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**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 

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

 

**For the quarterly period ended September 30,2008**

 

**OR**

 

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

 

**For the transition period from                    to                    **

 

**Commission File Number: 0-27206**

 

**SPACEHAB,Incorporated**

(Exactname of registrant as specified in this charter)

 

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

 

**907 Gemini**

**Houston, Texas 77058-2762**

(Addressof principal executive offices and zip code)

 

**(713) 558-5000**

(Registrant’stelephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed allreports 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 a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See the definitions of “large accelerated filer,” “accelerated filer”and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

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

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act.)

 

Yes oNo x

 

As of October 31,2008 there were 16,392,718 shares of the registrant’s common stock outstanding.

 

 

 

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** **

**SPACEHAB,INCORPORATED AND SUBSIDIARIES**

**SEPTEMBER30, 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 | 14       |
| ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                  | 21       |
| ITEM 4. CONTROLS AND  PROCEDURES                                                                     | 21       |
| **PART II: OTHER  INFORMATION**                                                                 | **21**   |
| ITEM 1. LEGAL PROCEEDINGS                                                                            | 21       |
| ITEM  1A. RISK FACTORS                                                                               | 21       |
| ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                 | 21       |
| ITEM 3.  DEFAULTS UPON SENIOR SECURITIES                                                             | 21       |
| ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                         | 21       |
| ITEM  6. EXHIBITS                                                                                    | 21       |

 

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**DEFINITIONS**

 

As used in this Form 10-Q, the abbreviations and acronymscontained herein have the meanings set forth below. Additionally, the terms “SPACEHAB”,“the Company”, “we”, “us” and “our” refer to SPACEHAB, Incorporated and itssubsidiaries, unless the context clearly indicates otherwise.

 
| 1994 Plan       |   | 1994 Stock Incentive Plan                     |
|-----------------|--------|-----------------------------------------------|
| Astrium         |   | Astrium GmbH                                  |
| Astrotech       |   | Astrotech Space Operations                    |
| CMC             |   | Cargo Mission Contract                        |
| Common stock    |   | SPACEHAB common stock                         |
| EPS             |   | Earnings Per Share                            |
| ICC             |   | Integrated Cargo Carrier                      |
| IDIQ            |   | Indefinite-Delivery, Indefinite-Quantity      |
| ISS             |   | International Space Station                   |
| Lockheed Martin |   | Lockheed Martin Corporation                   |
| NASA            |   | National Aeronautics and Space Administration |
| PI&C        |   | Program Integration and Control               |
| SEC             |   | Securities and Exchange Commission            |
| SFAS            |   | Statement of Financial Accounting Standards   |
| SFS             |   | SPACEHAB Flight Services                      |
| VCC             |   | Vertical Cargo Carrier                        |

 

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**PART I:  FINANCIAL INFORMATION**

 

**ITEM 1.  UNAUDITED CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

**SPACEHAB, INCORPORATED ANDSUBSIDIARIES**

**Unaudited Condensed ConsolidatedBalance Sheets**

(In thousands, exceptshare data)

 
| ** **                                                                                                           | ** ** | **September 30,** | ** ** | **June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-------------------|------------|
| ** **                                                                                                           | ** ** | **2008**               | ** ** | **2008**          | ** ** |
| **Assets**                                                                                                           |       |                   |       |              |       |
| Current assets                                                                                                       |       |                   |       |              |       |
| Cash and cash equivalents                                                                                            |       | $                      | 2,496      |              | $          | 2,640 |   |
| Accounts receivable, net                                                                                             |       | 6,638                  |       | 3,872             |       |
| Inventory                                                                                                            |       | 482                    |       | 482               |       |
| Short term note receivable, net                                                                                      |       | 175                    |       | 175               |       |
| Prepaid expenses and other current assets                                                                            |       | 443                    |       | 464               |       |
| Total current assets                                                                                                 |       | 10,234                 |       | 7,633             |       |
| Property and equipment                                                                                               |       |                   |       |              |       |
| Flight assets                                                                                                        |       | 49,210                 |       | 49,210            |       |
| Capital improvements in progress                                                                                     |       | 92                     |       | 76                |       |
| Payload processing facilities                                                                                        |       | 42,600                 |       | 42,600            |       |
| Furniture, fixtures, equipment and leasehold improvements                                                            |       | 18,344                 |       | 18,244            |       |
|                                                                                                                 |       | 110,246                |       | 110,130           |       |
| Less accumulated depreciation and amortization                                                                       |       | (69,644                | )          | (69,131           | )          |
| Property and equipment, net                                                                                          |       | 40,602                 |       | 40,999            |       |
| Restricted cash                                                                                                      |       | 10,577                 |       | 8,386             |       |
| Deferred financing costs, net                                                                                        |       | 130                    |       | 264               |       |
| Long term note receivable, net                                                                                       |       | 711                    |       | 717               |       |
| Other assets, net                                                                                                    |       | 210                    |       | 212               |       |
| Total assets                                                                                                         |       | $                      | 62,464     |              | $          | 58,211 |   |
| **Liabilities and Stockholders’ Equity**                                                                        |       |                   |       |              |       |
| Current liabilities                                                                                                  |       |                   |       |              |       |
| Revolving note payable                                                                                               |       | $                      | 970        |              | $          | — |   |
| Term note payable - current                                                                                          |       | 267                    |       | 267               |       |
| Accounts payable                                                                                                     |       | 1,908                  |       | 1,845             |       |
| Accounts payable- Astrium                                                                                            |       | 447                    |       | 754               |       |
| Income tax payable                                                                                                   |       | 463                    |       | 463               |       |
| Accrued interest                                                                                                     |       | 202                    |       | 83                |       |
| Accrued expenses                                                                                                     |       | 1,086                  |       | 2,124             |       |
| Deferred gains on sale of buildings                                                                                  |       | 86                     |       | 86                |       |
| Deferred revenue, current portion                                                                                    |       | 2,646                  |       | 1,007             |       |
| Total current liabilities                                                                                            |       | 8,075                  |       | 6,629             |       |
| Accrued contract costs and other                                                                                     |       | 60                     |       | 40                |       |
| Advances on construction contract                                                                                    |       | 6,582                  |       | 4,863             |       |
| Deferred gains on sale of buildings                                                                                  |       | 107                    |       | 129               |       |
| Deferred revenue, non-current                                                                                        |       | 1,647                  |       | 1,227             |       |
| Term note payable - non current (net of discount)                                                                    |       | 3,480                  |       | 3,526             |       |
| Senior convertible subordinated notes payable — 5.5%                                                            |       | 6,861                  |       | 6,861             |       |
| Total liabilities                                                                                                    |       | 26,812                 |       | 23,275            |       |
| Commitments and contingencies                                                                                        |       |                   |       |              |       |
| Stockholders’ equity                                                                                            |       |                   |       |              |       |
| Common stock, no par value, 75,000,000 shares authorized 16,392,718 and  14,942,718 shares outstanding, respectively |       | 183,306                |       | 183,306           |       |
| Treasury stock, 11,660 shares at cost                                                                                |       | (117                   | )          | (117              | )          |
| Additional paid-in capital                                                                                           |       | 1,352                  |       | 691               |       |
| Accumulated deficit                                                                                                  |       | (148,889               | )          | (148,944          | )          |
| Total stockholders’ equity                                                                                      |       | 35,652                 |       | 34,936            |       |
| Total liabilities and stockholders’ equity                                                                      |       | $                      | 62,464     |              | $          | 58,211 |   |

 

See accompanying notes tounaudited condensed consolidated financial statements.

 

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**SPACEHAB, INCORPORATED ANDSUBSIDIARIES**

**Unaudited Condensed ConsolidatedStatements of Operations**

(In thousands,except share data)

 
| ** **                                                           | ** ** | **Three Months**             | ** ** |
|----------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                           | ** ** | **Ended September 30,** | ** ** |
| ** **                                                           | ** ** | **2008**                          | ** ** | **2007** | ** ** |
| Revenue                                                              |       | $                                 | 5,974      |   | $ | 8,596 |   |
| Costs of revenue                                                     |       | 3,518                             |       | 6,437 |   |
| Gross profit                                                         |       | 2,456                             |       | 2,159 |   |
| Operating  expenses:                                                 |       |                              |       |   |   |
| Selling, general  and administrative                                 |       | 1,699                             |       | 1,814 |   |
| Research and  development                                            |       | 573                               |       | 318 |   |
| Total operating  expenses                                            |       | 2,272                             |       | 2,132 |   |
| Income from  operations                                              |       | 184                               |       | 27 |   |
| Interest expense                                                     |       | (223                              | )          | (1,067 | ) |
| Interest and  other income, net                                      |       | 94                                |       | 184 |   |
| Income (loss)  before income taxes                                   |       | 55                                |       | (856 | ) |
| Income tax  expense                                                  |       | —                            |       | — |   |
| Net income  (loss)                                                   |       | $                                 | 55         |   | $ | (856 | ) |
| Income (loss)  per share:                                            |       |                              |       |   |   |
| Net income  (loss) per share – basic                            |       | $                                 | 0.00       |   | $ | (0.66 | ) |
| Shares used in  computing net income (loss) per share – basic   |       | 16,109,023                        |       | 1,302,720 |   |
|                                                                 |       |                              |       |   |   |
| Net income  (loss) per share – diluted                          |       | $                                 | 0.00       |   | $ | (0.66 | ) |
| Shares used in  computing net income (loss) per share – diluted |       | 16,580,762                        |       | 1,302,720 |   |

 

See accompanying notes tounaudited condensed consolidated financial statements.

 

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** **

**SPACEHAB,INCORPORATED AND SUBSIDIARIES**

**Unaudited Condensed ConsolidatedStatements of Cash Flows**

(In thousands)

** **
| ** **                                                                                       | ** ** | **Three Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                       | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| **Cash flows from operating activities**                                     |       |                                                 |       |   |   |
| Net income  (loss)                                                                               |       | $                                                    | 55         |   | $ | (856 | ) |
| Adjustments to  reconcile net income(loss) to net cash provided by operating activities:         |       |                                                 |       |   |   |
| Increase in  restricted cash                                                                     |       | (2,191                                               | )          | (8,349 | ) |
| Gain on disposal  of property and equipment                                                      |       | (11                                                  | )          | — |   |
| Stock-based  compensation                                                                        |       | 9                                                    |       | (56 | ) |
| Depreciation and  amortization, including debt issuance cost of $0.1 million for each period     |       | 631                                                  |       | 1,117 |   |
| Recognition of  deferred gain                                                                    |       | (22                                                  | )          | (56 | ) |
| Changes in  assets and liabilities:                                                              |       |                                                 |       |   |   |
| Decrease  (increase) in accounts receivable                                                      |       | (2,760                                               | )          | 1,641 |   |
| Increase in  prepaid expenses and other current assets                                           |       | 100                                                  |       | (492 | ) |
| Increase in  other assets                                                                        |       | 0                                                    |       | (258 | ) |
| (Decrease)  increase in deferred revenue                                                         |       | 2,059                                                |       | (155 | ) |
| Decrease in  accounts payable, accounts payable-Astrium, accrued interest, and accrued  expenses |       | (510                                                 | )          | (1,605 | ) |
| Increase in  advances from construction contract                                                 |       | 1,719                                                |       | 7,535 |   |
| (Decrease)  increase in customer deposits                                                        |       | —                                               |       | (3,106 | ) |
| (Decrease)  increase in accrued subcontracting services and other                                |       | —                                               |       | (2,356 | ) |
| Increase in  long-term accrued contract costs and other liabilities                              |       | 20                                                   |       | 37 |   |
| Net cash used by  operating activities                                                           |       | (901                                                 | )     | (6,959 | ) |
| **Cash  flows from investing activities**                                                        |       |                                                 |       |   |   |
| Purchases of  property, equipment and leasehold improvements, net of reimbursements              |       | (147                                                 | )          | (204 | ) |
| Net cash used in  investing activities                                                           |       | (147                                                 | )          | (204 | ) |
| **Cash  flows from financing activities**                                                        |       |                                                 |       |   |   |
| Proceeds from  revolving credit facility                                                         |       | 970                                                  |       | — |   |
| Payments on term  note facility                                                                  |       | (66                                                  | )          | — |   |
| Net cash  provided by financing activities                                                       |       | 904                                                  |       | — |   |
| Net change in  cash and cash equivalents                                                         |       | (144                                                 | )          | (7,163 | ) |
| Cash and cash  equivalents at beginning of period                                                |       | 2,640                                                |       | 9,724 |   |
| Cash and cash  equivalents at end of period                                                      |       | $                                                    | 2,496      |   | $ | 2,561 |   |

 

See accompanying notes tounaudited condensed consolidated financial statements.

 

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**SPACEHAB, INCORPORATED ANDSUBSIDIARIES**

**Notes to Unaudited CondensedConsolidated Financial Statements**

 

**1. Description of the Company and Operating Environment**

 

SPACEHAB is a provider of governmental and commercial spacecraftpre-launch processing facilities and services, a provider of manned andunmanned payload processing services, and an entrepreneurial force in spacecommerce providing access to, and utilization of the unique environment ofspace.

 

Historically, a substantial portion of our revenue has been generatedunder contracts with NASA, which were subject to periodic funding allocationsby the agency. NASA’s funding is dependent on receiving annual appropriationsfrom the U.S. Government. During the quarters ended September 30, 2008 and2007 approximately 15% and 84% of our revenues were generated under NASAcontracts, respectively.

 

Our Astrotech subsidiary provides commercial spacecraft launchprocessing services and payload processing facilities in the U.S. Theseservices are offered at the Astrotech facilities in Titusville, Florida andVandenberg Air Force Base in California. Additionally, Astrotech suppliespayload processing and facilities maintenance support services to Sea LaunchCompany, LLC for its Sea Launch program at the Home Port facilities in LongBeach, California. Our facilities and services are provided on a fixed priceper launch basis.

 

Our Astrotech Engineering Services subsidiary manages projects in needof comprehensive engineering solutions, and provides unique capabilities suchas specialty engineering, hardware design and development, and configurationand data management. Astrotech Engineering Services also designs and fabricatesspace flight hardware. We continuously review and seek new businessopportunities with NASA, the Department of Defense, and other governmentalagencies, either through current contract expansion or teaming with otheraerospace companies on new contract bid initiatives.

 

**Liquidity**

 

As of September 30, 2008, we had cash and restricted cash-on-handof $13.1 million and our working capital was approximately $2.2 million.Restricted cash, which consists of advance payments on a government contract tomodify certain spacecraft processing facilities and restricted deposit relatingto bank covenants, totaled $10.6 million at September 30, 2008. We carry aliability of $6.6 million for obligations under this construction contract.

 

In February 2008 (see Note 6), we consummated a financing facilitywith a commercial bank. This facility provides for a three year $4.0 millionterm loan, payable in monthly installments of principal in the amount of$22,222 plus interest and a $2.0 million revolving credit facility. The termloan is secured by the assets of our Astrotech subsidiary and the one-yearrevolving credit facility is secured by Astrotech’s accounts receivable. As of September 30,2008, we have a balance of $1.0 million outstanding under the revolving creditfacility.

 

We believe we have sufficient liquidity and backlog to fund ongoingoperations for at least the next fiscal year and expect to utilize existingcash and proceeds from operations to support strategies for new business initiatives.

 

**2.  Basis ofPresentation**

 

In the opinion of management, the accompanying unaudited condensedconsolidated financial statements reflect all adjustments, consisting of onlynormal recurring accruals, necessary for a fair presentation of the consolidatedfinancial position of SPACEHAB, Incorporated and its subsidiaries as of September 30,2008, and the results of its operations and cash flows for the periods ended September 30,2008 and 2007. However, the unaudited condensed consolidated financial statementsdo not include all related footnote disclosures.

 

The consolidated results of operations for the three month period endedSeptember 30, 2008 are not necessarily indicative of the results that maybe expected for the full year. Our results of operations typically fluctuatesignificantly from quarter to quarter. The interim unaudited condensedconsolidated financial statements should be read in conjunction with ouraudited consolidated financial statements appearing in our Annual Report on Form 10-Kfor the fiscal year ended June 30, 2008.

 

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**3.  Earnings(Loss) Per Share**

 

The following is a reconciliation of the numerator and denominator ofthe basic and diluted earnings (loss) per share (“EPS”) computations for thethree month period ended September 30, 2008 and September 30, 2007(in thousands, except share and per share data):

 
| ** **                                      | ** ** | **Three months ended** | ** ** | **Three months ended** | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                      | ** ** | **September 30, 2008** | ** ** | **September 30, 2007** | ** ** |
| ** **                                      | ** ** | **Income**                       | ** ** | **Shares**                       | ** ** | **Per Share** | ** ** | **Loss** | ** ** | **Shares** | ** ** | **Per Share** | ** ** |
| ** **                                      | ** ** | **(Numerator)**                  | ** ** | **(Denominator)**                | ** ** | **Amount** | ** ** | **(Numerator)** | ** ** | **(Denominator)** | ** ** | **Amount** | ** ** |
| Basic EPS:                                      |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Income (loss)  available to common stockholders |       | $                                | 55         |                             | 16,109,023 |   | $ | 0.00 |   | $ | (856 | ) | 1,302,720 |   | $ | (0.66 | ) |
| Diluted EPS:                                    |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Income (loss)  available to common stockholders |       | $                                | 55         |                             | 16,580,762 | * | $ | 0.00 |   | $ | (856 | ) | 1,302,720 |   | $ | (0.66 | ) |

 

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*Includes 550,000 unvested shares of restricted stock

 

In calculating diluted earnings per share using the “if converted”method, the Company “adds back” to net income or loss the interest expense onits convertible subordinated notes payable, outstanding as of September 30,2007, convertible into 75,640 shares of common stock at $136.25 per share anddue October 2007. These are potentially dilutive securities but theirimpact was anti-dilutive in 2007.

 

In calculating diluted earnings per share using the “if converted”method, the Company “adds back” to net income or loss the interest expense onits senior convertible notes payable outstanding, as of September 30,2007, due October 2010, convertible into 3,529,600 shares of common stockat $15.00 per share, as they include a mandatory conversion feature once theCompany’s stock price reaches $19.50 per share. These are potentially dilutivesecurities but their impact was anti-dilutive in 2007.

 

Options and warrants only have a dilutive effect if the average marketprice of the common stock during the period exceeds the exercise price (“in themoney”). For potential dilutive options or warrants that are dilutive, thetreasury stock method is applied to determine the number of weighted averageshares to be included as dilutive earnings or loss per share.

 

Options to purchase 107,400 shares of common stock outstanding at September 30,2007 were not included in diluted EPS for the three months ended September 30,2007 as they were anti-dilutive to our net loss. The options expire between October 12,2007 and August 9, 2016.

 

Options to purchase 900,608 shares of common stock outstanding at September 30,2008 were not included in diluted EPS for the three months ended September 30,2008 as they were anti-dilutive because the exercise price exceeds the averagemarket price. The options expire between November 20, 2008 and July 18,2018.

 

In November 2007, we 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.

 

**4.  RevenueRecognition**

 

Our business units’ revenue is derived primarily from long-termcontracts with the U.S. Government, U.S. Government contractors, and commercialcustomers. Revenue under these contracts is recognized using the methodsdescribed below. Estimating future costs and, therefore, revenues and profitsis a process requiring management judgment. Management bases its estimate onhistorical experience and on various assumptions that are believed to bereasonable under the circumstances including the negotiation(s) ofequitable adjustment(s) on the Cargo Mission Contract (“CMC”) that areadded to the contract as pricing amendment(s) due to delay(s) in thespace shuttle launch schedule. Costs to complete include, when appropriate,material, labor, subcontracting costs, lease costs, commissions, insurance, anddepreciation. Our business segment personnel perform periodic contract statusand performance reviews. In the event of a change in total estimated contractcost or profit, the cumulative effect of such change is recorded in the periodthat the change in estimate occurs.

 

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We, from time to time, make expenditures for specific enhancementsand/or additions to our facilities as required by certain contracts where thecustomer agrees to reimburse us for all or substantially all of suchexpenditures. We account for such reimbursements as a reduction in the cost ofsuch investments and recognize any excess of such reimbursements over therequired investment as revenue.

 

**A Summary of Revenue RecognitionMethods 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 

 

 

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

 

Ratably, for multi-year  contract  payments recognized over the  contract period |
|                            |       |                                                                                    |       |                                                                                                                  |       |                                                                                                                                                                                            |
| Astrotech Engineering  Services |       | Configuration  Management,  Engineering Services                                        |       | Cost Plus Award/Fixed  Fee                                                                                            |       | Earned as reimbursable costs  incurred plus award/fixed fee                                                                                                                                     |

 

Revenue for Astrotech Space Operations recognized under a buildingmodification contract with a government agency (see Note 11) is being accountedfor under the percentage-of-completion method based on costs incurred over theperiod of the agreement.

 

**5. Statements of Cash Flows – Supplemental Information**

 
| (a) |   | Cash paid for interest costs was $67,000 and $15,000  for the three months ended September 30, 2008 and 2007, respectively. We  did not capitalize any interest costs during the three months ended  September 30, 2008 or 2007. |
|-----|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (b) |   | We paid no income taxes for the three months ended  September 30, 2008 and September 30, 2007.                                                                                                                                   |

 

**6.  LongTerm Debt**

 

**Credit Facilities**

 

On February 6, 2008, we entered into a financing facility with abank providing a $4.0 million term loan terminating February 2011 and a$2.0 million revolving credit facility terminating in February 2009. Theterm loan requires monthly payments of principal totaling $22,222, plusinterest at the rate of prime plus 1.75% and the revolving credit facilityincurs interest at the rate of prime plus 1.75%. Funds available under therevolving credit facility are limited to 80% of eligible accounts receivable.The bank financing facilities are secured by the assets of our Astrotech SpaceOperations Florida facilities and other covenants including a minimum tangiblenet worth covenant, a cash flow coverage covenant, a debt service coverageratio, and a ratio of total liabilities to tangible net worth covenant. The balanceof the $4.0 million term loan at September 30, 2008 was $3.7 million. Alsoas of September 30, 2008, $1.0 million has been drawn on the $2.0 millionrevolving credit facility.

 

**Senior Convertible Subordinated Notes Payable**

 

The Company’s 5.5% Senior Convertible Notes payable mature on October 15,2010 and pay interest on April 15 and October 15 annually. On October 31,2008, the Company repurchased $1,750,000 principal amount of its SeniorConvertible Notes (see Note 14).

 

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**7.  FairValue of Financial Instruments**

 

In general, fair values utilize quoted prices (unadjusted) in activemarkets for identical assets or liabilities. The following table presents thecarrying amounts and estimated fair values of certain of the Company’sfinancial instruments as of September 30, 2008 and 2007 in accordance withSFAS No. 107, “Disclosures about Fair Value of Financial Instruments” (inthousands):

 
| ** **                                   | ** ** | **September 30, 2008** | ** ** | **September 30, 2007** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                   | ** ** | **Carrying**                     | ** ** | **Fair**                         | ** ** | **Carrying** | ** ** | **Fair** | ** ** |
| ** **                                   | ** ** | **Amount**                       | ** ** | **Value**                        | ** ** | **Amount** | ** ** | **Value** | ** ** |
| ** **                                   | ** ** | ** **                       | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Term Loan Payable                            |       | $                                | 3,747      |                             | $          | 3,747 |   | $ | — |   | $ | — |   |
| Senior Convertible Notes Payable – 5.5% |       | $                                | 6,861      |                             | $          | 4,254 |   | $ | 52,944 |   | $ | 50,694 |   |
| Junior Convertible Notes Payable – 8.0% |       | $                                | —     |                             | $          | — |   | $ | 10,306 |   | $ | 5,501 |   |

 

The fair value of our long term debt is based on quoted market prices,or is estimated based on the current rates offered to us for debt of similar remainingmaturities and other terms. The carrying amounts of cash and cash equivalents,investments, accounts receivable, accounts payable, and accrued expensesapproximate their fair market value because of the relatively short duration ofthese instruments.

 

**8.  SegmentInformation**

 

Based on our organization for the first quarterof fiscal year 2009, we operated in two business segments: Astrotech SpaceOperations (“Astrotech”) and Astrotech Engineering Services (“EngineeringServices”) Our SPACEHAB Flight Services business segment (“Flight Services”)was founded to commercially develop space habitat modules that operate in thecargo bay of the space shuttles. Flight Services provided access to the modulesand integration and operations support services for both NASA and commercialcustomers. We completed our last manifested space shuttle mission utilizing ourspace habitat modules in the first quarter of fiscal year 2008. Astrotechprovides payload processing facilities and services to serve the spacecraft manufacturingand launch services industries. Engineering Services is primarily engaged inproviding engineering services and products to the Government, including NASA.

 

Our chief operating decision maker utilizes bothrevenue and income (loss) before income taxes in assessing performance andmaking overall operating decisions and resource allocations.

 

Three Months Ended September 30,2008 (in thousands):

 
|                 | ** ** | ** **  | ** ** | ** **             | ** ** | **Net**    | ** ** | **Depreciation** | ** ** |
|----------------------|------------|-------------|------------|------------------------|------------|------------|------------|------------------|------------|
| ** **           | ** ** | ** **  | ** ** | **Income before** | ** ** | **Fixed**  | ** ** | **and**          | ** ** |
| ** **           | ** ** | **Revenue** | ** ** | **income taxes**  | ** ** | **Assets** | ** ** | **Amortization** | ** ** |
| Flight Services      |       | $           | —     |                   | $          | (666       | )          | $                | 254        |   | $ | 7 |   |
| Astrotech            |       | 5,704       |       | 2,282                  |       | 40,149     |       | 524              |       |
| Engineering Services |       | 77          |       | (7                     | )          | —     |       | —           |       |
| Corporate and Other  |       | 193         |       | (1,554                 | )          | 199        |       | 100              |       |
|                 |       | $           | 5,974      |                   | $          | 55         |       | $                | 40,602     |   | $ | 631 |   |

 

Three Months Ended September 30,2007 (in thousands):

 
| ** **           | ** ** | ** **  | ** ** | ** **       | ** ** | **Net**    | ** ** | **Depreciation** | ** ** |
|----------------------|------------|-------------|------------|------------------|------------|------------|------------|------------------|------------|
| ** **           | ** ** | ** **  | ** ** | **Loss before**  | ** ** | **Fixed**  | ** ** | **and**          | ** ** |
| ** **           | ** ** | **Revenue** | ** ** | **income taxes** | ** ** | **Assets** | ** ** | **Amortization** | ** ** |
| Flight Services      |       | $           | 3,583      |             | $          | 181        |       | $                | 294        |   | $ | 422 |   |
| Astrotech            |       | 3,713       |       | 1,282            |       | 42,295     |       | 532              |       |
| Engineering Services |       | 1,300       |       | 145              |       | —     |       | —           |       |
| Corporate and Other  |       | —      |       | (2,464           | )          | 513        |       | 163              |       |
|                 |       | $           | 8,596      |             | $          | (856       | )          | $                | 43,102     |   | $ | 1,117 |   |

 

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**9.  CommonStock Options, Stock Purchase Plans and Other Long Term Incentive Plans**

 

We grant options to employees and directors utilizing threeshareholder-approved plans and issue Company stock under an Employee StockPurchase Plan. Stock options and other equity awards are granted at the solediscretion of the Compensation Committee of the Board of Directors. The numberand price of the options granted are specifically defined by the CompensationCommittee at the time of each award. Such options typically vest incrementallyover a period of four years and generally expire within ten years of the dateof grant. Equity awards are valued at the closing bid price for the Company’sstock on the day of grant. As of September 30, 2008, there were 2,855,661shares available for future grant under the Company’s shareholder approvedplans.

 

**The 1994 Stock Incentive Plan**

 

Under the terms of the 1994 Plan, the number and price of the optionsgranted to employees is determined by the Board of Directors and such optionsvest, in most cases, incrementally over a period of four years and expire nomore than ten years after the date of grant. The total number of shares thatare available under this plan is 395,000. As of September 30, 2008, thereare 151,869 available for grant.

 

**The Directors’ Stock Option Plan**

 

Prior to suspension of the Directors’ Stock Option Plan in January 2008,each new non-employee director received a one-time grant of an option topurchase 1,000 shares of common stock at an exercise price equal to the fairmarket value on the date of grant. In addition, effective as of the date ofeach annual meeting of our stockholders, each non-employee director who waselected or continued as a member of the Board of Directors of the Company wasawarded an option to purchase 500 shares of common stock. Options under theDirector’s Plan vest after one year and expire seven years from the date ofgrant. The total number of options that are available under this plan is50,000. As of September 30, 2008, there are 20,500 available for grant.

 

**1997 Employee Stock Purchase Plan**

 

We adopted an employee stock purchase plan that permits eligibleemployees to purchase shares of common stock of the Company at prices no lessthan 85% of the current market price. Eligible employees may elect toparticipate in the plan by authorizing payroll deductions from 1% to 10% ofgross compensation for each payroll period. On the last day of each quarter,each participant’s contribution account is used to purchase the maximum numberof whole and fractional shares of common stock determined by dividing thecontribution account’s balance by the lesser of 85% of the price of a share ofcommon stock on the first day of the quarter or the last day of a quarter. Thenumber of shares of common stock that may be purchased under the plan is150,000. Through September 30, 2008, employees have purchased 148,265shares under this plan. During the fourth quarter of fiscal year 2007, wesuspended purchases in this plan. The shares purchased under this plan are consideredcompensatory for accounting and reporting purposes.

 

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

 

On March 27, 2008 the stockholders of the Company approved the2008 Stock Incentive Plan. The purpose of the 2008 Plan is to foster andpromote the long-term financial success of the Company, and to increaseshareholder value by attracting, motivating, and retaining key employees,consultants, and directors and providing such participants in the 2008 Planwith a program for obtaining an ownership interest in the Company that linksand aligns their personal interests with the Company’s stockholders. The 2008Plan authorizes grants of stock compensation, restricted stock, stock options,performance units, and other equity based performance awards. The total numberof shares that are available under the 2008 Plan is 5,500,000. During the threemonths ended September 30, 2008, 691,708 options were granted toemployees, 125,000 options were granted to directors, and 400,000 shares ofrestricted stock were granted to employees of the Company under the 2008 Plan.In addition, on July 18, 2008, the Company made unrestricted stock grantstotaling 1,450,000 shares from the 2008 Plan to the Company’s Chief ExecutiveOfficer and certain directors. As of September 30, 2008, there were2,683,292 shares available for future grant.

 

**Other Stock Based Incentive Awards**

 

·                  Specialperformance shares – We issued 62,200 performance shares on December 21,2007 that vest on January 15, 2009, subject to certain events or upondesignation by the Compensation Committee. Termination of employment, exceptfor resignation or cause was not an event of forfeiture. The employeesreceiving special performance shares were subsequently terminated by theCompany and the risk of subsequent forfeiture was not 

 

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material. Consequently, we expensed the entire fairvalue of the grant $127,510 in fiscal year 2008 valuing the performance sharesat the close of business on the date of grant. Subsequently, 9,750 shares havebeen forfeited and the stock price has decreased from $2.05 to $0.36 resultingin recovery of $11,015 in the three months ended September 30, 2008.

 

·                  2007 performanceshares – We issued 239,900 performance shares on December 21, 2007 that veston February 15, 2011 subject to certain events or upon designation by theCompensation Committee. Termination of employment for any cause is an event offorfeiture. We valued the 2007 performance shares granted at the close ofbusiness on the date of grant, and recognize expense and accrue an incentivecompensation liability, pro rata over the vesting period. 10,000 shares weresubsequently forfeited and the stock price decreased from $2.05 to $0.36 whichallowed for a recovery of expense in the amount of $2,121 for the period.

 

·                  Restricted stockgrants – On March 27, 2008 the Board of Directors granted 25,000 shares ofrestricted stock to each non-employee director of the Company. The RestrictedStock vests annually over a period of four years and unvested shares areforfeited if the director leaves the Board of Directors prior to the vestingdate. On July 18, 2008, the Board of Directors granted a total of 400,000shares of restricted stock to its named executive officers. The restrictedstock vests 50% on January 15, 2009, 25% on January 15, 2010, and 25%on January 15, 2011. In the three months ended September 30, 2008, werecognized compensation expense of $66,598 for restricted stock grants.

 

·                  Other equityawards – On July 18, 2008, the Board of Directors granted an award of1,100,000 shares of unrestricted common stock to Mr. Thomas B. Pickens, III,the Company’s Chief Executive Officer, 200,000 shares of unrestricted commonstock to Mr. Barry A. Williamson, a director, and 150,000 shares ofunrestricted common stock to Mr. Mark E. Adams, a director. Such grants ofunrestricted common stock were made from the 2008 Plan and compensation expenseof $1,002,500 was recognized in fiscal year 2008.

 

**Cash Based Long Term Incentive Awards**

 

In December 2007 the Compensation Committee of the Board ofDirectors adopted and implemented a Long Term Cash Incentive plan. The planmakes cash incentive awards to employees based on the successful completion ofcertain events and passage of time as established by the Committee. These unitsvest on February 15, 2011 and are subject to material risk of forfeiture.The Committee has granted such awards to employees valued at $344,900. As of September 30,2008, the Company had a remaining deferred liability for such awards of$165,550.

 

**Accounting for Stock Issued to Employees**

 

The fair value of each option award is estimated on the date of grantusing the Black Scholes option pricing model, which determines inputs as shownin the following table.

 
| ** **                       | ** ** | **September 30, 2008** | ** ** | **September 30,**   | ** ** |
|----------------------------------|------------|----------------------------------|------------|--------------------------|------------|
| ** **                       | ** ** | **2-Year Options**          | ** ** | **10-Year Options** | ** ** | **2007*** | ** ** |
| Expected  Dividend Yield         |       | 0                                |       | 0                        |       | N/A |   |
| Expected  Volatility             |       | 1.14                             |       | 1.14                     |       | N/A |   |
| Risk Free  Interest Rates        |       | 3.30                             |       | 3.30                     |       | N/A |   |
| Expected Option  Life (in years) |       | .58                              |       | 6.25                     |       | N/A |   |

 

----

*No options were issued for the period ended September 30, 2007

 

Because of differences in option terms and historical exercise patternsamong the plans, we have segregated option awards into three homogenous groupsfor the purpose of determining fair values for options. Valuation assumptionsare determined separately for the three groups that represent, respectively,the 1994 Stock Incentive Plan, the Director’s Stock Option Plan, and the 2008Stock Incentive Plan. The assumptions are as follows:

 

·                  We estimatedvolatility using our historical share price performance over the last tenyears. Management considered the guidance in SFAS No. 123R and believesthe historical estimated volatility is materially indicative of expectationsabout expected future volatility.

 

·                  We use thesimplified method outlined in the Securities and Exchange Commission (“SEC”)Staff Accounting Bulletin No. 107 to estimate expected lives for optionsgranted.

 

·                  The risk-freeinterest rate is based on the U.S. Treasury yield curve in effect at the timeof grant for the expected term of the option.

 

·                  The expecteddividend yield is based on our current dividend yield and the best estimate ofprojected dividend yield for future periods within the expected life of theoption, which is zero.

 

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A summary of our stock option activity as of September 30, 2008and changes during the first three months of fiscal year 2009 are presented inthe following table:

 
| ** **                              | ** ** | **Shares Under  Fixed Options** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Weighted-  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|-----------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------|------------|------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding at  June 30, 2008      |       | 85,400                                    |       | $                                       | 26.48      |                                                 | 3.65       |                            | $          | — |   |
| Granted                                 |       | 856,708                                   |       | $                                       | 0.45       |                                                 | 4.10       |                            | $          | — |   |
| Exercised                               |       | —                                    |       | $                                       | —     |                                                 | —     |                            | $          | — |   |
| Forfeited/Expired                       |       | (41,500                                   | )          | $                                       | 0.82       |                                                 | —     |                            | $          | — |   |
| Outstanding at  September 30, 2008 |       | 900,608                                   |       | $                                       | 2.90       |                                                 | 4.83       |                            | $          | — |   |
| Exercisable                             |       | 79,100                                    |       | $                                       | 27.60      |                                                 | 3.12       |                            | $          | — |   |

 

The weighted-average grant-date fair value of options granted duringthe first three months of fiscal year 2009 was $0.45 per share. The intrinsicvalue for stock options is defined as the difference between the current marketvalue ($0.36 per share as of September 30, 2008) and the grant price.There were no options exercised during the first three months of fiscal year2009. As of September 30, 2008 there was $0.3 million of unamortizedexpense related to our stock option plans.

 

During the first three months of fiscal year 2009, there were nooptions exercised.

 

**10.  RelatedParty Transactions**

 

We engaged in certain transactions with directors and executiveofficers during the three months ended September 30, 2008 and September 30,2007. Following is a description of these transactions:

 

**Astrium GmbH**

 

Dr. Graul, a member of SPACEHAB’s Board of Directors until hisresignation in August 2007, is the Executive Vice President for AstriumGmbH (“Astrium”). Astrium provides unpressurized payload and integration effortsto SPACEHAB on a fixed-price basis in addition to providing engineeringservices as required. For the three months ended September 30, 2007,Astrium’s payload and integration services included in cost of revenue wereapproximately $1.0 million. Astrium did not provide such services to theCompany during the quarter ended September 30, 2008. In August 2007SPACEHAB terminated its ICC/VCC lease agreements with Astrium North America. Weagreed to reimburse Astrium North America $1.4 million upon termination ofthese leases and agreed to provide certain facilities for Astrium’s use withoutcost to Astrium through December 2008.

 

**Executive Credit Cards**

 

Certain Named Executive Officers of the Company have company paidcredit cards for ordinary business expenses. Although the Company pays theamounts on the credit cards, the executive officer is obligated to substantiatethe charges and reimburse the Company for any non-business related charges. Asof September 30, 2008 the Company had no outstanding receivables on suchexecutive credit cards.

 

**R. Scott Nieboer**

 

On May 22, 2008, Mr. R. Scott Nieboer, a director of theCompany, purchased through Trace Management LLC, an entity through which he hasbeneficial ownership, 400,000 shares of the Company’s common stock on the openmarket and 1,063,828 shares of common stock through a private placement withthe Company. The purchases were made at $0.45 and $0.47 per share,respectively.

 

On October 31, 2008, (see Note 14) Curtiswood Capital LLC sold$1,750,000 principal amount of the Company’s 5.5% convertible notes due October 2010to the Company for $1,085,000 plus accrued interest. Mr. Nieboer was abeneficial owner of the notes.

 

**11.  Recent Accounting Pronouncement**

 

Staff Accounting Bulletin (SAB) 108, “Considering the Effects ofPrior-Year Misstatements when Quantifying Misstatements in Current YearFinancial Statements” – The Securities and Exchange Commission released SAB 108

 

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to provide interpretive guidance on how the effects of the carry-overor reversal of prior year misstatements should be considered in quantifying acurrent year misstatement. There have been two approaches commonly used toquantify such errors. Under one approach, the error is quantified as the amountby which the current year income statement is misstated. The other approachquantifies the error as the cumulative amount by which the current year balancesheet is misstated. The SEC staff believes that companies should quantifyerrors using both a balance sheet and an income statement approach and evaluatewhether either approach results in quantifying a misstatement that, when allrelevant quantitative and qualitative factors are considered, is material. Wedo not expect the application of this interpretation to have a material impacton our consolidated financial position or results of operations.

 

As of July 1, 2008, the Company implemented FAS No. 157, *Fair Value Measurements* (“FAS 157”) forits financial assets and liabilities that are remeasured and reported at fairvalue at each reporting period and non-financial assets and liabilities thatare remeasured and reported at fair value at least annually. In accordance withthe provisions of FSP No. FAS 157-2, *EffectiveDate of FASB Statement No. 157*, the Company elected to deferimplementation of FAS 157 as it relates to its non-financial assets andnon-financial liabilities that are recognized and disclosed at fair value inthe consolidated financial statements on a nonrecurring basis until its fiscalyear beginning July 1, 2009.

 

In general, fair values determined by Level 1 inputs utilize quotedprices (unadjusted) in active markets for identical assets or liabilities. Fairvalues determined by Level 2 inputs utilize observable inputs other than Level1 prices, such as quoted prices for similar assets or liabilities, quotedprices in markets that are not active or other inputs that are observable or canbe corroborated by observable market data for substantially the full term ofthe related assets or liabilities. Fair values determined by Level 3 inputs areunobservable data points for the asset or liability, and include situationswhere there is little, if any, market activity for the asset or liability.

 

**12. Restricted Cash, Advances on Construction Contract, and Contingency**

 

In December 2006, our Astrotech subsidiary was awarded a contractwith a governmental agency to modify one of our payload processing facilitiesto specific requirements of a programmed mission. Under the terms of this $20.0million fixed-price contract, which has subsequently been increased to $34.2million, we will own the improvements after completion of the contractobligations. We have entered into a firm fixed price construction subcontractwith J. P. Donovan Construction, Inc. to provide a significant portion ofthe design and construction work that will be required under our contract. Thecontract requires us to complete the construction on the facility by September 30,2009 and contains penalties if we do not meet the contracted completion date.As a result we have a contingency of up to $3.0 million in penalties. Inaccordance with our contracts, payments will be received from our customer on amilestone schedule that generally provides receipt of cash before payments arerequired to the contractor under their milestone schedule. Receipts in advanceof disbursements are retained in a restricted cash account within our subsidiarycompany and used exclusively for purposes of the contract obligations. As of September 30,2008, net cash receipts of $10.6 million have been designated as restrictedcash. A liability of $6.6 is recognized on the balance sheet as of September 30,2008, for accrued obligations under this contract relating to such advances.

 

**13.  EarlyTermination of Cost Plus Award Fee Contract**

 

On May 7, 2008, the Company received a letter from ARESCorporation notifying the Company of ARES’s intent to terminate its Cost PlusAward Fee Subcontract with the Company. The Company continued under open taskorders relevant to the subcontract until June 5, 2008. The Company andARES have not resolved certain issues relative to the early termination of thesubcontract, including, but not limited to certain accounts receivable fromARES under this subcontract totaling $1.4 million. The Company is evaluatingits contractual rights and other options, including damages, with respect toARES’s actions.

 

**14. Subsequent Events**

 

**NASDAQ Deficiency Letters**

 

On April 6, 2008, we received a NASDAQ Staff Determination letterindicating that we failed to comply with NASDAQ Marketplace Rule 4310(c)(4) andthat our securities were, therefore, subject to delisting from The NASDAQCapital Market. Marketplace Rule 4310(c)(4) requires that we maintaina $1.00 bid price. Pursuant to NASDAQ rules we were granted a graceperiod, which expired on October 6, 2008. On October 7, 2008, wereceived an additional NASDAQ Staff Determination letter advising us thatbecause we had failed to regain compliance under the $1.00 bid price rule, ourshares were to be delisted from the NASDAQ Capital Markets exchange. We filedfor an appeal of NASDAQ’s action and were granted a hearing date in November 2008.On October 16, 2008, NASDAQ 

 

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announced the suspension of Marketplace Rule 4310(c)(4) untilJanuary 16, 2009, and advised the Company that it was no longer out ofcompliance with the Marketplace Rule.

 

**Common Stock and Convertible Note RepurchaseProgram**

 

On March 25, 2003 the Board of Directors authorized us torepurchase up to $1.0 million of our outstanding common stock at market prices.On September 25, 2008, the Board of Directors authorized the repurchase ofup to an additional $6.0 million of the Company’s common stock and outstandingconvertible notes due October 2010. (See Repurchase of Outstanding Notes below.)  Any purchases under SPACEHAB’s securityrepurchase program may be made from time-to-time, in the open market, throughblock trades or otherwise in accordance with applicable regulations of theSecurities and Exchange Commission. Depending on market conditions and otherfactors, these purchases may be commenced or suspended at any time or fromtime-to-time without prior notice. Additionally, the timing of suchtransactions will depend on other corporate strategies and will be at thediscretion of the management of the Company. As of September 30, 2008, we had repurchased 11,660 shares ofcommon stock at a cost of $117,320 under the program, which represents anaverage cost of $10.06 per share. The Company has made no purchases of commonstock under the program in fiscal years 2008 or through the date of this filing.

 

**Repurchase of Outstanding Notes**

 

On October 31, 2008, the Company purchased $1,750,000 principalamount of its outstanding 5.5% convertible notes due October 2010 fromCurtiswood Capital LLC. Mr. R. Scott Nieboer, a director of the Companywas a beneficial owner of the repurchased securities. The repurchased noteswere acquired at an established market price on the day of trade and will beretired by the Company. The Company will recognize a gain of $665,000 on thetransaction.

 

**Establish New Subsidiary**

 

On October 21, 2008, the Company formed AirWard Corporation, awholly owned subsidiary of the Company.

 

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**ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

*You should read the following discussion andanalysis together with our consolidated financial statements and notes theretoand the discussion “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” and Item 1A.* —*“RiskFactors” included in our 2008 Annual Report Form 10-K. The followinginformation contains forward-looking statements, which are subject to risks anduncertainties. Should one or more of these risks or uncertainties materialize,our actual results may differ from those expressed or implied by theforward-looking statements.*

 

**OVERVIEW**

 

**Forward Looking Statements**

 

This document may contain “forward-looking statements” within themeaning 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 Conditionand Results of Operations” and “Liquidity and Capital Resources.” Suchstatements are subject to risks and uncertainties that could cause actualresults to differ materially from those projected in the statements. Inaddition to those risks and uncertainties discussed herein, such risks anduncertainties include, but are not limited to, whether we will fully realizethe economic benefits under our NASA and other customer contracts, completionof the International Space Station (“ISS”), continued availability and use ofthe U.S. space shuttle system, technological difficulties, product demand,market acceptance risks, the effect of economic conditions, uncertainty ingovernment funding, and the impact of competition, delays, and uncertainties infuture space shuttle and ISS programs.

 

**Financial Summary**

 

SPACEHAB’s first quarter operating results for fiscal year 2009reflected net income of $0.1 million. For the first quarter of fiscal year 2008we recorded a net loss of $0.9 million.

 

The following table illustrates financial highlights for the quartersended September 30, 2008 and September 30, 2007:

 
| ** **                                                         | ** ** | **2008**                                                            | ** ** | **2007** | ** ** | **Percent  Change** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|----------|------------|---------------------|------------|
| ** **                                                         | ** ** | **(in millions except per share amounts)** | ** ** |
| For the Three Months Ended  September 30: |       |                                                                |       |     |       |                |       |
| Revenue                                                            |       | 6.0                                                                 |       | 8.6      |       | (30.2               | )%         |
| Net income  (loss)                                                 |       | 0.1                                                                 |       | (0.9     | )          | 111.1               | %          |
| Diluted EPS                                                        |       | 0.00                                                                |       | (0.66    | )          | 100.0               | %          |
| As of  September 30:                                          |       |                                                                |       |     |       |                |       |
| Cash and Cash  Equivalents*                                        |       | 2.5                                                                 |       | 2.6      |       | (3.8                | )%         |
| Total Debt                                                         |       | 11.6                                                                |       | 63.4     |       | (81.7               | )%         |
| Stockholders  Equity (deficit)                                     |       | 35.7                                                                |       | (14.0    | )          | 355.0               | %          |

 

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*excludingrestricted cash

 

**Business Segments**

 

For the first quarter of fiscal year 2009, our Company was comprised ofthree primary business segments. The following is a brief discussion of each ofthese segments, including a list of key factors that have affected, and areexpected to continue to affect, their respective earnings and cash flows. Wealso present a brief discussion of our corporate-level expenses along with asummary of our current liquidity position and items that could impact ourliquidity position in fiscal year 2009 and beyond.

 

**Astrotech Space Operations, Inc.**

 

Astrotech Space Operations provides all support necessary for itsgovernment and commercial customers to successfully process complexcommunication, Earth observation and deep space satellites in preparation fortheir launch on a variety of domestic and foreign launch vehicles. Processingactivities include satellite ground transportation; pre-launch hardwareintegration and testing; satellite encapsulation, fueling, launch pad delivery;and communication linked launch control. Our Astrotech facilities canaccommodate five meter class satellites with 

 

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weights of 11,000 kilograms, encompassing the majority of U.S. basedsatellite preparation services. During the quarters ended September 30,2008 and September 30, 2007, Astrotech accounted for 96% and 43%,respectively, of our consolidated revenues.

 

Revenue for our Astrotech business unit is generated from variousfixed-priced contracts with launch service providers in both the commercial andgovernment markets. The services and facilities we provide to our customerssupport the final assembly, checkout, and countdown functions associated withpreparing a spacecraft for launch. The earnings and cash flows generated fromour Astrotech operations are related to the number of commercial spacecraftlaunches, which reflects the growth in the satellite-based communicationsindustries; and, the replacement requirements inherent in aging satellites.Other factors that have impacted, and are expected to continue to impactearnings and cash flows for this business include:

 

·                  Our ability tocontrol our capital expenditures, which are primarily limited to modificationsto accommodate payload processing for new launch vehicles, upgradingcommunications infrastructure, maintenance and safety, environmental andreliability projects, and other costs, through disciplined management and safe,efficient operations;

 

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

 

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

 

**Astrotech Engineering Services, Inc.**

 

Formerly SPACEHAB Government Services, Astrotech Engineering Servicesprovides large scale program technical support and specialized engineeringanalysis, products and services, and configuration and data management supportto NASA and other government customers. Through the first quarter of fiscalyear 2008, Engineering Services derived most of its revenue from NASA’s ProgramIntegration and Control (“PI&C”) contract for the International SpaceStation. The Company’s role in the PI&C contract was terminated in June of2008. During the quarters ended September 30, 2008 and September 30,2007, our Engineering Services business unit accounted for 1% and 15%,respectively, of our consolidated revenues.

 

Earnings from Engineering Services are dependent upon our ability tocontinue to win contracts with NASA or other government entities through thecompetitive bidding process; and, our ability to sustain exemplary performancescores in order to achieve performance bonuses. Other factors that haveimpacted, and are expected to continue to impact earnings and cash flows forthis business include:

 

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

 

·                  Our ability tomaintain small business qualification for the Engineering Services businessunit under NASA and Department of Defense contracting rules;

 

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

 

·                  Our ability tocontrol costs within our budget commitments.

 

**SPACEHABOrbital Transportation Services, Inc. (“SOTS”)**

 

Historically called SPACEHAB Flight Services, SOTS offered a range ofengineering, research, logistics, integration, operations, and ground supportservices supporting our space shuttle module and pallet assets, and spacecraftowned by other entities. At this time, there are no more scheduled missions tobe performed under this business segment as the shuttle space transportationsystem nears retirement in 2010. During the fiscal year 2008, the Companycompleted space shuttle mission STS-118, its last contracted module mission,and recognized residual SOTS activity from previous missions. We continue toretain our space shuttle module assets to be available for future opportunitiesshould they arise. During the quarters ended September 30, 2008 and September 30,2007, our Flight Services business accounted for 0% and 42%, respectively, ofour consolidated revenues.

 

The primary factors impacting our Flight Services business unitearnings and cash flows are the number of space shuttle missions flown, therequirements for use of our space shuttle hardware and the configuration of thecargo handling and research logistics required for each mission. Other factorsthat have impacted, and are expected to continue to impact earnings and cashflows for this business unit include:

 

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

 

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

 

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

 

**Corporateand Other**

 

Significant items impacting future corporate expenses, earnings, andcash flow includes:

 

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

 

·                  Interest costson our variable rate bank financings and interest earnings on our reducingrestricted cash balances.

 

·                  Income taxes andour ability to utilize net operating loss carryforwards to offset future taxes,state income taxes, and the Texas margin tax.

 

**NEW BUSINESS INITIATIVES**

 

Our identified new business initiatives are focused on space-based lifesciences, end-to-end space mission assurance services, and commercialization ofspace-based technologies, which are natural extensions of our 23 years of spaceindustry experience and our core capabilities in these fields. These newbusiness initiatives will require large investments of capital and technicalexpertise. As of September 30, 2008, we have recorded no revenue fromthese new business initiatives.

 

**BioSpace Technologies, Inc.**

 

BioSpace Technologies, a natural extension of SPACEHAB’s many years ofexperience preparing, launching, and operating over 1,500 science payloads inspace, the Company is transitioning from supporting government-sponsored basicresearch into producing commercial products from the microgravity discoveries.This new business initiative involves the use of microgravity platforms, suchas the Space Shuttle and the ISS, for the development of space-made productsthat are to be sold on Earth. BioSpace Technologies has successfully processedvaccine samples in space on Space Shuttle Flights, STS-118, STS-123, andSTS-124, which have resulted in preliminary salmonella vaccine production data.

 

**SPACETECH, Inc.**

 

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

 

**RESULTS OF OPERATIONS**

 

*For the three months ended September 30, 2008as compared to the three months ended September 30, 2007.*

 

Revenue. Revenue decreasedapproximately 30% to $6.0 million for the three months ended September 30,2008 as compared to $8.6 million for the three months ended September 30,2007.

 

(in millions)

 
| ** **            | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **  | ** ** |
|-----------------------|------------|----------------------------------|------------|------------|------------|-------------|------------|
| ** **            | ** ** | **September 30,**           | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **            | ** ** | **2008**                         | ** ** | **2007**   | ** ** | **Change**  | ** ** | **Change** | ** ** |
| Flight Services       |       | $                                | 0.0        |       | $          | 3.6         |       | $ | (3.6 | ) | (100.0 | )% |
| Astrotech             |       | 5.7                              |       | 3.7        |       | 2.0         |       | 54.1 | % |
| Engineering  Services |       | 0.1                              |       | 1.3        |       | (1.2        | )          | (92.3 | )% |
| Other                 |       | 0.2                              |       | 0.0        |       | 0.2         |       | 100.0 | % |
|                  |       | $                                | 6.0        |       | $          | 8.6         |       | $ | (2.6 | ) | (30.2 | )% |

 

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Revenue from our SFS business unit decreased by $3.6million for the three months ended September 30, 2008 as compared to thethree months ended September 30, 2007. The loss of revenue for thisbusiness unit is a result of the loss of shuttle mission work under the CMCwith Lockheed Martin in the first quarter of fiscal year 2008.

 

Revenue from our Astrotechbusiness unit increased by $2.0 million for the three months ended September 30,2008 as compared to the three months ended September 30, 2007. Thefollowing summarizes significant items that affected the quarter ended September 30,2008 as compared to the quarter ended September 30, 2007:

 

·                  Decrease inrevenue of $1.2 million at our Florida facility due to one satellite in-housefor the period ending September 30, 2008 whereas, for the same period lastfiscal year, two satellites were in the facility for most of the period. Inaddition, the one mission processed was done as part of the guaranteed contractin which revenue is recognized equally over the year.

 

·                  Increase inrevenue of $1.7 million at our VAFB facility due to three missions processedduring the three month period ending September 30, 2008, as compared toone mission being processed during the same period last fiscal year.

 

·                  Astrotechsupported two satellite launches at its Sea Launch facility during the periodending September 30, 2008 which resulted in revenue of $1.0 million. Inthe period ending September 30, 2007, Astrotech did not support asatellite launch at its Sea Launch facility. This is attributed to the January 30,2007 launch failure experienced by Sea Launch that resulted in the loss of asatellite and damage to their ground support equipment on the floating launchplatform.

 

·                  Revenue earned on the construction of a processingfacility in California resulted in an increase of $0.5 million for the firstquarter of fiscal year 2009 compared to the first quarter of fiscal year 2008.

 

Revenue from our Engineering Services business unitdecreased by $1.2 million for the three months ended September 30, 2008 ascompared to the three months ended September 30, 2007. The followingsummarizes the significant items that affected the quarter ended September 30,2008 as compared to the quarter ended September 30, 2007:

 

·                  Decrease inrevenue from our subcontract with ARES on the PI&C contract of $1.3million. This subcontract was terminated in June 2008.

 

·                  Increase inrevenue from our contract with a foreign commercial customer for manufacture ofspace hardware of $0.1 million.

 

Cost of Revenue. Cost of revenue forthe three months ended September 30, 2008 decreased by 45% toapproximately $3.5 million, as compared to $6.4 million for the three monthsended September 30, 2007.

 

(in millions)

 
| ** **            | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **  | ** ** |
|-----------------------|------------|----------------------------------|------------|------------|------------|-------------|------------|
| ** **            | ** ** | **September 30,**           | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **            | ** ** | **2008**                         | ** ** | **2007**   | ** ** | **Change**  | ** ** | **Change** | ** ** |
| Flight Services       |       | $                                | 0.2        |       | $          | 3.0         |       | $ | (2.8 | ) | (93.3 | )% |
| Astrotech             |       | 3.0                              |       | 2.4        |       | 0.6         |       | 25.0 | % |
| Engineering  Services |       | 0.1                              |       | 1.0        |       | (0.9        | )          | (90.0 | )% |
| Other                 |       | 0.2                              |       | 0.0        |       | 0.2         |       | 100.0 | % |
|                  |       | $                                | 3.5        |       | $          | 6.4         |       | $ | (2.9 | ) | (45.3 | )% |

 

Cost of revenue for our SFS business unit decreased$2.8 million for the three months ended September 30, 2008 compared to thethree months ended September 30, 2007. Subsequent to the completion of theCMC contract with Lockheed Martin, a significant reduction in the workforce andother cost reducing measures were taken to reduce cost:

 

The increase in cost of revenue of $0.6 million in ourAstrotech business unit for the three months ended September 30, 2008compared to the three months ended September 30, 2007 is primarily due toincreased mission specific activities at our VAFB and Florida facilities.

 

Cost of revenue from our Engineering Services businessunit decreased by $0.9 million for the quarter ended September 30, 2008 ascompared to the same quarter ended September 30, 2007. The followingsummarizes the significant items that affected the quarter ended September 30,2008 as compared to the quarter ended September 30, 2007:

 

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·                  Decrease incost of revenue from our subcontract with ARES on the PI&C contract of $0.9million. The termination of the subcontract in June 2008 resulted in a significantlyreduced workforce reflected in this lower cost of revenue.

 

Operating Expenses. Operatingexpenses increased to $2.3 million for the three months ended September 30,2008 as compared to approximately $2.1 million for the three months ended September 30,2007. The following summarizes the significant differences between the threemonths ended September 30, 2008 and the three months ended September 30,2007:

 

·                  Increase indirector fees by $0.1 million.

 

·                  Research anddevelopment costs increased by approximately $0.3 million. This increase is dueto continued efforts on the Micro Electro Mechanical System program as well asa large investment in the new business initiative BioSpace Technologies.

 

·                  Travel expensesdecreased $0.1 million from fiscal year 2007 first quarter.

 

Interest Expense. Interest expensewas approximately $0.2 million for the three months ended September 30,2008 as compared to approximately $1.1 million for the three months ended September 30,2007. Significant items affecting the differences in interest expense for thethree months ended September 30, 2008, as compared to the three monthsending September 30, 2007, are discussed below:

 

·                  SeniorConvertible Notes principal amount of $46.1 million were converted into commonstock in October 2007 which reduced interest expense by $0.7 million.

 

·                  JuniorConvertible Notes principal amount of $7.4 million were converted into commonstock in October 2007 which reduced interest expense by $0.2 million.

 

·                  JuniorConvertible Notes principal amount of $2.9 million were redeemed for cash atmaturing in October 2007, reducing interest expense by $0.1 million.

 

·                  For the threemonths ended September 30, 2008, we recognized interest expense of $0.1million on our bank term loan and outstanding balance on our revolving line ofcredit.

 

Interest and Other Income. Interestincome is earned on our restricted money market and other restricted depositaccounts. Interest and other income was approximately $0.1 million and $0.2million for the three months ended September 30, 2008 and 2007,respectively.

 

Income Taxes. Based on our projectedeffective tax rate for fiscal year 2008 and 2007, we recorded no tax expensefor the three month period ending September 30, 2008 and September 30,2007.

 

Net Income (Loss). Net loss for thethree months ended September 30, 2007 was approximately $0.9 million or$0.66 per share as compared to net income of approximately $55,000 or $0.00 pershare for the three months ended September 30, 2008.

 

### **Liquidity and Capital Resources**

### ** **

Currently our primary sources of liquidity are cashflow from operations and funds available under our revolving line of credit.The principal uses of cash flow that affect our liquidity position include bothoperational expenditures and debt service payments. Management is focused onincreasing cash flow and on managing cash effectively through limiting cashinvestments in long-term assets.

 

*Cash Flows From Operating Activities.*Cashused by operations for the three months ended September 30, 2008 and 2007 was $0.9 million and $7.0million, respectively. The significant items affecting the differences in cashflows from operating activities for the three months ended September 30,2008 as compared to the three months ended September 30, 2007 arediscussed below:

 

·                  Net income forthe three months ended September 30,2008 was $0.1 million as compared to a net loss for the three months ended September 30, 2007 of $0.9 million.

 

·                  Depreciationand amortization for the three months ended September 30,2008 was $0.6 million as compared to $1.1 million for the three months periodended September 30, 2007.

 

·                  For the threemonths ended September 30, 2008, changes in assets used $2.7 million ofcash from operations compared to providing $0.9 million of cash from operationsin the three months ended September 30, 2007 

 

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primarily due to an increasein accounts receivable of $2.8 million compared to a reduction of accountsreceivable of $1.6 million in the three months ended September 30, 2007.

 

·                  For the threemonths ended September 30, 2008, cash flows from operating activitiesincluded an increase in restricted cash of $2.2 million compared to an increasein restricted cash of $8.3 million in the three months ended September 30,2007, due to the timing of milestone payments from our customer.

 

·                  Deferredrevenue increased $2.1 million in the three months ended September 30,2008.

 

·                  Accountspayable used cash from operations of $0.5 million in the three months ended September 30,2008, compared to using cash from operations of $1.6 million in the threemonths ended September 30, 2007.

 

·                  Advances fromconstruction contracts increased $1.7 million for the three months ended September 30,2008, compared to $7.5 million for the three months ended September 30,2007, relevant to contract milestones and advances from our customer.

 

·                  Customerdeposits were reduced by $3.1 million and accrued subcontracting services werereduced by $2.4 million in the three months ended September 30, 2007. Thecustomer deposit was an advance on an insurance payment and accruedsubcontracting service related to services on the Company’s last shuttlemission.

 

*Cash Flows From InvestingActivities*. For the three months ended September 30, 2008and 2007, cash flows used in investing activities were $0.1 million and $0.2million, respectively. The significant items affecting the differences in cashflows from investing activities for the three months ended September 30,2008 as compared to the three months ended September 30, 2007 arediscussed below:

 

·                  There werepurchases of property and equipment of $0.1 million for the three months ended September 30, 2008 as compared to $0.2million for the three months ended September 30,2007. This difference was primarily due to ongoing capital improvements of ourAstrotech facilities in Florida and California.

 

*Cash Flows From Financing Activities.*Forthe three months ended September 30, 2008 and 2007, cash flows providedby financing activities were $0.9 million and $0, respectively. The significantitems affecting the differences in cash flows from financing activities for thethree months ended September 30, 2008 as compared to the three monthsended September 30, 2007 are discussed below:

 

·                  For the threemonths ended September 30, 2008, we borrowed $1.0 million from ourrevolving credit facility and paid $0.1 million as principal payments on theterm note facility.

 

On March 25, 2003 the Board of Directorsauthorized us to repurchase up to $1.0 million of our outstanding common stockat market prices. On September 25, 2008, the Board of Directors authorizedthe repurchase of up to an additional $6.0 million of our outstanding commonstock or our outstanding 5.5% convertible notes at market prices. Any purchasesunder our stock repurchase program may be made from time to time, in the openmarket, through block trades or otherwise in accordance with applicableregulations of the SEC. As of September 30, 2008, we had repurchased11,660 shares at a cost of $117,320 under the program, which represents anaverage cost of $10.06 per share. We will continue to evaluate the stockrepurchase program and the funds authorized for the program. This stockrepurchase program remains available for purchases of our stock or our 5.5%convertible notes.

 

### **Liquidity**

### ** **

Management continues to focus its efforts on improvingoverall liquidity through identifying new business opportunities within theareas of our core competencies, reducing operating expenses, and limiting cashcommitments for future capital investments and new asset development.Additionally, management continues to evaluate operating expenses in an effortto reduce or eliminate costs not required to effectively operate the Company.

 

As of September 30, 2008 we had cash andrestricted cash on hand of $13.1 million and our working capital was $2.2million. Restricted cash, which consists of advance payments on a governmentcontract to modify certain spacecraft processing facilities, totaled $10.6million at September 30, 2008. We carry a current liability of $6.6million for obligations under this construction contract. For the three monthsended September 30, 2008 we generated $1.3 million from operatingactivities.

 

In February 2008 (see Note 6), we consummated afinancing facility with a commercial bank. This facility provides for a threeyear $4.0 million term loan, payable in monthly installments of principal inthe amount of $22,222 plus interest and a $2.0 million revolving creditfacility. The term loan is secured by the assets of our Astrotech subsidiaryand the one-year revolving credit facility is secured by Astrotech’s accountsreceivable. As of September 30, 2008 

 

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we have a balance of $1.0 million outstanding underthe revolving credit facility and $3.7 million outstanding on the term note.

 

### **Construction Contract Contingency**

### ** **

In August 2007 we entered into a $14.0 millionmodification to our existing Vandenberg construction contract, which increasedthe contract to a total of $34.2 million. The modification requires us tocomplete the construction on the redesigned facility by September 30,2009. The modification contains penalties if we do not meet the contractedcompletion date. As a result we have a contingency of up to $3.0 million inpenalties.

 

### **Off-Balance Sheet Arrangements**

### ** **

We do not have any significant off-balance sheetarrangements, other than operating leases, that have, or are reasonably likelyto have, a current or future material effect on our financial condition,revenues or expenses, results of operations, liquidity, capital expenditures orcapital resources.

 

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# **ITEM3.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

# ** **

We have no material changes to the disclosure made regardingmarket risk in our Annual Report on Form 10-K for the year ended June 30,2008.

 

# **ITEM4.  CONTROLS AND PROCEDURES**

# ** **

Under the supervision andwith the participation of our management, including our principal executiveofficer and principal financial officer, we have evaluated the effectiveness ofthe design and operation of our disclosure controls and procedures as of theend of the period covered by this quarterly report, and, based on ourevaluation, our principal executive officer and principal financial officerhave concluded that these controls and procedures are effective. There havebeen no changes in our internal control over financial reporting that occurredduring our last fiscal quarter that have materially affected, or are reasonablylikely to materially affect, our internal control over financial reporting.

 

Disclosure controls andprocedures are our controls and other procedures that are designed to ensurethat information required to be disclosed by us in the reports that we file orsubmit under the Exchange Act is recorded, processed, summarized, and reportedwithin the time periods specified in the SEC’s rules and forms. Disclosurecontrols and procedures include, without limitation, controls and proceduresdesigned to provide reasonable assurance that information required to bedisclosed by us in the reports that we file or submit under the Exchange Act isaccumulated and communicated to our management, including our principalexecutive officer and principal financial officer, as appropriate to allowtimely decisions regarding required disclosure.

 

# **PART II:  OTHER INFORMATION**

# ** **

# **ITEM1.  LEGAL PROCEEDINGS**

# ** **

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

 

# **ITEM1A.  RISK FACTORS**

# ** **

There have been nomaterial changes in the Risk Factors disclosed in Item 1A in our Annual Reporton Form 10-K for the year ended June 30, 2008.

 

# **ITEM2.  UNREGISTERED SALES OF EQUITYSECURITIES AND USE OF PROCEEDS**

# ** **

During the three months ended September 30, 2008we did not issue any unregistered securities.

 

# **ITEM3.  DEFAULTS UPON SENIOR SECURITIES**

# ** **

During the three months ended September 30, 2008we did not have any defaults upon senior securities.

 

# **ITEM4.  SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

# ** **

During the three months ended September 30, 2008we did not have any submissions of matters to a vote of security holders.

 

# **ITEM6.  EXHIBITS**

# ** **

The following exhibits are filed herewith:

 

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| **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.                        |

** **

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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: November 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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