           |       |
| Michael E. Kearney      |       | ––                                              |       |                    |       |                                  |       |           |       |
| Dr. Shelley A. Harrison |       | *25,000                                                   |       |                    |       |                                  |       | 25,000         |       |
| JR Thompson             |       | 5,000                                                     |       |                    |       |                                  |       | 5,000          |       |
| Total                   |       | 160,000                                                   |       | 21,600                  |       |                                  |       | 181,600        |       |

 

----

(1)          Mr. Williamson waived meeting fees after his election as Chairmanpending Board approval of his compensation.

*Prior year payment paid in FY2007

 

20

----

 

# **Item 12. Security Ownership of Certain Beneficial Owners and Management andRelated Stockholder Matters.**

#  

The followingtable sets forth as of October 5, 2007, certain information regarding thebeneficial ownership of the Company’s outstanding Common Stock and ConvertiblePreferred Stock held by (i) each person known by the Company to be a beneficialowner of more than five percent of any outstanding class of the Company’scapital stock, (ii) each of the Company’s directors, (iii) the Company’s ChiefExecutive Officer and four most highly compensated executive officers at theend of the Company’s last completed fiscal year, and (iv) all directors andexecutive officers of the Company as a group. Unless otherwise described below,each of the persons listed in the table below has sole voting and investmentpower with respect to the shares indicated as beneficially owned by such party.

 
| **Name and Address of Beneficial Owners** | ** ** | **Amount  and Nature  of  Beneficial  Ownership(c)** | ** ** | **Percentage  of  Class(1)** | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|------------------------------|------------|
| ***Preferred Stock***(a)(b)                                        |       |                                                      |       |                         |       |
| SMH Capital Advisors, Inc.                                         |       | 42,550.164                                                |       | 47.3                         | %          |
| Lanphier Capital Management, Inc.                                  |       | 12,545,607                                                |       | 14.0                         | %          |
| Bruce & Co., Inc.                                              |       | 8,235,657                                                 |       | 9.2                          | %          |
| Plainfield Asset Management                                        |       | 11,366,580                                                |       | 12.6                         | %          |
| Astrium GmbH                                                       |       | 9,554,940                                                 |       | 10.6                         | %          |
|                                                               |       |                                                      |       |                         |       |
| ***Common Stock***(a)(b)                                           |       |                                                      |       |                         |       |
| SMH Capital Advisors, Inc.                                         |       | 61,975,872                                                | (2)        | 70.3                         | %          |
| Lanphier Capital Management, Inc.                                  |       | 18,273,136                                                | (3)        | 31.4                         | %          |
| Bruce & Co., Inc.                                              |       | 11,312,720                                                | (5)        | 21.0                         | %          |
| Plainfield Asset Management                                        |       | 11,846,396                                                | (4)        | 20.8                         | %          |
| Astrium GmbH                                                       |       | 10,992,439                                                | (6)        | 19.9                         | %          |
| TQA Special Opportunities Master Fund Ltd.                         |       | 4,256,000                                                 | (7)        | 8.8                          | %          |
|                                                               |       |                                                      |       |                         |       |
| **Non-Employee Directors:**                                        |       |                                                      |       |                         |       |
| Mark Adams                                                         |       | —                                                    |       | *                            |       |
| Barry Williamson                                                   |       | 15,000                                                    | (8)        | *                            |       |
|                                                               |       |                                                      |       |                         |       |
| **Named Executive Officers:**                                      |       |                                                      |       |                         |       |
| Thomas B. Pickens, III                                             |       | 15,000                                                    | (9)        | *                            |       |
| Brian K. Harrington                                                |       | 69,055                                                    | (10)       | *                            |       |
| Roscoe M. Moore, III                                               |       | 20,000                                                    | (11)       | *                            |       |
| James D. Royston                                                   |       | 27,000                                                    | (13)       | *                            |       |
|                                                               |       |                                                      |       |                         |       |
| **All Directors and Executive Officers as a  Group (10 persons)**  |       | 193,055                                                   | (14)       | *                            |       |

 

----

*                             Indicates beneficial ownership of less than 1%of the outstanding shares of common stock.

(a)                      Amount of Beneficial Ownership is based onnumber of common shares issuable upon conversion of all convertible securities.

(b)                     The Series C convertible preferred stock wasconverted into common stock on November 27, 2008.

(c)                      All ownership is in pre-reverse split shares.

(1)                      Calculated pursuant to Rule 13d-3(d) of theSecurities Exchange Act of 1934. Under Rule 13d-3(d), shares not outstandingwhich are subject to options, warrants, rights or conversion privilegesexercisable within 60 days are deemed outstanding for the purpose ofcalculating the number and percentage owned by a person, but not deemedoutstanding for the purpose of calculating the number and percentage owned byany other person listed. As of October 5, 2007, we had 45,648,377 shares ofcommon stock and 61,550 shares of our Series C Convertible Preferred Stockoutstanding.

(2)                      Represents $29,124,000 principal amount of ourSenior Notes that have been converted into 19,425,708 shares of common stockand 29,124 shares of Series C Convertible Preferred Stock which is convertibleinto common stock at the Company’s option at the rate of 1 share of our SeriesC Convertible Preferred Stock for 1,461 shares of common stock held by SMHCapital Advisors, Inc. in discretionary accounts for the benefit of itsclients. SMH Capital Advisors has shared voting power 

 

21

----

 

and sole investment powerwith respect to these shares. This holder disclaims beneficial ownership of allshares of common stock it holds. This holder’s address is 600 Travis, Suite3100, Houston, Texas 77002. Includes information from Form 13G filed by SMHCapital Advisors, Inc. on February 1, 2007.

(3)                      Represents $8,587,000 principal amount of ourSenior Notes that have been converted into 5,727,529 shares of our common stockand 8,587 shares of our Series C Convertible Preferred Stock which isconvertible into common stock at the Company’s option at the rate of 1 share ofSeries C Convertible Preferred Stock for 1,461 shares of common stock held byLanphier Capital Management Inc. in discretionary accounts for the benefit ofits clients. The holder’s address is 4175 Kamaliani Lane, Princeville, HI96722.

(4)                      Represents $6,484,000 principal amount of ourJunior Notes that have been converted into 479,816 shares of common stock and7,780 shares of Series C Convertible Preferred Stock which is convertible atthe option of the Company at the rate of 1 share of Series C ConvertiblePreferred Stock for 1,461 shares of common stock. Plainfield Asset Management’saddress is 411 West Putnam Avenue, Suite 340, Greenwich, CT 06830.

(5)                      Bruce & Co., Inc., is the investmentmanager for Bruce Fund, Inc., a Maryland registered investment company with itsprinciple business conducted at 20 North Wacker Dr., Suite 2414, Chicago, IL60606. This owner ship represents $4,509,000 principal amount of Senior Notesand $940,000 principal amount of Junior Notes which were converted into3,077,063 shares of common stock and 5,637 shares of our Series C ConvertiblePreferred Stock which is convertible at the Company’s option at the rate of 1share of Series C Convertible Preferred Stock for 1,461 shares of common stock.The information provided in this table is based on a Schedule 13G filed withthe Securities and Exchange Commission on March 1, 2006 by Bruce & Co.,Inc. on behalf of Bruce Fund, Inc.

(6)                      Astrium GmbH beneficially owns 1,437,499shares of common stock and 6,540 shares of our Series C Convertible PreferredStock that are convertible at the Company’s option into common stock on thebasis of 1 share of Series C Convertible Preferred Stock for 1,461 shares ofcommon stock. Astrium GmbH’s address is Hünefeldstraße 1-5, Postfach 105909,D-28059 Bremen, Germany. The information provided in this table is based onAmendment No. 1 to a Schedule 13D filed with the Securities and ExchangeCommission on October 27, 1999 by DaimlerChrysler Aerospace AG.

(7)                      Represents $2,000,000 principal amount ofSenior Notes converted into 1,334,000 shares of common stock and 2,000 sharesof our Series C Convertible Preferred Stock which is convertible into commonstock at the Company’s option at the rate of 1 share of Series C ConvertiblePreferred Stock for 1,461 shares of common stock. TQA Special OpportunitiesMaster Fund Ltd’s. principal business address is 333 Ladlow Street, Stanford,CT 06902. The information provided in this table is based in part on the 13Gfiled by TQA Special Opportunities Master Fund Ltd. on January 30, 2007 forwhich TQA disclaims beneficial ownership to the common stock reported except tothe extent of their pecuniary interest therein.

(8)                      Includes options to purchase 15,000 shares ofour common stock.

(9)                    Includes options to purchase 15,000 shares ofour common stock.

(10)                Includes 9,055 shares of common stock held inour 1997 Employee Stock Purchase Plan, and options to purchase 45,000 shares ofour common stock and 15,000 shares of common stock beneficially owned.

(11)                Includes options to purchase 15,000 shares ofour common stock and 5,000 shares of common stock beneficially owned.

(12)                Includes options to purchase 17,000 shares ofour common stock.

(13)                Includes options to purchase 27,000 shares ofour common stock.

(14)                Includes options to purchase 184,000 shares ofour common stock and 9,055 shares of our common stock held in our 1997 EmployeeStock Purchase Plan.

 

22

----

 

# **Securities Authorized for Issuance UnderEquity Compensation Plans.**

 

**Equity Compensation Plan Information**

 
| **Plan Name**                                         | ** ** | **Type**                                        | ** ** | **Options  Authorized** | ** ** | **(a)  Number of  securities to be  issued upon  exercise of  outstanding  options,  warrants and  rights** | ** ** | **(b)  Weighted-average  exercise price  of outstanding  options,  warrants and  rights** | ** ** | **(c)  Number of  securities  remaining  available at June  30, 2007 for  future issuance  under equity  compensation   plans (excluding  securities  reflected in  column (a)** | ** ** |
|------------------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                 |       |                                            |       |                    |       |                                                                                                                                      |       |                                                                                                     |       |
| **Plans  Previously Approved by Security Holders**         |       |                                            |       |                    |       |                                                                                                                                      |       |                                                                                                     |       |
| ** **                                                 |       |                                            |       |                    |       |                                                                                                                                      |       |                                                                                                     |       |
| 1 The 1994 Plan(1)                                         |       | Common Stock Options Incentive or Non-Qualified |       | 3,950,000               |       | 806,935                                                                                                                                   |       | $                                                                                                        | 2.81       |                                                                                                                                                                                                                                    | 3,005,774  |   |
|                                                       |       |                                            |       |                    |       |                                                                                                                                      |       |                                                                                                     |       |                                                                                                                                                                                                                                    |       |
| 2 Directors Stock Option  Plan(2)                          |       | Non-Qualified Common Stock Options              |       | 500,000                 |       | 270,000                                                                                                                                   |       | $                                                                                                        | 2.00       |                                                                                                                                                                                                                                    | 180,000    |   |
|                                                       |       |                                            |       |                    |       |                                                                                                                                      |       |                                                                                                     |       |                                                                                                                                                                                                                                    |       |
| 3 1997 Employee Stock Purchase  Plan(3)                    |       | Common Stock                                    |       | 1,500,000               |       | 0                                                                                                                                         |       | N/A                                                                                                      |       | 17,355                                                                                                                                                                                                                                  |       |
|                                                       |       |                                            |       |                    |       |                                                                                                                                      |       |                                                                                                     |       |                                                                                                                                                                                                                                    |       |
| **Plans  Not Previously Approved by the Security Holders** |       |                                            |       |                    |       |                                                                                                                                      |       |                                                                                                     |       |
| ** **                                                 |       |                                            |       |                    |       |                                                                                                                                      |       |                                                                                                     |       |
| 4 Space Media, Inc. Stock  Option Plan(4)                  |       | Common Stock of Space Media, Inc.               |       | 1,500,000               |       | 274,063                                                                                                                                   |       | $                                                                                                        | 1.00       |                                                                                                                                                                                                                                    | 1,111,250  |   |

 

----

(1)          Under the terms of the 1994 Plan, the number and price of the optionsgranted to employees is determined by the Board of Directors and such optionsvest, in most cases, incrementally over a period of four years and expire nomore than ten years after the date of grant.

 

(2)          Under the terms of the Directors’ Stock Option Plan, each newnon-employee director received a one-time grant of an option to purchase 10,000shares of Common Stock at an exercise price equal to the fair market value onthe date of grant. In addition, effective as of the date of each annual meetingof the Company’s stockholders, each non-employee director who is elected orcontinues as a member of the Board of Directors of the Company shall be awardedan option to purchase 5,000 shares of Common Stock. Options under the Directors’Plan vest after one year and expire seven years from the date of grant.

 

(3)          We adopted an Employee Stock Purchase Plan that permits eligibleemployees to purchase shares of Common Stock of the Company at prices no lessthan 85% of the current market price. Eligible employees may elect toparticipate in the plan by authorizing payroll deductions from 1% to 10% ofgross compensation for each payroll period. On the last day of each quarter,each participant’s contribution account is used to purchase the maximum numberof whole and fractional shares of Common Stock determined by dividing thecontribution account’s balance by the lesser of 85% of the price of a share ofCommon Stock on the first day of the quarter or the last day of a quarter.

 

(4)          During the year ended June 30, 2000, Space Media, Inc., a majority ownedsubsidiary of the Company, adopted an option plan (SMI Plan) for employees,officer, directors and consultants of SMI. Under the terms of the SMI Plan, thenumber and price of the options granted is determined by the Board of Directorsof Space Media, Inc., and such options vest, in most cases, incrementally overa period of four years and expire no more than ten years after the date ofgrant.

 

For adescription of the Company’s equity compensation plan, also please see thediscussion under Item 11 above.

 

# **Item 13. Certain Relationships and Related Transactions and DirectorIndependence.**

#  

# **Related Party Transactions**

#  

The Companyengaged in certain transactions with directors, executive officers,shareholders, and certain former officers during fiscal years 2007, 2006, and2005. Following is a description of these transactions:

 

23

----

 

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

#  

Astriumprovides Unpressurized payload and integration efforts to SPACEHAB on a fixedprice basis in addition to providing engineering services as required. For theyears ended June 30, 20007, 2006, and 2005, Astrium’s payload and integrationservices included in cost of revenue was approximately $13.8 million, $11.4million, and $15.3 million, respectively.

 

# **Executive Credit Cards**

#  

Certain namedexecutive officers of the Company have company paid credit cards for ordinarybusiness expenses. Although the Company pays the amounts on the credit cards,the executive officer is obligated to substantiate the charges and reimbursethe Company for any non-business related charges. As of June 30, 2007 theCompany has a receivable due from an executive officer for $12,354.

 

# **Director Independence**

#  

The Board ofDirectors has determined that Mr. Mark Adams and Mr. Barry A. Williamson to bean “independent director” as such term is defined by Rule 4200(a) of the NASD.On October 22, 2007, as a result of the resignation of Myron J. Goins as adirector of SPACEHAB, Inc. effective October 16, 2007, we no longer comply withthe NASDAQ independent director and audit committee requirements.

 

Consistentwith Marketplace Rule 4350(c)(1), which requires that a majority of the boardof directors consist of independent directors, and 4350(d)(4) requiring theparticipation of three independent directors on the audit committee, NASDAQwill provide us a cure period in order to gain compliance until the earlier ofthe Company’s next annual shareholder’s meeting, or October 16, 2008; or, ifthe next annual shareholder’s meeting is held before April 14, 2008, then wemust evidence compliance no later than April 14, 2008.

 

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

#  

# **The Company’s Independent Registered PublicAccounting Firm**

#  

On January 12,2007, the Company’s Audit Committee approved the dismissal of its independentregistered public accounting firm Grant Thornton LLP. Grant Thornton LLP hasaudited the Company’s financial statements since its appointment in fiscal year2004 through the first quarter of fiscal year 2007. Grant was the principalaccountant of the registrant’s financial statements for the fiscal year endedJune 30, 2006. Grant Thornton’s report on the financial statements for thefiscal years ended June 30, 2006 did not contain an adverse opinion ordisclaimer of opinion, nor were they modified or qualified as to uncertainty,audit scope or accounting principles.

 

In connectionwith the audits for the fiscal year ended June 30, 2006 and through January 12,2007, there were no disagreements with Grant Thornton LLP on any matter ofaccounting principles or practices, financial statement disclosure, or auditingscope or procedure, which disagreements, if not resolved to the satisfaction ofGrant Thornton LLP, would have caused them to make reference in connection withtheir opinion to the subject matter of the disagreement.

 

On January 12,2007, the Board of Directors appointed PMB Helin Donovan LLP as the newindependent registered public accounting firm to audit the Company’s financialstatements. There were no discussions between the Company and PMB Helin DonovanLLP regarding the application of accounting principles to specific completed orcontemplated transactions, or the type of audit opinion that might be renderedon the Company’s financial statements. Furthermore, no written or oral advicewas provided by PMB Helin Donovan LLP that was an important factor consideredby the Company in reaching a decision as to any accounting, auditing orfinancial reporting issue. The Company has not consulted with PMB Helin DonovanLLP regarding any matter that was either the subject of a disagreement (asdefined in paragraph (a)(1)(iv) of Item 304 of Regulation S-K and the relatedinstructions to this item) or a reportable event (as described in paragraph(a)(1)(v) of Item 304 of Regulation S-K).

 

The firm Hein& Associates LLP has been engaged by the Company to perform Tax and OtherRelated work for the fiscal years ended June 30, 2007 and 2006 for which thesummary of fees are set forth below. The Company has also engaged JeffersonWells Consulting firm to access the Company’s internal controls, policies andprocedures in an effort to prepare for Sarbanes Oxley compliance.

 

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Representativesof PMB Helin Donovan LLP are expected to be present at the Annual Meeting, andwill have an opportunity to make a statement if they so desire and will beavailable to respond to appropriate questions.

 

The followingtable presents fees paid or to be paid for professional audit services renderedby Grant Thornton LLP and PMB Helin Donovan LLP for the audit of the Company’sannual financial statements during the years ended June 30, 2007 and 2006, andfees billed for other services rendered by Hein & Associates LLP andJefferson Wells Consulting:

 
| ** **                           | ** ** | **Fiscal 2007** | ** ** | **Fiscal 2006** | ** ** |
|--------------------------------------|------------|----------------------|------------|----------------------|------------|
| Grant Thornton LLP Audit Fees  (1)   |       | $                    | 194,200    |                 | $          | 201,975 |   |
| PMB Helin Donovan LLP Audit  Fees(1) |       | 54,947               |       | —               |       |
| Tax Fees                             |       | 92,697               |       | 94,813               |       |
| All Other Fees                       |       | 16,965               |       | 189,502              |       |
| Total All Fees                       |       | $                    | 358,809    |                 | $          | 486,290 |   |

 

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(1)          Audit Fees consisted of fees billed for professional services renderedfor the audit of the Company’s annual financial statements and review of theinterim financial statements included in quarterly reports.

 

# **Audit Committee Pre-Approval Policy**

#  

The AuditCommittee is responsible for appointing, setting compensation for, andoverseeing the work of PMB Helin Donovan LLP, the Company’s independentregistered public accountants. The Audit Committee has established a policyrequiring its pre-approval of all audit and permissible non-audit services tobe provided by independent registered public accountants in order to assurethat the provision of such services does not impair the auditors’ independence.The policy, as amended, provides for the general pre-approval of specific typesof services and gives detailed guidance to management as to the specific audit,audit-related, and tax services that are eligible for general pre-approval. Thepolicy requires specific pre-approval of the annual audit engagement, moststatutory or subsidiary audits, and all permissible non-audit services forwhich no general pre-approval exists. For both audit and non-auditpre-approvals, the Audit Committee will consider whether such services areconsistent with applicable law and SEC rules and regulations concerning auditorindependence.

 

The policydelegates to the Chairman the authority to grant certain specificpre-approvals; provided, however, that the Chairman is required to report thegranting of any pre-approvals to the Audit Committee at its next regularlyscheduled meeting. The policy prohibits the Audit Committee from delegating tomanagement the committee’s responsibility to pre-approve services performed bythe independent registered public accountants.

 

Requests forpre-approval of services must be detailed as to the particular servicesproposed to be provided and are to be submitted by the CFO. In addition, eachsuch request generally must include a detailed description of the type andscope of services, proposed staffing, a budget of the proposed fees for suchservices, and a general timetable for the performance of such services.

 

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| **Exhibit No.** | ** ** | **Description  of Exhibit** |
|-----------------|------------|-----------------------------|
| ** **      | ** ** | ** **                  | ** ** | ** ** |
| **(31)**        | ** ** | ** **                  | ** ** | **Rule  13a-14(a) Certifications** |
| ** **      | ** ** | ** **                  | ** ** | ** ** |
|            |       | 31.1                        |   | Certification of Thomas B. Pickens, III, the Company’s Chief  Executive Officer, pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002, file herewith |
|            |       |                        |   |   |
|            |       | 31.2                        |   | Certification of Brian K. Harrington, the Company’s Senior Vice  President and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as  Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, file  herewith |
|            |       |                        |   |   |
| **(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 tothe requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
| SPACEHAB,  Incorporated |   |                      |
|-------------------------|--------|---------------------------|
|                    |   |                      |
|                    | By:    | /s/Thomas B. Pickens, III |   |
|                    |   |                      | Thomas B. Pickens, III |
|                    |   |                      | Chief Executive Officer and Director |
|                    |   |                      |
| Date: December 3, 2007  |   |                      |
|                    |   |                      |
|                    | By:    | /s/Brian K. Harrington    |   |
|                    |   |                      | Brian K. Harrington |
|                    |   |                      | Senior Vice President and |
|                    |   |                      | Chief Financial Officer |
| Date:  December 3, 2007 |   |                      |
|                         |        |                           |  |  |

 

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