** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-Q**

** **

**(MarkOne)**

 

**x****QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

** **

**For the quarterly period ended March 31, 2008**

 

**OR**

 

o**TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.**

 

**For the transition period from                 to**

 

**Commission File Number: 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.) |

 

**12130Highway 3, Building 1**

**Webster,Texas 77598-1504**

(Addressof principal executive offices and zip code)

 

**(713)558-5000**

(Registrant’stelephone number, including area code)

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15 (d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.

 

Yes x No o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer, or asmaller reporting company. See definitions of “large accelerated filer,”“accelerated filer,” and “smaller reporting company” in Rule 12b-2 of theExchange Act. (Check one):

 

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

 

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

 

Yes o No x

 

As of May 14, 2008there were 13,857,413 shares of the registrant’s common stock outstanding.

 

 

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** **

**SPACEHAB,INCORPORATED AND SUBSIDIARIES**

**MARCH 31,2008 QUARTERLY REPORT ON FORM 10-Q**

** **

**TABLEOF CONTENTS**

** **
| ** **             | ** **                                                                                  | ** ** | **Page** |
|------------------------|---------------------------------------------------------------------------------------------|------------|----------|
|                   |                                                                                        |       |     |
| DEFINITIONS            |                                                                                        | 1          |
|                   |                                                                                        |       |     |
| **PART I:**       | **FINANCIAL INFORMATION**                                                                   | ** ** | **2**    |
|                   |                                                                                        |       |     |
| ITEM 1.                | UNAUDITED CONDENSED  CONSOLIDATED FINANCIAL STATEMENTS                                      |       | 2        |
|                   |                                                                                        |       |     |
| ITEM 2.                | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |       | 16       |
|                   |                                                                                        |       |     |
| RESULTS  OF OPERATIONS |                                                                                        | 19         |
|                   |                                                                                        |       |     |
| ITEM 3.                | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                 |       | 25       |
|                   |                                                                                        |       |     |
| ITEM 4.                | CONTROLS AND  PROCEDURES                                                                    |       | 25       |
|                   |                                                                                        |       |     |
| **PART II:**      | **OTHER INFORMATION**                                                                       | ** ** | **26**   |
|                   |                                                                                        |       |     |
| ITEM 1.                | LEGAL PROCEEDINGS                                                                           |       | 26       |
|                   |                                                                                        |       |     |
| ITEM 1A.               | RISK FACTORS                                                                                |       | 26       |
|                   |                                                                                        |       |     |
| ITEM 2.                | UNREGISTERED  SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                |       | 26       |
|                   |                                                                                        |       |     |
| ITEM 3.                | DEFAULTS UPON  SENIOR SECURITIES                                                            |       | 26       |
|                   |                                                                                        |       |     |
| ITEM 4.                | SUBMISSION OF  MATTERS TO A VOTE OF SECURITY HOLDERS                                        |       | 26       |
|                   |                                                                                        |       |     |
| ITEM 6.                | EXHIBITS                                                                                    |       | 27       |
|                        |                                                                                             |            |          |  |

 

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# ** **

# **DEFINITIONS**

# ** **

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

 
| 1994 Plan       |   | 1994 Stock Incentive Plan                                            |
|-----------------|--------|----------------------------------------------------------------------|
| ARCTUS          |   | Advanced Research and Conventional Technology Utilization Spacecraft |
| Astrium         |   | Astrium GmbH                                                         |
| Astrotech       |   | Astrotech Space Operations                                           |
| Boeing          |   | The Boeing Company                                                   |
| CMC             |   | Cargo Mission Contract                                               |
| COTS            |   | Commercial Orbital Transportation Services                           |
| Common stock    |   | SPACEHAB common stock                                                |
| EPS             |   | Earnings Per Share                                                   |
| ESP2            |   | External Stowage Platform 2                                          |
| FASB            |   | Financial Accounting Standards Board                                 |
| GSA             |   | General Services Administration                                      |
| ICC             |   | Integrated Cargo Carrier                                             |
| IDIQ            |   | Indefinite-Delivery, Indefinite-Quantity                             |
| IP              |   | Intellectual Property                                                |
| IRS             |   | Internal Revenue Service                                             |
| ISS             |   | International Space Station                                          |
| IT              |   | Information Technology                                               |
| Lockheed Martin |   | Lockheed Martin Corporation                                          |
| MMS             |   | Mini Mass Spectrometer                                               |
| NASA            |   | National Aeronautics and Space Administration                        |
| NRO             |   | National Reconnaissance Office                                       |
| PI&C        |   | Program Integration and Control                                      |
| RDM             |   | Research Double Module                                               |
| RSC Energia     |   | Rocket Space Corporation-Energia                                     |
| SAB             |   | Staff Accounting Bulletin                                            |
| SEC             |   | Securities and Exchange Commission                                   |
| SFAS            |   | Statement of Financial Accounting Standards                          |
| SES             |   | SPACEHAB Engineering Services                                        |
| SFS             |   | SPACEHAB Flight Services                                             |
| SGS             |   | SPACEHAB Government Services                                         |
| SMI             |   | Space Media, Inc.                                               |
| SMI Plan        |   | Space Media, Inc. Stock Option Plan                             |
| SPF             |   | Spacecraft Processing Facility                                       |
| VAFB            |   | Vandenberg Air Force Base                                            |
| VCC             |   | Vertical Cargo Carrier                                               |

 

1

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# ** **

# **PART I:  FINANCIAL INFORMATION**

# ** **

# **ITEM1.  UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

# ** **

**SPACEHAB,INCORPORATED AND SUBSIDIARIES**

**UnauditedCondensed Consolidated Balance Sheets**

(In thousands, except share data)

 
| ** **                                                                                                                                                                     | ** ** | **March 31,** | ** ** | **June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-------------------|------------|
| ** **                                                                                                                                                                     | ** ** | **2008**           | ** ** | **2007**          | ** ** |
| ** **                                                                                                                                                                     | ** ** | **(unaudited)**    | ** ** | **restated**      | ** ** |
| ASSETS                                                                                                                                                                         | ** ** | ** **         | ** ** | ** **        | ** ** |
| Cash and cash  equivalents                                                                                                                                                     |       | $                  | 2,037      |              | $          | 9,724 |   |
| Accounts  receivable, net                                                                                                                                                      |       | 10,429             |       | 8,224             |       |
| Inventory                                                                                                                                                                      |       | 695                |       | 695               |       |
| Short term note  receivable, net                                                                                                                                               |       | 106                |       | 95                |       |
| Prepaid expenses  and other current assets                                                                                                                                     |       | 875                |       | 906               |       |
| Total current assets                                                                                                                                                           |       | 14,142             |       | 19,644            |       |
| Property and  equipment, net of accumulated depreciation and amortization of $68,968 and  $53,546 respectively                                                                 |       | 42,008             |       | 43,884            |       |
| Restricted cash                                                                                                                                                                |       | 6,511              |       | 6,282             |       |
| Deferred  financing costs, net                                                                                                                                                 |       | 300                |       | 1,596             |       |
| Long term note  receivable, net                                                                                                                                                |       | 760                |       | 178               |       |
| Other assets,  net                                                                                                                                                             |       | 513                |       | 891               |       |
| Total assets                                                                                                                                                                   |       | $                  | 64,234     |              | $          | 72,475 |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                      | ** ** | ** **         | ** ** | ** **        | ** ** |
| Convertible 8%  subordinated notes payable                                                                                                                                     |       | $                  | —     |              | $          | 10,306 |   |
| Term note  payable – current                                                                                                                                              |       | 267                |       | —            |       |
| Accounts payable                                                                                                                                                               |       | 1,179              |       | 1,494             |       |
| Accounts payable  – Astrium                                                                                                                                               |       | 1,580              |       | 2,955             |       |
| Accrued interest                                                                                                                                                               |       | 176                |       | 789               |       |
| Accrued expenses                                                                                                                                                               |       | 1,317              |       | 2,056             |       |
| Accrued  subcontracting services                                                                                                                                               |       | —             |       | 3,669             |       |
| Deferred gains  on sale of buildings                                                                                                                                           |       | 221                |       | 221               |       |
| Customer  deposits                                                                                                                                                             |       | —             |       | 3,106             |       |
| Accrued  incentive compensation – current                                                                                                                                 |       | 108                |       | —            |       |
| Deferred  revenue, current portion                                                                                                                                             |       | 643                |       | 1,153             |       |
| Total current  liabilities                                                                                                                                                     |       | 5,491              |       | 25,749            |       |
| Accrued contract  cost and other                                                                                                                                               |       | —             |       | 39                |       |
| Advances on  construction contract                                                                                                                                             |       | 11,546             |       | 5,722             |       |
| Deferred gains  on sale of buildings                                                                                                                                           |       | 986                |       | 1,152             |       |
| Senior  convertible 5.5% notes payable                                                                                                                                         |       | 6,861              |       | 52,944            |       |
| Term note  payable – non-current                                                                                                                                          |       | 3,711              |       | —            |       |
| Accrued  incentive compensation – non-current                                                                                                                             |       | 52                 |       | —            |       |
| Total  liabilities                                                                                                                                                             |       | 28,647             |       | 85,606            |       |
| Stockholders’  equity                                                                                                                                                     |       |               |       |              |       |
| Preferred stock,  no par value, authorized 2,500,000 shares, 1,333,334 and 0 shares issued,  respectively (liquidation preference of $12,000 issued as of June 30,  2007) |       | —             |       | 11,892            |       |
| Common stock,  75,000,000 and 7,000,000 shares authorized, respectively; 13,869,023 and  1,322,141 shares issued, respectively                                                 |       | 182,558            |       | 84,122            |       |
| Treasury stock,  11,610 and 11,610 shares, respectively at cost                                                                                                                |       | (117               | )          | (117              | )          |
| Additional  paid-in capital                                                                                                                                                    |       | 596                |       | 544               |       |
| Accumulated  (deficit)                                                                                                                                                         |       | (147,450           | )          | (109,572          | )          |
| Total stockholders’  equity (deficit)                                                                                                                                     |       | 35,587             |       | (13,131           | )          |
| Total  liabilities and stockholders’ equity                                                                                                                               |       | $                  | 64,234     |              | $          | 72,475 |   |

 

See accompanying notes to unaudited condensedconsolidated financial statements.

 

2

----

 

**SPACEHAB, INCORPORATED AND SUBSIDIARIES**

**UnauditedCondensed Consolidated Statements of Operations**

(In thousands, except share data)

 
| ** **                                                | ** ** | **Three Months  Ended March 31,** | ** ** | **Nine Months  Ended March 31,** | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                | ** ** | **2008**                                         | ** ** | **2007**                                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenue                                                   |       | $                                                | 6,588      |                                            | $          | 12,183 |   | $ | 19,494 |   | $ | 39,932 |   |
| Costs of revenue                                          |       | 4,158                                            |       | 9,757                                           |       | 15,050 |   | 31,962 |   |
| Gross profit                                              |       | 2,430                                            |       | 2,426                                           |       | 4,444 |   | 7,970 |   |
| Operating  expenses:                                      |       |                                             |       |                                            |       |   |   |   |   |
| Selling, general  and administrative                      |       | 2,311                                            |       | 2,597                                           |       | 6,324 |   | 7,963 |   |
| Research and  development                                 |       | 593                                              |       | 177                                             |       | 1,355 |   | 542 |   |
| Total operating  expenses                                 |       | 2,904                                            |       | 2,774                                           |       | 7,679 |   | 8,505 |   |
| Income (loss)  from operations                            |       | (474                                             | )          | (348                                            | )          | (3,235 | ) | (535 | ) |
| Interest expense                                          |       | (119                                             | )          | (1,068                                          | )          | (1,232 | ) | (3,225 | ) |
| Debt conversion  expense                                  |       | (3                                               | )          | —                                          |       | (30,194 | ) | — |   |
| Interest and  other income, net                           |       | 112                                              |       | 221                                             |       | 478 |   | 624 |   |
| Income (loss)  before income taxes                        |       | (484                                             | )          | (1,195                                          | )          | (34,183 | ) | (3,136 | ) |
| Income tax  (expense) benefit                             |       | (350                                             | )          | —                                          |       | (350 | ) | 69 |   |
| Net income  (loss)                                        |       | $                                                | (834       | )                                               | $          | (1,195 | ) | $ | (34,533 | ) | $ | (3,067 | ) |
| Income (loss)  per share:                                 |       |                                             |       |                                            |       |   |   |   |   |
| Net income  (loss) per share – basic and diluted     |       | $                                                | (0.06      | )                                               | $          | (0.92 | ) | $ | (4.92 | ) | $ | (2.37 | ) |
| Shares used in  computing net loss per share – basic |       | 13,644,707                                       |       | 1,296,830                                       |       | 7,702,328 |   | 1,291,603 |   |

 

See accompanying notes tounaudited condensed consolidated financial statements.

 

3

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**SPACEHAB,INCORPORATED AND SUBSIDIARIES**

**UnauditedCondensed Consolidated Statements of Cash Flows**

**(Inthousands)**

 
| ** **                                                                                                  | ** ** | **Nine Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                                                  | ** ** | **2008**                                        | ** ** | **2007** | ** ** |
| **Cash  flows from operating activities**                                                                   |       |                                            |       |   |   |
| Net loss                                                                                                    |       | $                                               | (34,533    | ) | $ | (3,067 | ) |
| Adjustments to  reconcile net loss to net cash provided by (used in) operating activities:                  |       |                                            |       |   |   |
| Non-cash debt  conversion expense                                                                           |       | 30,194                                          |       | — |   |
| Stock-based  compensation                                                                                   |       | 212                                             |       | 218 |   |
| Common stock  paid for services                                                                             |       | 168                                             |       | — |   |
| Depreciation and  amortization, including debt issuance cost of $0.1 million and $0.3 million               |       | 2,162                                           |       | 4,771 |   |
| Recognition of  deferred gain                                                                               |       | (166                                            | )          | (166 | ) |
| Changes in  assets and liabilities:                                                                         |       |                                            |       |   |   |
| Increase in  restricted cash                                                                                |       | (229                                            | )          | (7,181 | ) |
| Increase in  accounts receivable                                                                            |       | (2,798                                          | )          | (410 | ) |
| Increase in  prepaid expenses and other current assets                                                      |       | (671                                            | )          | (210 | ) |
| (Increase)  decrease in other assets                                                                        |       | 317                                             |       | (35 | ) |
| Increase  (decrease) in deferred revenue                                                                    |       | (510                                            | )          | 76 |   |
| Increase  (decrease) in accounts payable, accounts payable-Astrium, accrued interest,  and accrued expenses |       | (1,668                                          | )          | 1,051 |   |
| Increase  (decrease) in customer deposits                                                                   |       | (3,106                                          | )          | 3,106 |   |
| Increase  (decrease) in accrued subcontracting services and other                                           |       | (3,612                                          | )          | 2,708 |   |
| Increase in  advance on construction contract                                                               |       | 5,646                                           |       | 7,143 |   |
| Decrease in  long-term accrued contract costs and other liabilities                                         |       | (96                                             | )          | (18 | ) |
| Net cash  provided by (used in) operating activities                                                        |       | (8,690                                          | )          | 7,986 |   |
| **Cash  flows from investing activities**                                                                   |       |                                            |       |   |   |
| Purchases of  property, equipment and leasehold improvements, net of reimbursements                         |       | (108                                            | )          | (414 | ) |
| Net cash used in  investing activities                                                                      |       | (108                                            | )          | (414 | ) |
| **Cash  flows from financing activities**                                                                   |       |                                            |       |   |   |
| Payment of  mortgage loan                                                                                   |       | —                                          |       | (1,636 | ) |
| Proceeds from  term loan                                                                                    |       | 3,978                                           |       | — |   |
| Payment of  Junior Notes not participating in exchange                                                      |       | (2,867                                          | )          | — |   |
| Proceeds from  issuance of common stock, net of expenses                                                    |       | —                                          |       | 75 |   |
| Net cash used in  financing activities                                                                      |       | 1,111                                           |       | (1,561 | ) |
| Net change in  cash and cash equivalents                                                                    |       | (7,687                                          | )          | 6,011 |   |
| Cash and cash  equivalents at beginning of period                                                           |       | 9,724                                           |       | 6,317 |   |
| Cash and cash  equivalents at end of period                                                                 |       | $                                               | 2,037      |   | $ | 12,328 |   |
|                                                                                                        |       |                                            |       |   |   |
| Non-cash  investing and financing activities:                                                               |       |                                            |       |   |   |
| Issuance of  common stock for bonds                                                                         |       | $                                               | 83,031     |   | $ | — |   |
| Issuance of  common stock for preferred stock                                                               |       | $                                               | 11,892     |   | $ | — |   |
| Deemed dividend  related to induced conversion of preferred shares                                          |       | $                                               | 3,344      |   | $ | — |   |
| Cash paid for  interest                                                                                     |       | $                                               | 340        |   | $ | 1,868 |   |
| Cash paid for  income taxes                                                                                 |       | $                                               | —     |   | $ | — |   |

 

See accompanying notes to unaudited condensedconsolidated financial statements.

 

4

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** **

**SPACEHAB, INCORPORATED ANDSUBSIDIARIES**

**Notes to Unaudited CondensedConsolidated Financial Statements**

 

### **1.  The Company**

###  

For more than 20 years, SPACEHAB, Inc.has provided a full spectrum of space-related products and services to both thegovernment and private sectors. The Company offers spacecraft processingfacilities and services, space access and payload integration services,production of valuable commercial products in space, development and extensionof space-based products to the commercial consumer market, and program andengineering support ranging from development and manufacturing of flighthardware and mockups to large scale government project management. Specificservices include:

 

·      Facilities and supportservices necessary for the preparation of satellites and payloads for launch;

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

·      Engineering, analysis, andpayload operations services;

·      Program integration andcontrol;

·      Microgravity processing andlife science product development; and,

·      Product design, development,and fabrication.

 

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

 

### **OurBusiness**

###  

Our Company is comprised of four primary businessesproviding the following products and services to the government and commercialmarkets. These SPACEHAB businesses included:

 

*SPACEHAB Flight Services*(SFS). Historically, SFS offered a range of engineering, research, logistics,integration, operations, and ground support services supporting our spaceshuttle module and pallet assets. At this time, there are no more scheduledmissions to be performed under this business segment as the shuttle spacetransportation system nears retirement. During the third quarter of fiscal year2008, the Company recognized residual SFS activity from previous missions andcontinues to retain its space shuttle assets.

 

*Astrotech Space Operations, Inc.*Astrotech provides services and facilities in support of the final assembly,checkout, and countdown functions associated with preparing our customers’multi-million dollar spacecraft for launch on expendable launch vehicles.Astrotech currently has long-term contracts in place with NASA, United LaunchAlliance, National Reconnaissance Office and Sea Launch, LLC. During fiscalyear 2007, Astrotech accounted for 23% of our consolidated revenues.

 

*SPACEHAB Engineering Services, Inc.*(SES) Formerly SPACEHAB Government Services, SES provides large scale programtechnical support and specialized engineering analysis, products, and servicesto NASA and other government customers. Our Engineering Services business unitderives most of its revenue providing configuration and data managementservices within NASA’s Program Integration and Control (“PI&C”) contractfor the International Space Station (“ISS”).

 

*SPACETECH, Inc.*Through SPACETECH, the Company is transforming space-based technologies andproducts into commercial applications, useful products, intellectual property (“IP”),and possible spin-off businesses. The Company’s new microgravity processinginitiatives are also included in SPACETECH’s list of services. These newbusiness initiatives involve the commercial utilization of the ISS, and othermicrogravity platforms for the development of ‘biospace’ products to improvelife on Earth. In early 2008, SPACEHAB was selected by NASA to cooperate on aformal Space Act Agreement for use of the ISS as a commercial laboratory forthe Company’s microgravity processing initiative. Another area of supportprovided under this subsidiary is SPACEHAB heritage hardware design andfabrication, developed in support of commercial customers.

### ** **

5

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###  

### **Liquidity**

###  

As of March 31, 2008 we had cash on hand of $2.0million and our working capital surplus was $8.7 million. Restricted cash,which consists of advance payments on a government contract to modify certainspacecraft processing facilities, totaled $6.5 million at March 31, 2008.Billings of $4.8 million in regards to this contract are included in accountsreceivable. We carry a liability of $11.5 million for obligations under thisconstruction contract. For the nine months ended March 31, 2008, our cashflows from operating activities utilized cash of $8.7 million.

 

In October 2007 we successfully exchanged $7.4million of our 8.0% convertible notes due October 2007, $46.1 million ofour 5.5% convertible notes due October 2010 and our 1.3 million shares of Series Bconvertible preferred stock for 32.6 million shares of common stock and 61,550shares of new Series C convertible preferred stock (the “ExchangeTransaction”). In November 2007 we converted the Series C convertiblepreferred stock into 89.9 million shares of common stock and affected a 1 for10 reverse stock split. On October 15, 2007 we redeemed the outstanding$2.9 million of our 8.0% convertible notes for cash at par.

 

As a consequence of the Exchange Transaction, we recognizeda non cash debt conversion expense of $30.2 million in the three months ended December 31,2007, and increased our common stock by $98.3 million.

 

In February 2008 (see Note6), we consummated a financing facility with a commercial bank. This facilityprovides for a three year $4.0 million term loan, payable in monthlyinstallments of principal in the amount of $22,222 plus interest and a $2.0million revolving credit facility. The term loan is secured by the assets ofour Astrotech subsidiary and the one-year revolving credit facility is securedby Astrotech’s accounts receivable.

 

As of March 31, 2008 ourcontract backlog was approximately $26.6 million. Total backlog consists of allcontract values over the entire life of each contract, excluding any portionspreviously recognized as revenues, but including unexercised contract options,anticipated award fees, expected task orders under existing contracts, andauthorized orders not yet fully negotiated.

 

With the conclusion of STS-118in August 2007, we have experienced a material decrease in our revenuefrom our Flight Services business unit, which accounted for over 65% of ourconsolidated revenue during fiscal year 2007. We continue to focus ourefforts on improving overall liquidity through identifying new businessopportunities within the areas of our core competencies, reducing operatingexpenses, and limiting cash commitments for future capital investments and newasset development. We have continued to restrict new capital investment and newasset development, limiting projects to those with unique strategic potentialand those required to support current contracts and facility maintenance.Additionally, we continue to evaluate operating expenses in an effort to reduceor eliminate costs not required for us to operate effectively.

 

We believe we have sufficientliquidity and backlog to fund ongoing operations for at least the next fiscalyear and expect to utilize existing cash and proceeds from operations tosupport strategies for new business initiatives.

 

### **2.  Basis of Presentation**

###  

In the opinion of management, the accompanyingunaudited condensed consolidated financial statements reflect all adjustments,consisting of only normal recurring accruals necessary for a fair presentationof the consolidated financial position of SPACEHAB, Incorporated and itssubsidiaries as of March 31, 2008, and the results of its operations andcash flows for the periods ended March 31, 2008 and 2007. However, theunaudited condensed consolidated financial statements do not include allrelated footnote disclosures.

 

The consolidated results of operations for the ninemonth period ended March 31, 2008 are not necessarily indicative of theresults that may be expected for the full year. Our results of operations typicallyfluctuate significantly from quarter to quarter. The interim unauditedcondensed consolidated financial statements should be read in conjunction withour audited consolidated financial statements appearing in our Annual Report onForm 10-K for the fiscal year ended June 30, 2007.

 

6

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###  

### **3.  Income (Loss) per Share**

###  

The following is areconciliation of the numerator and denominator of the basic and diluted lossper share computations for the three and nine month periods ended March 31,2008 and March 31, 2007 (in thousands, except share and per share data):

 
| ** **                                                         | ** ** | **Three months ended** | ** ** | **Three months ended** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                                         | ** ** | **March 31, 2008**     | ** ** | **March 31, 2007**     | ** ** |
| ** **                                                         | ** ** | **Loss**                         | ** ** | **Shares**                       | ** ** | **Per Share** | ** ** | **Loss** | ** ** | **Shares** | ** ** | **Per Share** | ** ** |
| ** **                                                         | ** ** | **(Numerator)**                  | ** ** | **(Denominator)**                | ** ** | **Amount** | ** ** | **(Numerator)** | ** ** | **(Denominator)** | ** ** | **Amount** | ** ** |
| Basic and  Diluted EPS:                                            |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Net Loss                                                           |       | $                                | (834       | )                                | 13,644,707 |   | $ | (0.06 | ) | $ | (1,195 | ) | 1,296,830 |   | $ | (0.92 | ) |
|                                                               |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Deemed Dividend  Related to Induced Conversion of Preferred Shares |       | —                           |       | —                           |       | — |   | — |   | — |   | — |   |
| Net Loss  Applicable to Common Shares                              |       | $                                | (834       | )                                | 13,644,707 |   | $ | (0.06 | ) | $ | (1,195 | ) | 1,296,830 |   | $ | (0.92 | ) |

 
| ** **                                                          | ** ** | **Nine months ended** | ** ** | **Nine months ended** | ** ** |
|---------------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                                          | ** ** | **March 31, 2008**    | ** ** | **March 31, 2007**    | ** ** |
| ** **                                                          | ** ** | **Loss**                        | ** ** | **Shares**                      | ** ** | **Per Share** | ** ** | **Loss** | ** ** | **Shares** | ** ** | **Per Share** | ** ** |
| ** **                                                          | ** ** | **(Numerator)**                 | ** ** | **(Denominator)**               | ** ** | **Amount** | ** ** | **(Numerator)** | ** ** | **(Denominator)** | ** ** | **Amount** | ** ** |
| Basic and  Diluted EPS:                                             |       |                            |       |                            |       |   |   |   |   |   |   |   |   |
| Net Loss                                                            |       | $                               | (34,533    | )                               | 7,702,328  |   | $ | (4.48 | ) | $ | (3,067 | ) | 1,291,603 |   | $ | (2.37 | ) |
|                                                                |       |                            |       |                            |       |   |   |   |   |   |   |   |   |
| Deemed Dividends  Related to Induced Conversion of Preferred Shares |       | (3,344                          | )          | —                          |       | — |   | — |   | — |   | — |   |
| Net Loss  Applicable to Common Shares                               |       | $                               | (37,877    | )                               | 7,702,328  |   | $ | (4.92 | ) | $ | (3,067 | ) | 1,291,603 |   | $ | (2.37 | ) |

 

Senior convertible notes payable outstanding as of March 31,2008 due 2010 convertible into 459,133 shares of common stock at $15.00 pershare, which include a mandatory conversion feature once the Company’s stockprice reaches $19.50 per share, have not been included in the computation ofdiluted EPS for the three months and nine months ended March 31, 2008 and2007 as the conversion price(s) of the convertible notes payable per sharewere greater than the average market price of the shares during the period andno value has been assigned to the mandatory conversion feature.

 

Options to purchase 89,500 shares of common stockoutstanding at March 31, 2008 were not included in diluted EPS for thethree months and nine months ended March 31, 2008 as they wereanti-dilutive due to our net loss. The options expire between July 1, 2008and December 12, 2016.

 

Options to purchase 129,195 shares of common stockoutstanding at March 31, 2007 were not included in diluted EPS for thethree months and nine months ended March 31, 2007 as they wereanti-dilutive due to our net loss. The options expire between April 25,2007 and December 1, 2015.

 

### **4.  Revenue Recognition**

###  

Our business units’ revenue is derived primarily fromlong-term contracts with the U.S. Government, U.S. Government contractors, andcommercial customers. Revenue under these contracts is recognized using themethods described on the following page. Estimating future costs and,therefore, revenues and profits is a process requiring management judgment.Management bases its estimate on historical experience and on variousassumptions that are believed to be reasonable under the circumstancesincluding the negotiation(s) of equitable adjustment(s) and changeorders on the Cargo Mission Contract (“CMC”) that are added to the contract aspricing amendment(s) due to delay(s) in the space shuttle launchschedule and customer directed changes to the baseline contracted mission.Costs to complete include, when appropriate, material, labor, subcontractingcosts, lease costs, commissions, insurance, 

 

7

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and depreciation. Our business segment personnelperform periodic contract status and performance reviews. In the event of achange in total estimated contract cost or profit, the cumulative effect ofsuch change is recorded in the period that the change in estimate occurs.

 

**A Summary of Revenue Recognition Methods Follows:**

 
| **Business Segment**          | ** ** | **Services/Products  Provided**                                                       | ** ** | **Contract Type**                                     | ** ** | **Method of Revenue  Recognition**                                                                 | ** ** |
|-------------------------------|------------|---------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|
| SPACEHAB Flight Services      |       | Commercial Space Habitat Modules,  Integration & Operations Support Services |       | Firm Fixed Price                                      |       | Percentage-of-completion based on costs incurred                                                   |       |
|                          |       |                                                                                  |       |                                                  |       |                                                                                               |       |
| Astrotech Space Operations    |       | Payload Processing Facilities                                                         |       | Firm Fixed Price – Mission Specific 

      |       | Ratably, over the occupancy period of a satellite  within the facility from arrival through launch |       |
|                          |       |                                                                                  |       |                                                  |       |                                                                                               |       |
|                          |       |                                                                                  |       | Sea Launch Facility Management Contract               |       | Fixed Fee payable per launch                                                                       |       |
|                          |       |                                                                                  |       |                                                  |       |                                                                                               |       |
|                          |       |                                                                                  |       | Firm Fixed Price – Guaranteed Number of Missions |       | For multi-year contract payments recognized ratably  over the contract period                      |       |
|                          |       |                                                                                  |       |                                                  |       |                                                                                               |       |
| SPACEHAB Engineering Services |       | Configuration Management, Engineering Services                                        |       | Cost Plus Award/Fixed Fee Fixed Rate GSA              |       | Earned as reimbursable costs incurred plus  award/fixed fee Earned as billed costs incurred        |       |

 

We, from time to time, make expenditures for specificenhancements and/or additions to our facilities as required by certaincontracts where the customer agrees to reimburse us for all or substantiallyall of such expenditures. We account for such reimbursements as a reduction inthe cost of such investments and recognize any excess of such reimbursementsover the required investment as revenue. The $20.0 million contract, which hasbeen amended and increased to $35.1 million to design and construct a newpayload processing facility for a governmental agency is accounted for underthis method.

 

In calendar year 2007 Lockheed Martin Corporation (“LockheedMartin”) executed a one-year option extension of the satellite groundprocessing contract at our Astrotech Florida facility. Under the terms of thiscontract option, Lockheed Martin committed to a guarantee of four missions forcalendar year 2007. We accounted for this revenue as guaranteed period revenuesover calendar year 2007. As of December 31, 2006, we credited LockheedMartin for three missions in calendar year 2006 that were scheduled to beprocessed by The Boeing Company (“Boeing”) in calendar year 2007. This creditin the amount of $2.6 million is reflected in our quarter ended December 31,2006 revenue. United Launch Alliance, as successor to Lockheed Martin under thecontract, executed a one-year option extension of the contract for calendaryear 2008. This contract provides for one additional one-year renewal, whichhas not yet been executed for calendar year 2009.

 

### **5.  Statements of Cash Flows - SupplementalInformation**

###  

(a)   Cash paid for interest costs was $0.3 million and $1.9million for the nine months ended March 31, 2008 and 2007, respectively.We did not capitalize any interest costs during the nine months ended March 31,2008 or 2007.

(b)   The bond transactions of $10,306,000 of 8.0%convertible subordinated Junior Notes and $46,083,000 of 5.5% Senior Notes inexchange for 12,254,544 shares of common stock had the following cashimpact.  The principal portion of the8.0% Junior Notes not participating in the exchange amounting to $2.867 millionwas paid in cash.  In addition there wasno cash effect for the conversion of the 1,333,334 shares of Series B 

 

8

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preferred stock for the 1,088,828 shares of commonstock.  All of the conversion stocktransactions were effective prior to the 1 for 10 reverse stock split.

(c)   We paid no income taxes for the nine months ended March 31,2008 and 2007.

 

### **6.  Credit Facilities**

###  

On February 11, 2005 weentered into a revolving one-year credit facility with a bank providing forloans up to $5.0 million secured by the Company’s accounts receivable. In February 2006the revolving credit facility was renewed and the term extended until February 11,2007 with substantially the same terms as the original agreement. This creditfacility expired on February 11, 2007.

 

In February 2008 weconsummated a new financing facility with a commercial bank. This facilityprovides for a three year $4.0 million term loan, payable in monthlyinstallments of principal of $22,222 plus interest and a $2.0 million revolvingcredit facility. The interest rate on the credit facility is prime plus 1.75%(7.0% as of March 31, 2008). The unused revolving credit facility balanceis subject to a charge of 0.5%. Funds available under the revolving creditfacility are limited to 80% of eligible accounts receivable, and we are subjectto various financial and other covenants based upon our Astrotech subsidiary,including a minimum tangible net worth covenant, a liability to tangible networth covenant, and a debt service coverage covenant. The three-year term loanis secured by the assets of our Astrotech subsidiary and the one-year revolvingcredit facility is secured by Astrotech’s accounts receivable.

 

### **7.  Segment Information**

###  

Based on our organization, weoperate in four business segments: SFS, Astrotech, SES and SPACETECH. SFS wasfounded to commercially develop space carriers that operate in the cargo bay ofthe space shuttle. SFS provides space flight assets and integration andoperations support services for both NASA and commercial customers. Astrotechprovides payload processing facilities and services to serve the spacecraftmanufacturing and launch services industry. Through SPACETECH, the Company istransforming space-based technologies and products into commercialapplications, useful products, IP, and possible spin-off businesses. TheCompany’s new microgravity processing initiatives are also included in SPACETECH’slist of services, as well as SPACEHAB heritage hardware design and fabrication,developed in support of commercial customers. SES is primarily engaged inproviding engineering services and products to the Government, including NASA.

 

Our chief operating decisionmaker utilizes both revenue and income (loss) before income taxes in assessingperformance and making overall operating decisions and resource allocations.

 
| ** **                                                                               | ** ** | ** **  | ** ** | ** **                                       | ** ** | **Net**           | ** ** | **Depreciation**      | ** ** |
|------------------------------------------------------------------------------------------|------------|-------------|------------|--------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **Three Months Ended ****March 31, 2008  (in thousands):** | ** ** | **Revenue** | ** ** | **Income (Loss)  before income taxes** | ** ** | **Fixed  Assets** | ** ** | **And  Amortization** | ** ** |
| SFS                                                                                      |       | $           | 160        |                                             | $          | (748              | )          | $                     | 269        |   | $ | 21 |   |
| Astrotech                                                                                |       | 4,975       |       | 1,856                                            |       | 41,276            |       | 537                   |       |
| SES                                                                                      |       | 1,453       |       | (74                                              | )          | —            |       | —                |       |
| SPACETECH                                                                                |       | —      |       | (451                                             | )          | —            |       | —                |       |
| Corporate and Other                                                                      |       | —      |       | (1,067                                           | )          | 463               |       | 41                    |       |
|                                                                                     |       | $           | 6,588      |                                             | $          | (484              | )          | $                     | 42,008     |   | $ | 599 |   |

 

9

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| ** **                                                                               | ** ** | ** **  | ** ** | **Income (Loss)**             | ** ** | **Net**           | ** ** | **Depreciation**      | ** ** |
|------------------------------------------------------------------------------------------|------------|-------------|------------|-------------------------------|------------|-------------------|------------|-----------------------|------------|
| **Three Months Ended ****March 31, 2007  (in thousands):** | ** ** | **Revenue** | ** ** | **before income  Taxes** | ** ** | **Fixed  Assets** | ** ** | **And  Amortization** | ** ** |
| SFS                                                                                      |       | $           | 7,955      |                          | $          | 972               |       | $                     | 14,177     |   | $ | 898 | ** ** |
| Astrotech                                                                                |       | 2,816       |       | 633                           |       | 42,921            |       | 531                   | ** ** |
| SES                                                                                      |       | 1,412       |       | 152                           |       | —            |       | —                | ** ** |
| Corporate and Other                                                                      |       | —      |       | (2,952                        | )          | 579               |       | 169                   | ** ** |
|                                                                                     |       | $           | 12,183     |                          | $          | (1,195            | )          | $                     | 57,677     |   | $ | 1,598 | ** ** |

 
| ** **                                                          | ** ** | ** **  | ** ** | ** **                        | ** ** | **Net**    | ** ** | **Depreciation** | ** ** |
|---------------------------------------------------------------------|------------|-------------|------------|-----------------------------------|------------|------------|------------|------------------|------------|
| **Nine Months Ended March 31, 2008 ** | ** ** | ** **  | ** ** | **Income (Loss)**            | ** ** | **Fixed**  | ** ** | **And**          | ** ** |
| **(in thousands):**                                            | ** ** | **Revenue** | ** ** | **before income taxes** | ** ** | **Assets** | ** ** | **Amortization** | ** ** |
| SFS                                                                 |       | $           | 4,241      |                              | $          | (1,820     | )          | $                | 269        |   | $ | 448 |   |
| Astrotech                                                           |       | 11,125      |       | 3,509                             |       | 41,276     |       | 1,600            |       |
| SES                                                                 |       | 4,128       |       | 240                               |       | —     |       | —           |       |
| SPACETECH                                                           |       | —      |       | (451                              | )          | —     |       | —           |       |
| Corporate and Other                                                 |       | —      |       | (35,661                           | )          | 463        |       | 114              |       |
|                                                                |       | $           | 19,494     |                              | $          | (34,183    | )          | $                | 42,008     |   | $ | 2,162 |   |

 
| ** **                                                          | ** ** | ** **  | ** ** | ** **                        | ** ** | **Net**    | ** ** | **Depreciation** | ** ** |
|---------------------------------------------------------------------|------------|-------------|------------|-----------------------------------|------------|------------|------------|------------------|------------|
| **Nine Months Ended March 31, 2007 ** | ** ** | ** **  | ** ** | **Income (Loss)**            | ** ** | **Fixed**  | ** ** | **And**          | ** ** |
| **(in thousands):**                                            | ** ** | **Revenue** | ** ** | **before income taxes** | ** ** | **Assets** | ** ** | **Amortization** | ** ** |
| SFS                                                                 |       | $           | 27,862     |                              | $          | 5,078      |       | $                | 14,177     |   | $ | 2,720 |   |
| Astrotech                                                           |       | 7,104       |       | 7                                 |       | 42,921     |       | 1,553            |       |
| SES                                                                 |       | 4,727       |       | 810                               |       | —     |       | —           |       |
| Corporate and Other                                                 |       | 239         |       | (9,031                            | )          | 579        |       | 498              |       |
|                                                                |       | $           | 39,932     |                              | $          | (3,136     | )          | $                | 57,677     |   | $ | 4,771 |   |

###  

### **8.  Common Stock Options, Stock Purchase Plan,and Other Long Term Incentive Plans**

###  

We grant options to employees and directors utilizingfour shareholder-approved plans and issue Company stock under an Employee StockPurchase Plan.

 

### **The 1994Plan**

###  

Under the terms of the 1994 Plan, the number and priceof the options granted to employees is determined by the Board of Directors andsuch options vest, in most cases, incrementally over a period of four years andexpire no more than ten years after the date of grant.

 

### **TheDirectors’ Stock Option Plan**

###  

Each new non-employee director receives a one-timegrant of an option to purchase 1,000 shares of common stock at an exerciseprice equal to the fair market value on the date of grant. In addition,effective as of the date of each annual meeting of our stockholders, eachnon-employee director who is elected or continues as a member of the Board ofDirectors of the Company shall be awarded an option to purchase 500 shares ofcommon stock. Options under the Director’s Plan vest after one year and expireseven years from the date of grant.

 

10

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###  

### **SpaceMedia, Inc. Stock Option Plan**

###  

During the year ended June 30, 2000, Space Media, Inc.(“SMI”), a majority-owned subsidiary, adopted an option plan (“SMI Plan”) foremployees, officers, directors and consultants of SMI. Under the terms of theSMI Plan, 1,500,000 shares have been reserved for future grants for which thenumber and price of the options granted is determined by the Board of Directorsand such options vest, in most cases, incrementally over a period of four yearsand expire no more than ten years after the date of grant.

 

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

###  

We adopted an employee stock purchase plan thatpermits eligible employees to purchase shares of common stock of the Company atprices no less than 85% of the current market price. Eligible employees mayelect to participate in the plan by authorizing payroll deductions from 1% to10% of gross compensation for each payroll period. On the last day of eachquarter, each participant’s contribution account is used to purchase themaximum number of whole and fractional shares of common stock determined bydividing the contribution account’s balance by the lesser of 85% of the priceof a share of common stock on the first day of the quarter or the last day of aquarter. The number of shares of common stock that may be purchased under theplan is 150,000. Through March 31, 2008, employees have purchased148,264.5 shares under this plan. During the fourth quarter of fiscal year2007, we terminated the purchasing of Common Stock by the employees from thisplan. The shares purchased under this plan are considered compensatory foraccounting and reporting purposes.

 

### **2008Stock Incentive Plan**

###  

On March 27, 2008 the shareholders approved the2008 Stock Incentive Plan, which reserves 5,500,000 shares for future grants ofincentive based equity awards. The number, type of grant, price, and vestingrequirements of awards under the plan are determined from time to time by theCompensation Committee of the Board of Directors. Employees, members of theBoard of Directors, and consultants are eligible to participate under the plan.

 

### **StockOptions**

###  

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

 

·      We estimated volatilityusing our historical share price performance over the last ten years.Management considered the guidance in SFAS No. 123R and believes thehistorical estimated volatility is materially indicative of expectations aboutfuture volatility.

·      We use the simplified methodoutlined in the Securities and Exchange Commission (“SEC”) Staff AccountingBulletin No. 107 to estimate expected lives for options granted.

·      The risk-free interest rateis based on the U.S. Treasury yield curve in effect at the time of grant forthe expected term of the option.

·      The expected dividend yieldis based on our current dividend yield and the best estimate of projecteddividend yield for future periods within the expected life of the option.

 

11

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A summary of our stock option activity as of December 31,2007 and changes during the first nine months of fiscal year 2008 are presentedin the following table:

 
| ** **                          | ** ** | **Shares Under  Fixed Options** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Weighted-  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|-------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------|------------|------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding at  June 30, 2007  |       | 107,691                                   |       | $                                       | 2.61       |                                                 | 4.94       |                            | $          | — |   |
| Granted                             |       | 1,000                                     |       | $                                       | 4.40       |                                                 | 7.0        |                            | $          | — |   |
| Exercised                           |       | —                                    |       | $                                       | —     |                                                 | —     |                            | $          | — |   |
| Forfeited/Expired                   |       | (19,191                                   | )          | $                                       | 25.62      |                                                 | —     |                            | $          | — |   |
| Outstanding at  March 31, 2008 |       | 89,500                                    |       | $                                       | 25.91      |                                                 | 4.02       |                            | $          | — |   |
| Exercisable                         |       | 77,400                                    |       | $                                       | 27.93      |                                                 | 3.44       |                            | $          | — |   |

 

As of March 31, 2008 there was $215,571 ofunamortized expense related to our stock option plans.

 

During the first nine months of fiscal year 2008 therewere 1,000 shares of stock options granted with a fair value of $4.40 pershare.

 

We issue performance shares to certain employees ofthe Company from our 1994 Stock Incentive Plan. Performance shares are to beissued subject to the passing of certain events as established by theCompensation Committee of the Board of Directors. Such events may result in amaterial risk of forfeiture before vesting of the award. In December 2007we awarded performance shares which, subject to materiality of the risk offorfeiture, we account for as follows:

 

### **OtherStock Based Incentive Awards**

###  

·      Special performance shares –We issued 62,200 performance shares that vest on January 15, 2009, subjectto certain events or upon designation by the Compensation Committee.Termination of employment, except for resignation or cause was not an event offorfeiture. The employees receiving special performance shares weresubsequently terminated by the Company and the risk of subsequent forfeiturewas not material. Consequently, we expensed the entire fair value of the grant($127,305) valuing the performance shares at the close of business on the dateof grant. Subsequently, 9,750 shares have been forfeited and our expense hasbeen adjusted for them in the amount of $19,782.

·      2007 performance shares – Weissued 239,900 performance shares that vest on February 15, 2011 subjectto certain events or upon designation by the Compensation Committee.Termination of employment for any cause is an event of forfeiture. We valuedthe 2007 performance shares granted at the close of business on the date ofgrant and recognize expense and accrue an incentive compensation liability, prorata over the vesting period. In the three months ended December 31, 2007and March 31, 2008, we recognized compensation expense of $9,976 and$3,901, respectively for these performance shares.

·      Restricted Stock grants – OnMarch 27, 2008 the Board of Directors granted 25,000 shares of restrictedstock to each non-employee director of the Company. The Restricted Stock vestsannually over a period of four years and unvested shares are forfeited if thedirector leaves the Board of Directors prior to the vesting date. The Companyrecognized no board compensation expense for the three months ended March 31,2008.

 

The Compensation Committee of the Board of Directorsadopted and implemented a Long Term Cash Incentive Plan during the three monthsended December 31, 2007. The Long Term Cash Incentive Plan makes cashincentive awards to employees upon the successful completion of certain eventsand passage of time as established by the Committee. In the three months ended December 31,2007, the Committee awarded Long Term Cash Incentive Units valued at $344,900to employees. These units vest on February 15, 2011 and are subject tomaterial risk of forfeiture. We recognized expense and accrued deferredcompensation liability of $7,379 and $30,892 under the Long Term Cash IncentivePlan during the three months ended December 31, 2007 and March 31,2008, respectively.

 

12

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### ** **

### **9.  Gain on Saleof The Space Store LLC**

### ** **

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

 

### **10.  RelatedParty Transactions**

### ** **

We engaged in certain transactions with directors andexecutive officers during the nine months ended March 31, 2008. Followingis a description of these transactions:

 

### **Astrium GmbH**

### ** **

Dr. Graul, a member of SPACEHAB’s Board ofDirectors until his resignation in August 2007, is the Executive VicePresident for Astrium GmbH (“Astrium”). Astrium provided unpressurized payloadand integration efforts to SPACEHAB on a fixed-price basis in addition toproviding engineering services as required. For the nine months ended March 31,2008 and 2007, Astrium’s payload and integration services included in cost ofrevenue were approximately $1.0 million and $7.8 million, respectively. In August 2007SPACEHAB terminated its ICC/VCC lease agreements with Astrium North America(see Note 14). We reimbursed Astrium North America $1.4 million upontermination of these leases. As of March 31, 2008 the Company carries anaccount payable of $1.6 million due to Astrium.

 

### **Executive Credit Cards**

### ** **

Certain named executive officers of the Company havecompany paid credit cards for ordinary business expenses. Although the Companypays the amounts on the credit cards, the executive officer is obligated tosubstantiate the charges and reimburse the Company for any non-business relatedcharges. As of March 31, 2008 the Company has a receivable due from anexecutive officer for $33,179.

 

### **11.  Recent Accounting Pronouncements**

### ** **

In July 2006, the Financial Accounting StandardsBoard (“FASB”) issued Interpretation No. 48, *Accountingfor Uncertainty in Income Taxes* (FIN No. 48). Thisinterpretation clarifies the accounting for uncertainty in income taxesrecognized in an entity’s financial statements in accordance with SFAS No. 109,*Accounting for Income Taxes*. Itprescribes a recognition threshold and measurement attribute for financialstatement disclosure of tax positions taken or expected to be taken on a taxreturn. We have adopted provisions of this interpretation beginning with theCompany’s first-quarter of fiscal year 2008. The application of the standarddoes not have a material impact on our financial position or results ofoperations.

 

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

 

In September 2006 the FASB issued FASB Statement No. 157,*Fair Value Measurements.*Statement No. 157establishes a common definition for fair value to be applied to U.S. generallyaccepted accounting principles requiring use of fair value, establishes aframework for measuring fair value, and expands disclosure about such fairvalue measurements. Statement No. 157 is effective for fiscal yearsbeginning after November 15, 2007. The adoption of this statement is notexpected to have a material impact on the Company’s consolidated financialposition and results of operations.

 

13

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### ** **

### **12.  RestrictedCash, Advances on Construction Contract, and Contingency**

### ** **

In December 2006, our Astrotech subsidiary wasawarded a contract with a governmental agency to modify one of our payloadprocessing facilities to specific requirements of a programmed mission. Underthe terms of this $20.0 million fixed-price contract, which has subsequentlybeen increased in contract value to $35.1 million, we will own the improvementsafter completion of the contract obligations. We have entered into a firm fixedprice construction subcontract with J. P. Donovan Construction, Inc. toprovide a significant portion of the design and construction work that will berequired under our contract. In accordance with our contracts, payments will bereceived from our customer on a milestone schedule that generally providesreceipt of cash before payments are required to the subcontractor under theirmilestone schedule. Receipts in advance of disbursements will be retained in arestricted cash account within our subsidiary company and used exclusively forpurposes of the contract obligations. As of March 31, 2008, net cashreceipts of $6.5 million have been designated as restricted cash and $11.5million has been designated as a liability.

 

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

 

### **13.  CustomerDeposits**

### ** **

During the quarter ended September 30, 2007 wepaid $3.1 million for in-flight insurance on our pressurized module for use onSTS-118, which launched mid-August 2007. This $3.1 million was recorded asa current liability on our balance sheet as of June 30, 2007. This amountis included as a cash outlay in cash flows from operating activities during thethree month period ending September 30, 2007.

 

### **14.  Agreementto Termination of ICC and VCC Leases**

### ** **

On August 28, 2007, the Company and Astrium, GmbHmutually agreed to terminate the lease agreement dated as of February 28,2001 in regards to the Company’s lease of the Integrated Cargo Carriers (“ICC”)assets from Astrium, GmbH. Also, we mutually agreed to terminate the leaseagreement dated as of July 3, 2001 in regards to the Company’s lease ofthe Vertical Cargo Carrier (“VCC”) assets from Astrium, GmbH. The ICC and VCCassets are specifically designed cargo carrying equipment used from time totime in the U.S. Space Shuttle. In order to terminate these two leases, wemutually agreed that the Company reimburse Astrium, GmbH $1.4 million for theperiod March 1, 2007 through August 31, 2007 for the ICC and VCCassets and incur no financial obligations for either the ICC or VCC after August 31,2007.

 

### **15.  InducedConversion of Convertible Securities and Reverse Stock Split**

### ** **

On October 5, 2007, we announced the successfulclosing of our offer to exchange (the “Exchange Offer”) any and all of ouroutstanding 8% Convertible Subordinated Notes due 2007 (the “Junior Notes”) andany and all of our outstanding 5.5% Senior Convertible Notes due 2010 (the “SeniorNotes”). As a result of the closing of the Exchange Offer, for theapproximately $7.4 million in principal amount of Junior Notes tendered, theholders received approximately 550,000 shares of common stock and 8,927 sharesof Series C Convertible Preferred Stock on a pre reverse split basis.Following the closing of the Exchange Offer, approximately $2.9 million ofJunior Notes remained outstanding pursuant to the original terms of theindenture governing the Junior Notes. On October 15, 2007 we redeemed theoutstanding Junior Notes, including accrued interest, for cash. In addition,for the approximately $46.1 million in principal amount of outstanding SeniorNotes tendered, the holders received approximately 30.7 million shares ofcommon stock and 46,083 shares of Series C Convertible Preferred Stock ona pre reverse split basis. Following the closing of the Exchange Offer,approximately $6.9 million of Senior Notes remained outstanding pursuant to anindenture governing the Senior Notes that was amended through the eliminationof substantially all of the indenture’s restrictive covenants.

 

In addition, as a result of the closing of theRestructuring and Exchange Agreement, effective as of August 31, 2007,among the Company and certain holders of Junior Notes and Senior Notes, theCompany issued to Astrium GmbH 1,333,334 shares of common stock and 6,540shares of Series C Convertible Preferred Stock in exchange for Astrium’sexisting 1,333,334 shares of Series B Convertible Preferred Stock on a prereverse split basis.

 

As a consequence of the Exchange Transaction, werecognized non cash debt conversion expense of $30.2 million in the nine monthsended March 31, 2008, and we increased our common stock by $98.3 million.

 

14

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

 

### **16.  CommitmentConsideration Paid in Stock**

### ** **

### **Equity Securities**

### ** **

On February 11, 2008, the Company entered into aStock Purchase Agreement with certain investors for the purchase of 55,000shares of the Company’s Series D convertible preferred stock for a totalprice of $5.5 million. Consummation of the transaction was contingent upon NASAawarding us a funded Space Act Agreement under the Commercial OrbitalTransportation Services (“COTS”) Program and shareholder approval of thetransaction. As consideration for investor commitment to this transaction, theCompany issued 150,150 shares of common stock upon entering into thetransaction.

 

The Company was not awarded a funded Space ActAgreement under the COTS Program and, except for the 150,150 commitmentcompensation paid, the offering was terminated.

 

### **17.  SubsequentEvents**

### ** **

### **NASDAQ Deficiency Letter**

### ** **

On April 7, 2008, we received a NASDAQ StaffDetermination letter indicating that we failed to comply with NASDAQMarketplace Rule 4310(c)(4) and our securities were, therefore, subject todelisting from The NASDAQ Capital Market. MarketplaceRule 4310(c)(4) requires that we maintain a $1.00 bid price. We weregranted a grace period, which expires on October 6, 2008, to regain compliancewith this Rule.

 

### **Early Termination of Lease**

### ** **

On May 1, 2008, The Company and R&HInvestments reached an agreement upon early termination of the Company’s leaseat 12130 Highway 3, Building 1, Webster, Texas. The lease provided for rentalpayments of $26,538 monthly, which escalated annually through the leasetermination of February 2015. In addition, the Company was responsible forall maintenance, utilities, and taxes on the building through the lease terms.Under the terms of the agreement, the Company will pay rent through June 30,2008 and transfer ownership of 2.9 acres of vacant land owned by the Company toR&H Investments. The Company anticipates recognizing lease terminationexpenses of approximately $369,500 million representing consideration paid andforfeited leasehold improvements.

 

# **EarlyTermination of Cost Plus Award Fee Contract**

# ** **

On May 7, 2008, SPACEHAB, Incorporated (the “Company”)received a letter from ARES Corporation (“ARES”) notifying the Company of ARES’sintent to terminate the Cost Plus Award Fee Subcontract No. SGS-0311403.00with the Company (the “Subcontract”) pursuant to section GP-07(7.2) of theGeneral Provisions as set forth in Attachment J-7 to the Subcontract. Theprovision referred to in ARES’s correspondence provides for termination for “convenience.”

 

As stated in ARES’s letter “...the objective of theSubcontract was to assist NASA’s continued development and operation of theInternational Space Station...” The Company has consistently received excellentreviews for its performance under the Subcontract and has earned near maximumaward fees. Currently 45 employees of the Company are engaged under theSubcontract, which resulted in revenues of $3.9 million for the first ninemonths of the current fiscal year.

 

The Company will continue under the current taskorders under the Subcontract until at least June 5, 2008. The Subcontractextended pursuant to its original term until September 30, 2008. TheCompany and ARES have not resolved certain issues relative to the early terminationof the Subcontract. The Company is evaluating its contractual rights and otheroptions with respect to ARES’s claimed termination of the Subcontract,including ARES’ obligations with respect to such claimed termination.

 

15

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# ** **

# **ITEM2.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

# ** **

*The following discussion and analysis should beread together with our consolidated financial statements and notes thereto andthe discussion “Management’s Discussion and Analysis of Financial Condition andResults of Operations” and Item 1A. — “Risk Factors” included in our 2007Annual Report Form 10-K. The following information containsforward-looking statements, which are subject to risks and uncertainties.Should one or more of these risks or uncertainties materialize, our actualresults may differ from those expressed or implied by the forward-lookingstatements.*

 

**OVERVIEW**

** **

### **Forward Looking Statements**

### ** **

This document may contain “forward-looking statements”within the meaning of Section 27A of the Securities Act of 1933 and Section 21Eof the Securities Exchange Act of 1934, including (without limitation)statements under “Management’s Discussion and Analysis of Financial Condition andResults of Operations” and “Liquidity and Capital Resources.” Such statementsare subject to risks and uncertainties that could cause actual results todiffer materially from those projected in the statements. In addition to thoserisks and uncertainties discussed herein, such risks and uncertainties include,but are not limited to, whether we will fully realize the economic benefitsunder our NASA and other customer contracts, completion of the InternationalSpace Station, continued availability and use of the U.S. space shuttle system,technological difficulties, product demand, market acceptance risks, the effectof economic conditions, uncertainty in government funding, and the impact ofcompetition, delays, and uncertainties in future space shuttle and ISSprograms.

 

### **Financial Summary**

### ** **

SPACEHAB’s first nine months operating results reflectthe completion of the Company’s STS-118 space shuttle mission in August 2007.As a result, the Company’s revenues were significantly below the first ninemonths of the prior fiscal year. Recognition of non cash debt conversionexpense of ($30.2) million on the induced conversion of convertible securitiescontributed to a loss for the nine months of $34.5 million, compared to a netloss of $3.1 million for the first nine months of the prior fiscal year.

 

The following table illustrates financial highlightsfor the nine months ended March 31, 2008 and March 31, 2007:

 
| **For the Nine Months Ended** | ** ** | **2008**                                                            | ** ** | **2007** | ** ** | **Percent  Change** | ** ** |
|---------------------------------------------------|------------|---------------------------------------------------------------------|------------|----------|------------|---------------------|------------|
| ** **                                        | ** ** | **(in millions except per share amounts)** | ** ** |
| March 31:                                    |       |                                                                |       |     |       |                |       |
| Revenue                                           |       | 19.5                                                                |       | 39.9     |       | (51                 | )%         |
| Net (Loss)                                        |       | (34.5                                                               | )          | (3.1     | )          | (1012               | )%         |
| Diluted EPS                                       |       | (4.92                                                               | )          | (2.37    | )          | (108                | )%         |
| As of  March 31:                             |       |                                                                |       |     |       |                |       |
| Cash and Cash  Equivalents                        |       | 2.0                                                                 |       | 12.3     |       | (84                 | )%         |
| Restricted Cash                                   |       | 6.5                                                                 |       | 6.3      |       | (3                  | )%         |
| Total Debt                                        |       | 10.8                                                                |       | 63.3     |       | (83                 | )%         |
| Stockholders  Equity                              |       | 35.6                                                                |       | —   |       | 100                 | %          |

### ** **

### **Business Segments**

### ** **

Our Company is comprised of four primary businesssegments. Following is a brief discussion of each of these segments, includinga list of key factors that affected their respective contribution to earningsand cash flows. We also present a brief discussion of our corporate-levelexpenses along with a summary of our current liquidity position and items thatcould impact our liquidity position in fiscal year 2008 and beyond.

 

*SPACEHAB Flight Services*(SFS). Historically, SFS offered a range of engineering, research, logistics,integration, operations, and ground support services supporting our spaceshuttle module and pallet assets. At this time, there are no more scheduledmissions to be performed under this business segment as the shuttle spacetransportation system nears retirement. During the third quarter of fiscal year2008, the Company recognized residual SFS activity from previous missions andcontinues to retain its space shuttle assets.

 

16

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*Astrotech Space Operations*. OurAstrotech business unit provides modern facilities and support for thepreparation of multi-million dollar satellites and payloads for launch onexpendable launch vehicles. Since 1985, Astrotech has been providing governmentand commercial customers with a commercial alternative to usinggovernment-owned facilities to prepare their satellites for launch in theUnited States. Revenue is generated from various fixed-price contracts withlaunch service providers in both the commercial and government markets. Theservices and facilities we provide to our customers support the final assembly,checkout, and countdown functions associated with preparing a spacecraft for launch.

 

The earnings and cash flows generated from ourAstrotech operations are related to the number of governmental commercialspacecraft launches, which reflects the growth in the satellite-basedcommunication industries and the requirement to replace aging satellites. Otherfactors that have impacted, and are expected to continue to impact, earningsand cash flows for this business unit include:

 

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

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

·                  The consistentlaunch schedule and processing requirements of our government and commercialcustomers

 

Looking ahead, the current expansion of our facilityat its Vandenberg Air Force Base location is scheduled to be operational in2009. Supporting Astrotech’s long-term growth, the Company intends to expandAstrotech’s market by offering end-to-end mission services to both commercialand government customers. These new end-to-end mission services would extendAstrotech’s current relationships with customers’ spacecraft from a condensedfew weeks of ground processing at an Astrotech facility to multiple years ofspace mission assurance services throughout the satellite’s lifecycle.

 

*SPACEHAB Engineering Services*.Formerly SPACEHAB Government Services, our SPACEHAB Engineering Services (SES)business generates revenue by providing support to the U.S. Government in theareas of large-scale configuration and data management programs such as theInternational Space Station; low- to high-fidelity mockup design andconstruction; and safety and quality support services. Our SES business unitcurrently provides configuration management, data management, and IT servicesunder the PI&C contract with NASA. Additionally, we provide cargo shipmentcoordination services to NASA for all U.S. cargo shipped to the InternationalSpace Station via the Russian *Progress* spacevehicle. These services are provided under contract with Lockheed Martin, theprime Cargo Mission Contract contractor to NASA.

 

Earnings from our SES business unit operations aredependent on our ability to continue to win contracts with NASA or othergovernment entities through the competitive bidding process and our performanceunder those contracts in achieving performance bonuses. Other factors that haveimpacted earnings and cash flows for this business include:

 

·                  Continuation,through the government fiscal year 2008, of our PI&C contract with theInternational Space Station program and exercise of the contract optionsthrough the government fiscal year 2010

·                  Our ability tomaintain small business qualification for our SES business unit under NASAcontracting rules

·                  Our ability tocontrol costs within our budget commitments

 

*SPACETECH.* SPACETECH is atechnology transfer, product development, and sales-focused ‘businessdevelopment’ subsidiary of the Company established to transform space-basedtechnologies and products into commercial applications, useful products,intellectual property, and possible spin-off businesses.

 

Although we are developing products and services insupport of the new business initiatives under SPACETECH, we currently do nothave contracts or other arrangements for several of these new products andservices. We cannot assure you that we will be able to successfully developthese new products and services in the future. We anticipate that we willrequire substantial additional capital to develop these new products andservices, and that this additional financing will likely substantially dilutecurrent holders of our common stock. The following are examples of currentSPACETECH initiatives:

 

·                  MicrogravityProcessing – SPACEHAB’s 23 years of experience processing and integratingcomplex science payloads for spaceflight propelled our entrance into the fieldof microgravity processing of high value bioscience products for the benefit ofthe general public. In January 2008, SPACEHAB was selected by NASA 

 

17

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                        to cooperate ona Space Act Agreement for use of the ISS as a commercial National Lab forresearch, development, and industrial processing purposes. Additionally, theCompany recently announced a partnership with the State of Florida to fullydevelop the biotech industry in space, has flown an infectious disease model onSTS-123, and will fly the same model aboard STS-124 in May to confirmsuccessful results retrieved from the initial flight.

·                  AirWardContainer – The Department of Transportation has enacted new regulations forair transportation of oxygen containers to enhance safety in the event of afire. The new requirements are scheduled to be enforced by October 2009.Applying decades of experience in the development of specialized containers, wesuccessfully debuted SPACETECH’s AirWard Container, which exceeds the newsafety guidelines, at the 2008 Aviation Expo and have received significantinterest from several major airline carriers.

·                  Mini-MassSpectrometer (MMS) – Through SPACETECH, the Company has been developing theMMS, a trace chemical analyzer capable of detecting residues and vapors fromexplosives, chemical warfare agents, and toxic chemicals. The MMS samplesambient air directly or, alternatively, chemicals sampled by swabs, andmeasures the constituent chemicals using ion-trap mass spectrometry. Thetechnology, which also includes proprietary software used for accurate chemicalidentification, is being targeted for use and applications to the defense,industrial, and homeland security industries. SPACEHAB recently announced itsreceipt of a formal Developmental Testing and Evaluation Designation from theU.S. Department of Homeland Security for the Company’s new MMS technology. Thedesignation was instituted by the U.S. Department of Homeland Security toencourage the development of ‘promising anti-terrorism technologies’ byproviding legal liability protections under the Support Anti-terrorism byFostering Effective Technologies Act of 2002, or the SAFETY Act. Thedesignation letter, dated April 10, 2008, states “SPACEHAB, Incorporated’sMiniature Mass Spectrometer is such a technology.”

 

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

 

·                  Our ability tocontrol sales, general and administrative costs in a period of decreasingrevenues and pursuit of new business opportunities

·                  Interestexpense on our convertible notes, costs relative to the refinancing of ourlong-term debt during fiscal year 2008, and interest savings on the conversionand repayment of our debt

·                  Income taxes,of which we currently only pay alternative minimum tax and minimal state incometaxes; income taxes will also be impacted by our ability to realize oursignificant deferred tax assets, including loss carry forwards that are limiteddue to IRS restrictions after a significant change in ownership

 

18

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**RESULTSOF OPERATIONS**

 

*For thethree months ended March 31, 2008 as compared to the three months ended March 31,2007.*

 

Revenue.Revenue decreased approximately 46% to $6.6 million for the three months ended March 31,2008 as compared to $12.2 million for the three months ended March 31,2007 (in millions).

 
| ** **                     | ** ** | **Three months Ended** | ** ** | ** ** | ** ** | ** **  | ** ** |
|--------------------------------|------------|----------------------------------|------------|------------|------------|-------------|------------|
| ** **                     | ** ** | **March 31,**               | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **                     | ** ** | **2008**                         | ** ** | **2007**   | ** ** | **Change**  | ** ** | **Change** | ** ** |
| SPACEHAB  Flight Services      |       | $                                | 0.2        |       | $          | 8.0         |       | $ | (7.8 | ) | (98 | )% |
| Astrotech  Space Operations    |       | 5.0                              |       | 2.8        |       | 2.2         |       | 79 | % |
| SPACEHAB  Engineering Services |       | 1.4                              |       | 1.4        |       | —      |       | — |   |
| SPACETECH                      |       | —                           |       | —     |       | —      |       | — |   |
| Other                          |       | —                           |       | —     |       | —      |       | — |   |
|                           |       | $                                | 6.6        |       | $          | 12.2        |       | $ | (5.6 | ) | (46 | )% |

 

Revenue from our SFSbusiness unit decreased by $7.8 million for the period ending March 31,2008 as compared to the same period ending March 31, 2007. The followingsummarizes the significant items that affected the quarter ended March 31,2008 as compared to the quarter ended March 31, 2007:

 

·      Decrease in revenue from STS-116 and STS-118under the CMC with Lockheed Martin of $7.7 million due to launch and completionof these missions during prior periods. There are no more scheduled missions under our CMC contract withLockheed Martin.

·      Other contract revenue decrease of $0.1 milliondue to the delivery of the Extravehicular Activity and Passive FRAM InterfacePlate flight hardware in the second quarter.

 

Revenue from ourAstrotech business unit increased by $2.2 million for the three months ended March 31,2008 as compared to the three month period ending March 31, 2007. Thefollowing summarizes significant items that affected the three months ended March 31,2008 as compared to the same period ended March 31, 2007:

 

·      Increase in revenue of $0.4 million due to theprocessing and launch of two satellite missions at the Sea Launch facilityduring the three month period ending March 31, 2008 as opposed to only onesuch mission for the same period of the prior fiscal year.

·      Increase of $2.0 million in revenue, a result ofthe recognition of 39% of the National Reconnaissance Office (“NRO”) facilityconstruction contract relating to the Astrotech only portion.

·      The remaining $0.2 million decrease resulted fromhaving a mission processed under the guaranty contract whereby the revenue forthe contract is recognized evenly throughout the year, offset by other supportwork completed for various customers that generated revenue during the periodended March 31, 2008.

 

Revenue from our SESbusiness unit for the period ending March 31, 2008 was equal to the $1.4million recognized for the same period ended March 31, 2007.

 

Cost of Revenue.Cost of revenue for the three months ended March 31, 2008 decreased by 57%to approximately $4.2 million, as compared to $9.8 million for the same periodof the prior year (in millions).

 
| ** **                     | ** ** | **Three months Ended** | ** ** | ** ** | ** ** | ** **  | ** ** |
|--------------------------------|------------|----------------------------------|------------|------------|------------|-------------|------------|
| ** **                     | ** ** | **March 31,**               | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **                     | ** ** | **2008**                         | ** ** | **2007**   | ** ** | **Change**  | ** ** | **Change** | ** ** |
| SPACEHAB  Flight Services      |       | $                                | 0.3        |       | $          | 6.5         |       | $ | (6.2 | ) | (95 | )% |
| Astrotech  Space Operations    |       | 2.4                              |       | 2.1        |       | 0.3         |       | 14 | % |
| SPACEHAB  Engineering Services |       | 1.3                              |       | 1.2        |       | 0.1         |       | 8 | % |
| SPACETECH                      |       | 0.2                              |       | —     |       | 0.2         |       | 100 | % |
| Other                          |       | 0.0                              |       | 0.0        |       | 0.0         |       | 0 | % |
|                           |       | $                                | 4.2        |       | $          | 9.8         |       | $ | (5.6 | ) | (57 | )% |

 

19

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The following summarizessignificant items that affected the three months ended March 31, 2008 ascompared to the same period ended March 31, 2007 for SFS:

 

·      Completion of the CMC contract with LockheedMartin resulted in a reduction in the cost of revenue of approximately $6.2million.  There are no more scheduledmissions under our CMC contract with Lockheed Martin.

·      Current cost of revenue includes depreciation andcost associated with miscellaneous space related project work.

 

The cost of revenue inour Astrotech business unit increased by $0.3 million compared with the samequarter the previous year. This cost increase relates to the 83% increase inrevenue over the three months ended March 31, 2008.

 

The increase in cost ofrevenue of $0.1 million in our SES business unit is primarily resulting fromthe addition of new contract work for various aerospace companies.

 

There was an increase of$0.2 million for our SPACETECH business unit that began operations in February.

 

Operating Expenses.Operating expenses increased to $2.9 million for the three months ended March 31,2008 as compared to approximately $2.8 million for the three months ended March 31,2007. The following summarizes the significant differences between the twoperiods:

 

·      Legal expenses decrease by $0.2 million due tothe termination of legal proceedings related to the loss of the Research DoubleModule (“RDM”).

·      Labor and related expenses decreased by $0.1million as a result of the reduction in work-force in January 2008.

·      R&D increase of $0.4 million during theperiod ending March 31, 2008 as compared to the same period lastyear.  This is attributable to the MMS,AirWard, and Advanced Research and Conventional Technology UtilizationSpacecraft (“ARCTUS”) programs.

 

Interest Expense.Interest expense was approximately $0.1 million for the three months ended March 31,2008 as compared to approximately $1.1 million for the three months ended March 31,2007. The decrease in interest expense is primarily due to the conversion of$7.4 million of 8% convertible subordinated notes due October 2008 and$46.1 million of our 5.5% senior convertible notes due October 2010 intocommon and convertible preferred stock on October 5, 2008, and repaymentof the remaining $2.9 million of 8% convertible subordinated notes on October 15,2008.

 

Interest and OtherIncome. Interest income is earned on our mortgage receivabledue to the sale of our payload processing facility in our SFS segment and oninvestment of our restricted cash. Additionally the gain on the sale of TheSpace Store, LLC of $189,000 was recorded as other income for the period ended March 31,2007. For the first three months of fiscal year 2008 we earned $0.1 million oninvestment of our restricted cash.

 

Income Taxes.Under U.S. tax rules the Exchange Transaction completed in November 2007resulted in taxable income. Although this income was offset by the Company’snet operating loss, alternative minimum tax is applicable to the transaction.The Company recognized $0.4 million of alternative minimum tax for the ninemonths ended March 31, 2008. The Company’s remaining net operating losscarryovers will be subject to limitations resulting from a significant changein ownership (as defined in the IRS regulations) arising from the ExchangeTransaction.

 

Net Loss.Net Loss for the three months ended March 31, 2008 was approximately($0.8) million or ($0.06) per share as compared to net loss of approximately($1.2) million or ($0.92) per share for the three months ended March 31,2007.

 

20

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*For the nine months ended March 31,2008 as compared to the nine months ended March 31, 2007.*

 

Revenue.Revenue decreased approximately 51% to $19.5 million for the nine months ended March 31,2008 as compared to $39.9 million for the nine months ended March 31, 2007(in millions).

 
| ** **                     | ** ** | **Nine months Ended** | ** ** | ** ** | ** ** | ** **  | ** ** |
|--------------------------------|------------|---------------------------------|------------|------------|------------|-------------|------------|
| ** **                     | ** ** | **March 31,**              | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **                     | ** ** | **2008**                        | ** ** | **2007**   | ** ** | **Change**  | ** ** | **Change** | ** ** |
| SPACEHAB  Flight Services      |       | $                               | 4.3        |       | $          | 27.9        |       | $ | (23.6 | ) | (85 | )% |
| Astrotech  Space Operations    |       | 11.1                            |       | 7.1        |       | 4.0         |       | 56 | % |
| SPACEHAB  Engineering Services |       | 4.1                             |       | 4.7        |       | (0.6        | )          | (13 | )% |
| SPACETECH                      |       | —                          |       | —     |       | —      |       | — |   |
| Other                          |       | 0.0                             |       | 0.2        |       | (0.2        | )          | (100 | )% |
|                           |       | $                               | 19.5       |       | $          | 39.9        |       | $ | (20.4 | ) | (51 | )% |

 

Revenue from our SFSbusiness unit decreased by $23.6 million for the period ending March 31,2008 as compared to the same period ending March 31, 2007. The followingsummarizes the significant items that affected the period ended March 31,2008 as compared to the period ended March 31, 2007:

 

·      Decrease in revenue for STS-116, STS-121 andSTS-118 under the CMC with Lockheed Martin of $23.9 million due to launch andcompletion of these missions during prior periods. There are no more scheduledmissions under our CMC contract with Lockheed Martin.

·      Increase in revenue of approximately $0.3 millionmainly due to revenue for the manufacture of flight hardware for LockheedMartin on STS-118 and flight bags for Mitsubishi.

 

Revenue from our Astrotech business unit increased by $4.0 million forthe nine months ended March 31, 2008 as compared to the nine month periodending March 31, 2007. The following summarizes significant items thataffected the nine months ended March 31, 2008 as compared to the sameperiod ended March 31, 2007:

 

·      Decrease in revenue of $1.9 million due to fivedifferent satellites in our Titusville facilities for processing for all of ora portion of the nine month period ending March 31, 2007. Whereas, for thesame period this fiscal year, there were only two satellites processed in thesefacilities.

·      Increase of $2.0 million in revenue, a result ofthe recognition of 39% of the NRO facility construction contract relating tothe Astrotech only portion.

·      Increase in revenue, over the nine month periodending March 31, 2007, of $2.4 million where the reduction of revenue onour Lockheed Martin guaranteed missions contract for two future missions thatwere to be processed for Boeing on Atlas launch vehicles partially offset byone Atlas mission that was processed at the Titusville facility contracted directlywith Boeing.  One of these missions,STP-1, was processed during fiscal year 2008. Another mission, WGS-F1, was processed at the end of fiscal year 2007and the beginning of fiscal year 2008.

·      Decrease in revenue from the nine month periodending March 31, 2007 to the nine month period ending March 31, 2008of $0.7 million from a contract to design a satellite processing facilitycompleted in the prior fiscal year.

·      Increase in revenue of $2.7 million at our VAFBfacility due to three missions processed during the nine month period ending March 31,2008, as compared to no missions being processed during the same period lastfiscal year.

·      Astrotech supported three satellite launches atits Sea Launch facility during the period ending March 31, 2007 whichresulted in revenue of $1.5 million. In the period ending March 31, 2008,Astrotech supported only two satellite launches for $1.0 million at its SeaLaunch facility. This is attributed to the January 30, 2007 launch failureexperienced by Sea Launch that resulted in the loss of a satellite and damageto their ground support equipment on the floating launch platform. Sea Launchreturned to flight in January 2008.

 

Revenue from our SESbusiness unit decreased by $0.6 million for the period ending March 31,2008 as compared to the same period ending March 31, 2007. The followingsummarizes the significant items that affected the period ended March 31,2008 as compared to the period ended March 31, 2007:

 

·      Decrease in revenue from the prior year sale ofour Destiny module to the Seattle Space Museum during the nine month periodended March 31, 2007 in the amount of $0.3 million.

 

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·      Decrease in contract revenue with United SpaceAlliance for support of the Constellation Program of $0.2 million.

·      Decrease in contract revenue with the ProgramIntegration & Control contract for the ISS of $0.1 million.

 

Cost of Revenue.Cost of revenue for the nine months ended March 31, 2008 decreased by 53%to approximately $15.0 million, as compared to $32.0 million for the sameperiod of the prior year (in millions).

 
| ** **                     | ** ** | **Nine months Ended** | ** ** | ** ** | ** ** | ** **  | ** ** |
|--------------------------------|------------|---------------------------------|------------|------------|------------|-------------|------------|
| ** **                     | ** ** | **March 31,**              | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **                     | ** ** | **2008**                        | ** ** | **2007**   | ** ** | **Change**  | ** ** | **Change** | ** ** |
| SPACEHAB  Flight Services      |       | $                               | 4.4        |       | $          | 21.3        |       | $ | (16.9 | ) | (79 | )% |
| Astrotech  Space Operations    |       | 7.0                             |       | 6.8        |       | 0.2         |       | 3 | % |
| SPACEHAB  Engineering Services |       | 3.4                             |       | 3.7        |       | (0.3        | )          | (8 | )% |
| SPACETECH                      |       | 0.2                             |       | —     |       | 0.2         |       | 100 | % |
| Other                          |       | 0.0                             |       | 0.2        |       | (0.2        | )          | (100 | )% |
|                           |       | $                               | 15.0       |       | $          | 32.0        |       | $ | (17.0 | ) | (53 | )% |

 

The following summarizessignificant items that affected the nine months ended March 31, 2008 ascompared to the same period ended March 31, 2007 for SFS:

 

·      Decrease in cost of revenue, other than directdepreciation cost of revenue, for STS-116, STS-121 and STS-118 under the CMCwith Lockheed Martin of $1.8 million due to launch and completion of thesemissions during prior periods.  There areno more scheduled missions under our CMC contract with Lockheed Martin.

·      Decrease in cost of revenue related to an expenseof $1.9 million. This was due to the write-down of our flight assets during theperiod ended June 30, 2007.

·      Decrease in cost of revenue of $10.7 million dueto the termination of the ICC/VCC assets during the fiscal year ended August 2007.

·      Decrease in cost of revenue of approximately $2.5million due to a reduction in workforce commencing in January of 2007.

 

The increase in cost of revenue of $0.2 million in our Astrotechbusiness unit is primarily due to the increase in mission traffic during thenine month period ending March 31, 2008.

 

The decrease in cost ofrevenue of $0.3 million in our SES business unit is primarily due to reducedcontract activities for the PI&C subcontract.

 

There was an increase of$0.2 million cost of revenue for SPACETECH which started operations in fiscalyear 2008.

 

Operating Expenses.Operating expenses decreased to $7.7 million for the nine months ended March 31,2008 as compared to approximately $8.5 million for the nine months ended March 31,2007. The following summarizes the significant differences between the twoperiods:

 

·      Legal expenses decrease by $0.9 million due tothe termination of legal proceedings related to the loss of the RDM.

·      R&D increase of $0.8 million during theperiod ending March 31, 2008 as compared to the same period lastyear.  This is attributable to the MMS,AirWard, and ARCTUS programs.

 

Interest Expense.Interest expense was approximately $1.2 million for the nine months ended March 31,2008 as compared to approximately $3.2 million for the nine months ended March 31,2007. The decrease in interest expense is primarily due to the conversion of$7.4 million of 8% convertible subordinated notes due October 2008 and$46.1 million of our 5.5% senior convertible notes due October 2010 intocommon and convertible preferred stock on October 5, 2008, and repaymentof the remaining $2.9 million of 8% convertible subordinated notes on October 15,2008.

 

Interest and OtherIncome. Interest income is earned on our mortgage receivabledue to the sale of our payload processing facility in our SFS segment and onour restricted cash. Interest and other income was $0.6 million for the ninemonths ended March 31, 2007 and $0.5 million over the nine month periodending March 31, 2008 from interest earned on our restricted cash.Additionally the gain on the sale of The Space Store, LLC of $189,000 was 

 

22

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recorded as other incomefor the period ended March 31, 2007. We recognized non cash debtconversion expense of ($30.2) million from the conversion of Junior and SeniorNotes to common stock.

 

Income Taxes.Under U.S. tax rules the Exchange Transaction completed in November 2007resulted in taxable income. Although this income was offset by the Company’snet operating loss, alternative minimum tax is applicable to the transaction.The Company recognized $0.4 million of alternative minimum tax for the ninemonths ended March 31, 2008. The Company’s remaining net operating losscarryovers will be subject to limitations resulting from a significant changein ownership (as defined in the IRS regulations) arising from the ExchangeTransaction. Previously, we recorded a tax benefit of $69,000 for the six monthperiod ending March 31, 2007.

 

Net Loss.Net Loss for the nine months ended March 31, 2008 was approximately($34.5) million or ($4.92) per share as compared to net loss of approximately($3.1) million or ($2.37) per share for the nine months ended March 31,2007. The net income for the nine months ended March 31, 2008 included anon cash debt conversion expense of ($30.2) million from our induced conversionof convertible securities.

 

### **Liquidity andCapital Resources**

### ** **

Our primary source ofliquidity is cash flow from operations. The principal uses of cash flow thataffect our liquidity position include both operational expenditures and debtservice payments. Management is focused on increasing cash flow and on managingcash effectively through limiting cash investments in long-term assets andreducing overhead expenses.

 

*Cash Flows From OperatingActivities.*Cash provided by (used in) operations for thenine months ended March 31, 2008 and 2007 was ($8.7) million and $8.0million, respectively. The significant items affecting the differences in cashflows from operating activities for the nine months ended March 31, 2008as compared to the nine months ended March 31, 2007 are discussed below:

 

·      Net loss for the nine months ended March 31, 2008 was ($34.5) million ascompared to net loss for the nine months ended March 31,2007 of ($3.0) million. Included in the net loss for the nine months ended March 31,2008 is ($30.2) million of debt conversion expense recognized as a result ofthe bond exchange transaction in October 2007.

·      Depreciation and amortization for the nine monthsended March 31, 2008 was $2.2 millionas compared to $4.8 million for the nine months period ended March 31, 2007.

·      For the nine months ended March 31, 2008, changes in assets used cashfrom operations of ($3.4) million resulting primarily from an increase inaccounts receivable of ($2.8) million along with a ($0.2) million in increasesfrom restricted cash and a ($0.4) million increase in prepaid and otherassets.  For the nine months ended March 31, 2007, changes in assets used cashof ($7.8) million, of which ($7.2) million was from the increase in restrictedcash.

·      Changes in liabilities for the nine months ended March 31, 2008 used cash from operations of($3.3) million. This change was due primarily to the payment of subcontractingservice invoices accrued at June 30, 2007 of ($3.6) million, as well asthe reduction in customers’ cash on deposit of ($3.1) million, the increase inadvances on the construction contract of $5.6 million, and the net decrease of($2.2) million from deferred revenue, accounts payable, accrued expenses, andlong term accrued contract cost.  For thenine months ended March 31, 2007, thechange in liabilities provided cash from operations of $14.1 million. Thischange was due primarily to the increases in accounts payable, accruedexpenses, customer deposits and other liabilities of $7.0 million and anincrease of $7.1 million in advances on our construction contract. The increasein advances on the construction contract was primarily due to receiving theinitial milestone payment on our contract with a governmental agency to designand build a new processing facility.

 

*Cash Flows From InvestingActivities*. For the nine months ended March 31, 2008 and2007, cash flows used in investing activities were ($0.1) million and $0.4million, respectively. Significant items affecting the differences in cashflows from investing activities included the improvements in our Astrotech SPFfacility during the nine months ended March 31, 2007.

 

*Cash Flows From FinancingActivities.*For the nine months ended March 31, 2008 and 2007, cash flowsprovided by (used in) financing activities were $1.1 million and ($1.6)million, respectively. The significant items affecting the differences in cashflows from financing activities for the nine months ended March 31, 2008as compared to the nine months ended March 31, 2007 are discussed below:

 

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·      Proceeds from the new credit facility provided$4.0 million in February.

·      As part of the bond conversion, we paid off the$2.9 million principal balance of the 8.0% junior subordinated notes payable tobondholders not participating in the exchange for stock during the nine monthsended March 31, 2008.

·      The nine month period ended March 31, 2007included use of cash in the amount of ($1.6) million to apply towards amortgage note payable.

 

On March 25, 2003the Board of Directors authorized us to repurchase up to $1.0 million of ouroutstanding common stock at market prices. Any purchases under our stockrepurchase program may be made from time to time in the open market throughblock trades or otherwise in accordance with applicable regulations of the SEC.As of December 31, 2006 we had repurchased 11,610 shares at a cost of$117,320 under the program. We will continue to evaluate the stock repurchaseprogram and the funds authorized for the program, which represents an averagecost of $10.10 per share. This stock repurchase program remains available forpurchases of our stock.

 

On August 28, 2007,the Company and Astrium, GmbH mutually agreed to terminate the lease agreementdated as of February 28, 2001 in regards to the Company’s lease of the ICCassets from Astrium, GmbH. Also, we mutually agreed to terminate the leaseagreement dated as of July 3, 2001 in regards to the Company’s lease ofthe VCC assets from Astrium, GmbH. The ICC and VCC assets are specificallydesigned cargo carrying equipment used from time to time in the U.S. SpaceShuttle. In order to terminate these two leases, we paid Astrium, GmbH $1.4million for the lease period of March 1, 2007 through August 31, 2007for the ICC and VCC assets and incur no financial obligations for either theICC or VCC after August 31, 2007. As of March 31, 2008, the Companycarries an account payable of $1.6 million due to Astrium representing balancesdue for Astrium’s payload integration services on STS- 118 mission which werecompleted in August 2007.

 

As of March 31, 2008we had cash on hand of $2.0 million and our working capital surplus was $8.7million. Restricted cash, which consists of advance payments on a governmentcontract to modify certain spacecraft processing facilities, totaled $6.5million at March 31, 2008. We carry a liability of $11.5 million forobligations under this construction contract. For the nine months ended March 31,2008 our cash flows from operating activities utilized cash of $8.7 million.

 

In October 2007 we successfully exchanged $7.4 million of our 8.0%convertible notes due October 2007, $46.1 million of our 5.5% convertiblenotes due October 2010 and our 1.3 million shares of Series Bconvertible preferred stock for 32.6 million shares of common stock on a prereverse split basis and 61,550 shares of new Series C convertiblepreferred stock. In November 2007 we converted the Series Cconvertible preferred stock into 89.9 million shares of common stock on a prereverse split basis and affected a 1 for 10 reverse stock split. On October 15,2007 we redeemed the outstanding $2.9 million of our 8.0% convertible notes forcash at par.

 

As a consequence of theExchange Transaction, we recognized non cash debt conversion expense of ($30.2)million in the three months ended December 31, 2007, and increased ourcommon stock, no par value by $98.3 million.

 

In February 2008we consummated a financing facility with a commercial bank. This facilityprovides for a three year $4.0 million term loan, payable in monthlyinstallments of principal of $22,222 plus interest and a $2.0 million revolvingcredit facility. The three-year term loan is secured by the assets of ourAstrotech subsidiary and the one-year revolving credit facility is also securedby Astrotech’s accounts receivable.

 

Asof March 31, 2008 our contract backlog was approximately $26.6 million.Total backlog consists of all contract values over the entire life of eachcontract, excluding any portions previously recognized as revenues, butincluding unexercised contract options, anticipated award fees, expected taskorders under existing contracts, and authorized orders not yet fullynegotiated.

 

Withthe conclusion of STS-118 in August 2007, we have experienced a materialdecrease in our revenue from our Flight Services business unit which hasaccounted for over 65% of our consolidated revenue during fiscal year 2007. Wecontinue to focus our efforts on improving overall liquidity throughidentifying new business opportunities within the areas of our corecompetencies, reducing operating expenses, and limiting cash commitments forfuture capital investments and new asset development. We have continued torestrict new capital investment and new asset development, limiting projects tothose with unique strategic potential and those required to support currentcontracts and facility maintenance. Additionally, we continue to evaluateoperating expenses in an effort to reduce or eliminate costs not required forus to operate effectively.

 

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Webelieve we have sufficient liquidity and backlog to fund ongoing operations forat least the next fiscal year and expect to utilize existing cash and proceedsfrom operations to support strategies for new business initiatives.

 

Our contractualobligations as of March 31, 2008 areas follows (in thousands):

 
| **Contractual Obligations**    | ** ** | **At  March 31,  2008** | ** ** | **Remaining in ****Fiscal Year****2008** | ** ** | **Fiscal********Year****2009** | ** ** | **Fiscal********Year****2010** | ** ** | **Fiscal********Year****2011** | ** ** | **Fiscal********Year****2012** | ** ** | **Fiscal********Year****2013** | ** ** | **Thereafter** | ** ** |
|-------------------------------------|------------|------------------------------|------------|-----------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|--------------------------------|------------|--------------------------------|------------|--------------------------------|------------|----------------|------------|
| Long-term  Debt(3)                  |       | $                            | 6,861      |                                          | $          | —                         |       | $                              | —     |                           | $          | —                         |       | $                              | 6,861      |           | $          | — |   | $ | — |   | $ | — |   |
| ICC/VCC(2)                          |       | $                            | —     |                                          | $          | —                         |       | $                              | —     |                           | $          | —                         |       | $                              | —     |           | $          | — |   | $ | — |   | $ | — |   |
| Other  Operating Leases(1)          |       | 5,044                        |       | 550                                           |       | 970                            |       | 982                            |       | 710                            |       | 426                            |       | 423                            |       | 753            |       |
| Total  Contractual Cash Obligations |       | $                            | 11,905     |                                          | $          | 550                            |       | $                              | 970        |                           | $          | 982                            |       | $                              | 7,571      |           | $          | 426 |   | $ | 423 |   | $ | 753 |   |
| (excluding  interest payments)      |       |                         |       |                                          |       |                           |       |                           |       |                           |       |                           |       |                           |       |           |       |

 

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(1) -  For the remainder of fiscal year 2008 weexpect to receive net payments of $0.03 million for sub leases. For fiscal year2009 the Company expects to receive net payments of approximately $0.1 million.There are currently no subleases beyond fiscal year 2009.

(2) -  We terminated our ICC/VCC lease agreementwith Astrium North America on August 28, 2007. There are no more cashobligations remaining.

(3) -  Please see the “Subsequent Events” sectionof this document.

 

### **Off-Balance SheetArrangements**

### ** **

We do not have anysignificant off-balance sheet arrangements, other than operating leases, thathave, or are reasonably likely to have, a current or future material effect onour financial condition, revenues or expenses, results of operations,liquidity, capital expenditures or capital resources.

 

### **ConstructionContract Contingency**

### ** **

In August 2007, weentered into a $14.2 million modification to our $20.9 million existingVandenberg construction contract. The modification requires us to complete theconstruction on the redesigned facility by September 30, 2009. Themodification contains penalties of up to $3.0 million if we do not meet thecontracted completion date. We have not established a reserve for thiscontingent liability.

 

# **ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

# ** **

We have no materialchanges to the disclosure made on this matter in our Annual Report on Form 10-Kfor the year ended June 30, 2007.

 

# **ITEM 4.  CONTROLSAND PROCEDURES**

# ** **

Underthe supervision and with the participation of our management, including ourprincipal executive officer and principal financial officer, we have evaluatedthe effectiveness of the design and operation of our disclosure controls andprocedures as of the end of the period covered by this quarterly report, and,based on our evaluation, our principal executive officer and principalfinancial officer have concluded that these controls and procedures areeffective. There have been no changes in our internal control over financialreporting that occurred during our last fiscal quarter that have materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting.

 

Disclosurecontrols and procedures are our controls and other procedures that are designedto ensure that information required to be disclosed by us in the reports that wefile or submit under the Exchange Act is recorded, processed, summarized, andreported within the time periods specified in the SEC’s rules and forms.Disclosure controls and procedures include, without limitation, controls andprocedures designed to ensure that information required to be disclosed by usin the reports that we file or submit under the Exchange Act is accumulated andcommunicated to our management, including our principal executive officer andprincipal financial officer, as appropriate, to allow timely decisionsregarding required disclosure.

# ** **

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# **PART II:  OTHERINFORMATION**

# ** **

# **ITEM 1.  LEGALPROCEEDINGS**

# ** **

Currently, the Company is not a party to any pending or threatenedproceedings, which in management’s opinion, would have a material adverseeffect on our business, financial condition, or results of operation.

 

# **ITEM 1A.  RISKFACTORS**

# ** **

There have been no material changes in the risk factors described inour Annual Report on Form 10-K for the year ended June 30, 2007.

 

# **ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

# ** **

During the nine monthsended March 31, 2008 we did not issue any unregistered securities.

 

# **ITEM 3.  DEFAULTSUPON SENIOR SECURITIES**

# ** **

During the nine monthsended March 31, 2008 we did not have any defaults upon senior securities.

 

# **ITEM 4.  SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

# ** **

The Annual Meeting ofShareholders was held on March 27, 2008. A quorum of 9,458,207 shares ofthe Company’s Common Stock, was present and voting.

 

(a)   Atthe Annual Meeting of Shareholders, candidates for the Board of Directors stoodfor and were duly elected, with each nominee receiving a vote of at least8,851,044 votes.

 

The directors elected by the shareholders are:

 
| ** **                    | ** ** | **For**   | ** ** | **Withheld** | ** ** |
|-------------------------------|------------|-----------|------------|--------------|------------|
| Mark  Adams                   |       | 8,851,044 |       | 606,884      |       |
| Thomas  B. Pickens, III  |       | 8,851,044 |       | 606,884      |       |
| Barry  A. Williamson          |       | 8,851,044 |       | 606,884      |       |
| General  (Ret.) Lance W. Lord |       | 8,851,045 |       | 606,883      |       |
| R.  Scott Nieboer             |       | 8,851,045 |       | 606,883      |       |
| John  A. Oliva                |       | 8,851,045 |       | 606,883      |       |
| William  F. Readdy            |       | 8,851,045 |       | 606,883      |       |

 

The following matters were brought to a vote of the shareholders at themeeting:

 

(b)   Theratification of the appointment of PMB Helin Donovan, LLP as the Company’sindependent auditors for fiscal year 2008.

 
| ** ** | ** ** | **Number of Votes** | ** ** |
|------------|------------|-------------------------------|------------|
| For        |       | 9,128,469                     |       |
| Against    |       | 324,303                       |       |
| Abstain    |       | 5,155                         |       |

 

(c)   Theratification of the approval of the SPACEHAB, Incorporated 2008 Stock IncentivePlan.

 
| ** ** | ** ** | **Number of Votes** | ** ** |
|------------|------------|-------------------------------|------------|
| For        |       | 7,328,747                     |       |
| Against    |       | 1,730,735                     |       |
| Abstain    |       | 17,733                        |       |

# ** **

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**ITEM 6.  EXHIBITS**

 

The following exhibitsare filed herewith:

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                        |
|------------------|------------|------------------------------------------------------------------------------------------------------------------------|
| ** **       | ** ** | ** **                                                                                                             |
| 31.1             |       | Certification of Chief Executive Officer pursuant to  Rule 13a-14(a) of the Securities Exchange Act of 1934. |
|             |       |                                                                                                                   |
| 31.2             |       | Certification of Chief Financial Officer pursuant to  Rule 13a-14(a) of the Securities Exchange Act of 1934. |
|             |       |                                                                                                                   |
| 32               |       | Certification pursuant to  Rule 13a-14(b) of the Securities and Exchange Act of 1934.                        |

** **

**27**

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** **

**SIGNATURE**

** **

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|                     | SPACEHAB,  INCORPORATED          |
|--------------------------|----------------------------------|
|                     |                             |
|                     |                             |
| Date: May 14,  2008 | /s/ Thomas B.  Pickens, III |
|                     | Thomas B. Pickens, III      |
|                     | Chief Executive  Officer         |
|                     |                             |
|                     |                             |
|                     | /s/ Brian K.  Harrington         |
|                     | Brian K. Harrington              |
|                     | Senior Vice  President and       |
|                     | Chief Financial  Officer         |

 

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