**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 10-Q**

**(Mark One)**

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

**For the quarterly period ended September 30, 2006**

**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**

(Exact name of registrantas specified in this charter)

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

**12130Highway 3, Building 1Webster, Texas 77598-1504**(Address of principal executive offices and zipcode)

**(713)558-5000**(Registrant’stelephone number, including area code)

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

Yes xNo o

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

Large acceleratedfiler o                                            Acceleratedfiler o                                      Non-acceleratedfiler x

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

Yes o No x

As of November 8, 2006 there were 12,919,582 shares ofthe registrant’s common stock outstanding.

 

 

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**SPACEHAB,INCORPORATED AND SUBSIDIARIESSEPTEMBER 30, 2006 QUARTERLY REPORT ON FORM 10-Q**

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

 

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**DEFINITIONS**

As used in this Form10-Q, the abbreviations and acronyms contained herein have the meanings setforth below. Additionally, the terms “SPACEHAB”, “the Company”, “we”, “us” and “our”refer to SPACEHAB, Incorporated and its subsidiaries, unless the contextclearly indicates otherwise.
| 1994 Plan       |   | 1994 Stock Incentive Plan                     |
|-----------------|--------|-----------------------------------------------|
| Astrium         |   | Astrium GmbH                                  |
| Astrotech       |   | Astrotech Space Operations                    |
| Boeing          |   | The Boeing Company                            |
| CE&R        |   | Concept Exploration and Refinement            |
| CMC             |   | Cargo Mission Contract                        |
| Common stock    |   | SPACEHAB common stock                         |
| EPS             |   | Earnings Per Share                            |
| ESP2            |   | External Stowage Platform 2                   |
| ICC             |   | Integrated Cargo Carrier                      |
| IDIQ            |   | Indefinite-Delivery, Indefinite-Quantity      |
| ISS             |   | International Space Station                   |
| Lloyd’s    |   | Lloyd’s of London                        |
| Lockheed Martin |   | Lockheed Martin Corporation                   |
| NASA            |   | National Aeronautics and Space Administration |
| PI&C        |   | Program Integration and Control               |
| RDM             |   | Research Double Module                        |
| RSC Energia     |   | Rocket Space Corporation-Energia              |
| SEC             |   | Securities and Exchange Commission            |
| SFAS            |   | Statement of Financial Accounting Standards   |
| SFS             |   | SPACEHAB Flight Services                      |
| SGS             |   | SPACEHAB Government Services                  |
| SMI             |   | Space Media, Inc.                             |
| SMI Plan        |   | Space Media, Inc. Stock Option Plan           |
| SPF             |   | Spacecraft Processing Facility                |

 

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**PART I:  FINANCIAL INFORMATION**

**ITEM 1.  Unaudited Condensed Consolidated FinancialStatements**

**SPACEHAB, INCORPORATEDAND SUBSIDIARIESUnaudited Condensed Consolidated Balance Sheets(In thousands, except share data)**
| ** **                                                                                                                                  | ** ** | **September 30, 2006** | ** ** | **June 30, 2006** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                  | ** ** | **(unaudited)**                  | ** ** | ** **                  | ** ** |
| ASSETS                                                                                                                                      |       |                             |       |                        |       |
| Cash and cash  equivalents                                                                                                                  |       | $                                | 9,793      |                        | $          | 6,317 |   |
| Accounts receivable,  net                                                                                                                   |       | 12,913                           |       | 11,379                      |       |
| Inventory                                                                                                                                   |       | 2,369                            |       | 2,369                       |       |
| Prepaid expenses and  other current assets                                                                                                  |       | 803                              |       | 610                         |       |
| Total current  assets                                                                                                                       |       | 25,878                           |       | 20,675                      |       |
| Property and equipment,  net of accumulated depreciation and amortization of $52,082 and $50,620,  respectively                             |       | 60,246                           |       | 61,637                      |       |
| Deferred financing  costs, net                                                                                                              |       | 1,995                            |       | 2,124                       |       |
| Other assets, net                                                                                                                           |       | 1,040                            |       | 1,014                       |       |
| Total assets                                                                                                                                |       | $                                | 89,159     |                        | $          | 85,450 |   |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                                  |       |                             |       |                        |       |
| Mortgage loan payable                                                                                                                       |       | $                                | 1,103      |                        | $          | 1,636 |   |
| Accounts payable                                                                                                                            |       | 1,329                            |       | 1,598                       |       |
| Accounts payable-Astrium                                                                                                                    |       | 1,957                            |       | 3,386                       |       |
| Accrued interest                                                                                                                            |       | 1,733                            |       | 804                         |       |
| Accrued expenses                                                                                                                            |       | 2,170                            |       | 2,394                       |       |
| Accrued subcontracting  services                                                                                                            |       | 8,155                            |       | 6,562                       |       |
| Deferred gains on sale  of buildings                                                                                                        |       | 221                              |       | 221                         |       |
| Customer deposits                                                                                                                           |       | 3,093                            |       | —                      |       |
| Deferred revenue                                                                                                                            |       | 1,779                            |       | 1,321                       |       |
| Total current  liabilities                                                                                                                  |       | 21,540                           |       | 17,922                      |       |
| Accrued contract cost  and other                                                                                                            |       | 159                              |       | 96                          |       |
| Deferred gains on sale  of buildings                                                                                                        |       | 1,318                            |       | 1,373                       |       |
| Convertible 8%  subordinated notes payable                                                                                                  |       | 10,306                           |       | 10,306                      |       |
| Senior convertible 5.5%  notes payable                                                                                                      |       | 52,944                           |       | 52,944                      |       |
| Total liabilities                                                                                                                           |       | 86,267                           |       | 82,641                      |       |
| Commitments and  contingencies                                                                                                              |       |                             |       |                        |       |
| Stockholders’ equity                                                                                                                   |       |                             |       |                        |       |
| Preferred Stock,  no par value, convertible, authorized 2,500,000 shares, issued and 1,333,334  shares, (liquidation preference of $12,000) |       | 11,892                           |       | 11,892                      |       |
| Common stock, no  par value, 70,000,000 shares authorized, 13,035,682 and 12,976,264 shares  issued, respectively                           |       | 84,067                           |       | 84,030                      |       |
| Treasury stock,  116,100 shares, at cost                                                                                                    |       | (117                             | )          | (117                        | )          |
| Additional  paid-in capital                                                                                                                 |       | 362                              |       | 284                         |       |
| Accumulated  deficit                                                                                                                        |       | (93,312                          | )          | (93,280                     | )          |
| Total stockholders’  equity                                                                                                            |       | 2,892                            |       | 2,809                       |       |
| Total liabilities and stockholders’ equity                                                                                             |       | $                                | 89,159     |                        | $          | 85,450 |   |

 

See accompanying notes tounaudited condensed consolidated financial statements.

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**SPACEHAB,INCORPORATED AND SUBSIDIARIES**Unaudited Condensed Consolidated Statements of Operations(In thousands, except share data)
| ** **                                                 | ** ** | **Three Months Ended September 30,** | ** ** |
|------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                 | ** ** | **2006**                                                 | ** ** | **2005** | ** ** |
| Revenue                                                    |       | $                                                        | 14,898     |   | $ | 11,985 |   |
| Costs of revenue                                           |       | 11,133                                                   |       | 10,212 |   |
| Gross profit                                               |       | 3,765                                                    |       | 1,773 |   |
| Operating expenses:                                        |       |                                                     |       |   |   |
| Selling, general  and administrative                       |       | 2,687                                                    |       | 2,280 |   |
| Research and  development                                  |       | 192                                                      |       | 78 |   |
| Total operating  expenses                                  |       | 2,879                                                    |       | 2,358 |   |
| Income (loss)  from operations                             |       | 886                                                      |       | (585 | ) |
| Interest expense                                           |       | (1,080                                                   | )          | (1,408 | ) |
| Interest and other  income, net                            |       | 162                                                      |       | 109 |   |
| Loss before income taxes                                   |       | (32                                                      | )          | (1,884 | ) |
| Income tax expense                                         |       | —                                                   |       | (32 | ) |
| Net loss                                                   |       | $                                                        | (32        | ) | $ | (1,916 | ) |
| Loss per share:                                            |       |                                                     |       |   |   |
| Net loss per share —  basic                           |       | $                                                        | 0.00       |   | $ | (0.15 | ) |
| Shares used in  computing net loss per share — basic  |       | 12,860,810                                               |       | 12,671,576 |   |
|                                                       |       |                                                     |       |   |   |
| Net loss per share — diluted                          |       | $                                                        | 0.00       |   | $ | (0.15 | ) |
| Shares used in computing net loss per share — diluted |       | 12,860,810                                               |       | 12,671,576 |   |

 

See accompanying notes to unaudited condensedconsolidated financial statements.

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**SPACEHAB,INCORPORATED AND SUBSIDIARIES**Unaudited Condensed Consolidated Statements of Cash Flows(In thousands)
| ** **                                                                                       | ** ** | **Three Months Ended September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                                                       | ** ** | **2006**                                                 | ** ** | **2005** | ** ** |
| **Cash flows from operating  activities**                                                        | ** ** | ** **                                               | ** ** | ** ** | ** ** |
| Net loss                                                                                         |       | $                                                        | (32        | ) | $ | (1,916 | ) |
| Adjustments to  reconcile net loss to net cash provided by operating activities:                 |       |                                                     |       |   |   |
| Stock-based  compensation                                                                        |       | 78                                                       |       | 86 |   |
| Depreciation and  amortization, including debt issuance cost of $0.1 million and $0.1 million    |       | 1,591                                                    |       | 1,345 |   |
| Recognition of deferred  gain                                                                    |       | (55                                                      | )          | (50 | ) |
| Changes in assets and  liabilities:                                                              |       |                                                     |       |   |   |
| (Increase)  decrease in accounts receivable                                                      |       | (1,534                                                   | )          | 1,008 |   |
| Increase in  prepaid expenses and other current assets                                           |       | (193                                                     | )          | (8 | ) |
| Increase in  other assets                                                                        |       | (27                                                      | )          | (131 | ) |
| Increase in  deferred revenue                                                                    |       | 458                                                      |       | 205 |   |
| Decrease in  accounts payable, accounts payable-Astrium, accrued interest, and accrued  expenses |       | (993                                                     | )          | (69 | ) |
| Increase in  customer deposits                                                                   |       | 3,093                                                    |       | — |   |
| Increase  (decrease) in accrued subcontracting services and other                                |       | 1,593                                                    |       | (217 | ) |
| Increase  (decrease) in long-term accrued contract costs and other liabilities                   |       | 63                                                       |       | (42 | ) |
| Net cash  provided by operating activities                                                       |       | 4,042                                                    |       | 211 |   |
| **Cash flows from investing  activities**                                                        | ** ** | ** **                                               | ** ** | ** ** | ** ** |
| Purchases of property,  equipment and leasehold improvements, net of reimbursements              |       | (70                                                      | )          | (642 | ) |
| Increase in restricted  cash                                                                     |       | —                                                   |       | (1,572 | ) |
| Net cash used in  investing activities                                                           |       | (70                                                      | )          | (2,214 | ) |
| **Cash flows from financing  activities**                                                        | ** ** | ** **                                               | ** ** | ** ** | ** ** |
| Payment of mortgage  loan                                                                        |       | (533                                                     | )          | (504 | ) |
| Increase in deferred  financing costs                                                            |       | —                                                   |       | (514 | ) |
| Proceeds from issuance  of common stock, net of expenses                                         |       | 37                                                       |       | 49 |   |
| Net cash used in  financing activities                                                           |       | (496                                                     | )          | (969 | ) |
| Net change in  cash and cash equivalents                                                         |       | 3,476                                                    |       | (2,972 | ) |
| Cash and cash  equivalents at beginning of period                                                |       | 6,317                                                    |       | 7,327 |   |
| Cash and cash equivalents at end of period                                                       |       | $                                                        | 9,793      |   | $ | 4,355 |   |

 

See accompanyingnotes to unaudited condensed consolidated financial statements.

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**SPACEHAB, INCORPORATED AND SUBSIDIARIES****Notes to Unaudited Condensed ConsolidatedFinancial Statements**

**1.  The Company**

SPACEHAB is a developerand operator of space flight hardware assets, a provider of manned and unmannedpayload processing services, and an entrepreneurial force in space commerceapplications.

A substantial portion ofour revenue has been generated under contracts with the National Aeronauticsand Space Administration (“NASA”) and our contracts are subject to periodicfunding allocations by the agency. NASA’s funding is dependent on receivingannual appropriations from the U.S. Government. During the years ended June 30,2006, 2005, and 2004 approximately 80%, 81%, and 54% of our revenues were generatedunder U.S. Government contracts, respectively.

The SPACEHAB FlightServices (“SFS”) business unit is continuing operations for the U.S. spaceshuttle program, supporting two of the next three planned space shuttlemissions through the use of our pressurized laboratory and logistics supplymodules and cargo carriers, which significantly enhance the capabilities of thespace shuttle fleet.

Our Astrotech SpaceOperations (“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 andVAFB in California, and are provided on a fixed-price basis. Additionally,Astrotech supplies payload processing and facilities maintenance supportservices to Sea Launch Company, LLC for its Sea Launch program at the Home Portfacilities in Long Beach, California.

Our SPACEHAB GovernmentServices (“SGS”) subsidiary manages projects in need of comprehensiveengineering solutions, and provides unique capabilities such as specialtyengineering, hardware design and development, and configuration and datamanagement. SGS also designs and fabricates space flight hardware. Wecontinuously review and seek new business opportunities with NASA, eitherthrough current contract expansion or teaming with other aerospace companies onnew contract bid initiatives.

A majority-ownedsubsidiary of SPACEHAB, Space Media, Inc. (“SMI”) operates a retail andinternet store offering space-related merchandise to the space enthusiast.

We believe that NASA, aswell as future space shuttle and International Space Station programs willcontinue to be funded and supported by the U.S. Government. While delays haveoccurred, we believe that it is highly unlikely that any decision todiscontinue these programs would be made during the next twelve months.However, the Company is subject to risks and uncertainties. We continue tofocus efforts on improving the overall liquidity of the Company throughidentifying new business opportunities within the areas of our corecompetencies, reducing operating expenses, and limiting cash commitments forfuture capital investments and new asset development.

As of September 30, 2006our cash and cash equivalents was approximately $9.8 million and workingcapital was approximately $4.3 million. For the three months ended September30, 2006 we generated $4.0 million of cash from operating activities.Management believes that we have sufficient liquidity, including cash and cashequivalents and cash anticipated to be generated from operations, to fundongoing operations for the next twelve months. In October 2007, $10.3 millionof the Company’s long-term debt will mature. Management expects that cash onhand and cash expected to be generated from operations will be available toredeem this debt on maturity. Management also expects to have unencumberedworking capital and assets available that could provide additional liquidity.If the Company is not successful in achieving its business developmentobjectives and is unable to execute its mitigation plans if anticipatedbusiness and contracts are not obtained, it may not have adequate resources tosupport strategies for new business initiatives and redeem maturing long-termdebt.

**2.  Basis of Presentation**

In the opinion ofmanagement, the accompanying unaudited condensed consolidated financialstatements reflect all adjustments, consisting of only normal recurringaccruals necessary for a fair presentation of the consolidated financial positionof SPACEHAB, Incorporated and its subsidiaries as of September 30, 2006, andthe results of its operations and cash flows for the periods ended September30, 2006 and 2005. However, the unaudited condensed consolidated financialstatements do not include all related footnote disclosures.

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The consolidated resultsof operations for the three month period ended September 30, 2006 are notnecessarily indicative of the results that may be expected for the full year.Our results of operations typically fluctuate significantly from quarter toquarter. The interim unaudited condensed consolidated financial statementsshould be read in conjunction with our audited consolidated financialstatements appearing in our Annual Report on Form 10-K for the fiscal year endedJune 30, 2006.

**3.  Earnings per Share**

The following is areconciliation of the numerator and denominator of the basic and dilutedearnings per share (“EPS”) computations for the three month period endedSeptember 30, 2006 and September 30, 2005 (in thousands, except share and pershare data):
| ** **                                      | ** ** | **Three months ended September 30, 2006** | ** ** | **Three months ended September 30, 2005** | ** ** |
|-------------------------------------------------|------------|--------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                      | ** ** | **Income  (Numerator)**                                            | ** ** | **Shares  (Denominator)**                                          | ** ** | **Per Share  Amount** | ** ** | **Income  (Numerator)** | ** ** | **Shares  (Denominator)** | ** ** | **Per Share  Amount** | ** ** |
| Basic EPS:                                      |       |                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |
| Income (loss) available  to common stockholders |       | $                                                                  | (32        | )                                                                  | 12,860,810 |   | $ | 0.00 |   | $ | (1,916 | ) | 12,671,576 |   | $ | (0.15 | ) |
| Diluted EPS:                                    |       |                                                               |       |                                                               |       |   |   |   |   |   |   |   |   |
| Income (loss) available to common stockholders  |       | $                                                                  | (32        | )                                                                  | 12,860,810 |   | $ | 0.00 |   | $ | (1,916 | ) | 12,671,576 |   | $ | (0.15 | ) |

 

Convertible subordinatednotes payable outstanding as of September 30, 2006, convertible into 756,404shares of common stock at $13.625 per share and due October 2007, were notincluded in the computation of diluted EPS for the three months ended September30, 2006 and 2005 as the conversion price of the convertible notes payable pershare was greater than the average market price of the common shares during theperiods.

Senior convertible notespayable outstanding as of September 30, 2006 due 2010 convertible into35,296,000 shares of common stock at $1.50 per share, which include a mandatoryconversion feature once the Company’s stock price reaches $1.95 per share, havenot been included in the computation of diluted EPS for the three months endedSeptember 30, 2006 and 2005 as the conversion price(s) of the convertible notespayable per share were greater than the average market price of the sharesduring the period.

Options to purchase1,824,329 shares of common stock outstanding at September 30, 2006 were notincluded in diluted EPS for the three months ended September 30, 2006 as theywere anti-dilutive to our net loss. The options expire between October 21, 2006and August 9, 2016.

Options to purchase1,672,059 shares of common stock outstanding at September 30, 2005 were notincluded in diluted EPS for the three months ended September 30, 2005 as theywere anti-dilutive to the Company’s net loss. The options expire betweenNovember 20, 2005 and August 3, 2015.

**4.  Revenue Recognition**

Our business units’revenue is derived primarily from long-term contracts with the U.S. Government,U.S. Government contractors, and commercial customers. Revenue under thesecontracts is recognized using the methods described below. Estimating futurecosts and, therefore, revenues and profits is a process requiring managementjudgment. Management bases its estimate on historical experience and on variousassumptions that are believed to be reasonable under the circumstancesincluding the negotiation(s) of equitable adjustment(s) on the Cargo MissionContract (“CMC”) that are added to the contract as pricing amendment(s) due todelay(s) in the space shuttle launch schedule. Costs to complete include, whenappropriate, material, labor, subcontracting costs, lease costs, commissions,insurance, and depreciation. Our business segment personnel perform periodiccontract status and performance reviews. In the event of a change in totalestimated contract cost or profit, the cumulative effect of such change isrecorded in the period that the change in estimate occurs.

We, from time to time,make expenditures for specific enhancements and/or additions to our facilitiesas required by certain contracts where the customer agrees to reimburse us forall or substantially all of such expenditures. We

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account for suchreimbursements as a reduction in the cost of such investments and recognize anyexcess of such reimbursements over the required investment as revenue.

**A Summary ofRevenue Recognition Methods Follows:**
| Business Segment             | ** ** | **Services/Products Provided**                                                   | ** ** | **Contract Type**                                     | ** ** | **Method of Revenue Recognition**                                                                  |
|------------------------------|------------|----------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|
| SPACEHAB Flight Services     |       | Commercial Space Habitat Modules, Integration &  Operations Support Services |       | Firm Fixed Price                                      |       | Percentage-of-completion based on costs incurred                                                   |
|                         |       |                                                                             |       |                                                  |       |                                                                                               |
| Astrotech Space Operations   |       | Payload Processing Facilities                                                    |       | Firm Fixed Price — Mission Specific              |       | Ratably, over the occupancy period of a satellite  within the facility from arrival through launch |
|                         |       |                                                                             |       |                                                  |       |                                                                                               |
|                         |       |                                                                             |       | Firm Fixed Price — Guaranteed Number of Missions |       | For multi-year contract payments recognized ratably  over the contract period                      |
|                         |       |                                                                             |       |                                                  |       |                                                                                               |
| SPACEHAB Government Services |       | Configuration Management, Engineering Services                                   |       | Cost Plus Award/Fixed Fee                             |       | Earned as reimbursable costs incurred plus  award/fixed fee                                        |
|                         |       |                                                                             |       |                                                  |       |                                                                                               |
| Space Media, Inc.            |       | Space-Themed Commercial Products/Activities                                      |       | Retail                                                |       | Internet and retail sales recognized when goods are  shipped                                       |

 

Revenues for the LockheedMartin Corporation (“Lockheed Martin”) subcontract are being accounted forunder 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 interestcosts was $15,000 and $51,000 for the three months ended September 30, 2006 and2005, respectively. We did not capitalize any interest costs during the threemonths ended September 30, 2006 or 2005.

(b)         We paid no income taxesfor the three months ended September 30, 2006 and paid an insignificant amountof income taxes for the period ended September 30, 2005.

### **6. Credit Facilities**

We have enteredinto a revolving credit facility with a bank providing for loans up to $5.0million secured by our accounts receivable. Funds available under the revolvingcredit facility are limited to 80% of eligible accounts receivable and we aresubject to various financial and other covenants including a minimum tangiblenet worth covenant, a cash flow coverage covenant, and a secured debt coveragecovenant. The facility provides that we must secure advances with cash balancesif the required tangible net worth or cash flow ratio is not met. As of September30, 2006 there have been no borrowings under thisrevolving credit facility. As of September 30, 2006 available borrowings on this credit facility waslimited to us posting an equivalent amount of restricted cash. The revolvingcredit facility expires on February 11, 2007.

Our Astrotech subsidiaryhas a mortgage loan with a financial institution for our Spacecraft ProcessingFacility (“SPF”) expansion project in Titusville, Florida. The loan agreementmatures in January 2007 and bears interest at 5.5%. For the three months endedSeptember 30, 2006, approximately $0.5 million was repaid and the outstandingbalance was $1.1 million.

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### **7. Segment Information**

Basedon our organization, we operate in four business segments: SFS, Astrotech, SGS,and SMI. SFS was founded to commercially develop space habitat modules thatoperate in the cargo bay of the space shuttles. SFS provides access to themodules and integration and operations support services for both NASA andcommercial customers. Astrotech provides payload processing facilities andservices to serve the spacecraft manufacturing and launch services industry.SGS is primarily engaged in providing engineering services and products to theGovernment, including NASA.

Ourchief operating decision maker utilizes both revenue and income (loss) beforeincome taxes in assessing performance and making overall operating decisionsand resource allocations. 

| Three Months Ended September 30, 2006  (in thousands):  | ** ** | **Revenue** | ** ** | **Income (Loss)  before income taxes** | ** ** | **Net  Fixed Assets** | ** ** | **Depreciation  And Amortization ** | ** ** |
|--------------------------------------------------------------------------------------------|------------|-------------|------------|-------------------------------------------------------|------------|--------------------------------------|------------|-----------------------------------------------|------------|
| SFS                                                                                        |       | $           | 10,070     |                                                  | $          | 2,278                                |       | $                                             | 15,959     |   | $ | 925 |   |
| Astrotech                                                                                  |       | 3,173       |       | 515                                                   |       | 43,675                               |       | 504                                           |       |
| SGS                                                                                        |       | 1,460       |       | 191                                                   |       | —                               |       | —                                        |       |
| Corporate  and Other                                                                       |       | 195         |       | (3,016                                                | )          | 612                                  |       | 162                                           |       |
|                                                                                       |       | $           | 14,898     |                                                  | $          | (32                                  | )          | $                                             | 60,246     |   | $ | 1,591 |   |

 

| Three Months Ended September 30, 2005  (in thousands): | ** ** | **Revenue** | ** ** | **Income (Loss)  before income taxes** | ** ** | **Net Fixed Assets** | ** ** | **Depreciation  And Amortization** | ** ** |
|--------------------------------------------------------------------------------------|------------|-------------|------------|-------------------------------------------------------|------------|--------------------------------|------------|-----------------------------------------|------------|
| SFS                                                                                  |       | $           | 8,497      |                                                  | $          | 1,340                          |       | $                                       | 26,871     |   | $ | 760 |   |
| Astrotech                                                                            |       | 1,978       |       | (131                                                  | )          | 45,490                         |       | 532                                     |       |
| SGS                                                                                  |       | 1,286       |       | 70                                                    |       | —                         |       | —                                  |       |
| Corporate  and Other                                                                 |       | 224         |       | (3,163                                                | )          | 684                            |       | 53                                      |       |
|                                                                                 |       | $           | 11,985     |                                                  | $          | (1,884                         | )          | $                                       | 73,045     |   | $ | 1,345 |   |

 

### **8. Common Stock Options and Stock Purchase Plans**

We grant options toemployees and directors utilizing four shareholder-approved plans and issueCompany stock under an Employee Stock Purchase Plan.

### **Non-qualified Options**

Non-qualified options aregranted at the sole discretion of the Board of Directors. Prior to the adoptionof the 1994 Stock Incentive Plan (“1994 Plan”), stock options granted tocertain officers and employees were part of their employment contract or offer.The number and price of the options granted were defined in the employmentagreements and such options vest incrementally over a period of four years andgenerally expire within ten years of the date of grant.

### **The 1994 Plan**

Under the terms of the1994 Plan, the number and price of the options granted to employees isdetermined by the Board of Directors and such options vest, in most cases,incrementally over a period of four years and expire no more than ten yearsafter the date of grant.

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

Each new non-employeedirector receives a one-time grant of an option to purchase 10,000 shares ofcommon stock at an exercise price equal to the fair market value on the date ofgrant. In addition, effective as of the date of each annual meeting of ourstockholders, each non-employee director who is elected or continues as amember of the Board of Directors of the Company shall be awarded an option topurchase 5,000 shares of common stock. Options under the Director’s Plan vestafter one year and expire seven years from the date of grant.

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

We adopted an employeestock purchase plan that permits eligible employees to purchase shares ofcommon stock of the Company at prices no less than 85% of the current marketprice. Eligible employees may elect to participate in the plan by authorizingpayroll deductions from 1% to 10% of gross compensation for each payrollperiod. On the last day of each quarter, each participant’s contributionaccount is used to purchase the maximum number of whole and fractional sharesof common stock determined by dividing the contribution account’s balance bythe lesser of 85% of the price of a share of common stock on the first day ofthe quarter or the last day of a quarter. The number of shares of common stockthat may be purchased under the plan is 1,500,000. Through September 30, 2006,employees have purchased 1,375,031 shares under this plan. Employees purchasedan aggregate of 59,418 shares at an average price of $0.63 during thethree-month period ended September 30, 2006. The shares purchased under thisplan are considered compensatory for accounting and reporting purposes.

### **Space Media, Inc. Stock Option Plan**

During the year endedJune 30, 2000, Space Media, Inc., a majority-owned subsidiary, adopted anoption plan (“SMI Plan”) for employees, officers, directors and consultants ofSMI. Under the terms of the SMI Plan, 1,500,000 shares have been reserved forfuture grants for which the number and price of the options granted isdetermined by the Board of Directors and such options vest, in most cases,incrementally over a period of four years and expire no more than ten yearsafter the date of grant.

### **Accounting for Stock Issued to Employees**

The fair value of eachoption award is estimated on the date of grant using the Black Scholes optionpricing model, which determines inputs as shown in the following table. Becauseof differences in option terms and historical exercise patterns among theplans, we have segregated option awards into two homogenous groups for the purposeof determining fair values for its options. Valuation assumptions aredetermined separately for the two groups which represent, respectively, the1994 Stock Incentive Plan and the Director’s Stock Option Plan. The assumptionsare as follows:

·                  We estimatedvolatility using our historical share price performance over the last tenyears. Management considered the guidance in SFAS No. 123R and believes thehistorical estimated volatility is materially indicative of expectations aboutexpected 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.

|                           | ** ** | **Quarter Ended  September 30, 2006** | ** ** | **Quarter Ended  September 30, 2005** | ** ** |
|---------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|
| Dividend yield            |       | 0.00                                                 | %          | 0.00                                                 | %          |
| Volatility                |       | 1.10                                                 |       | 1.70                                                 |       |
| Risk-free  interest rate  |       | 4.83                                                 | %          | 4.25                                                 | %          |
| Expected life  (in years) |       | 6.25                                                 |       | 6.25                                                 |       |

 

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A summary of our stockoption activity as of September 30, 2006 and changes during the first threemonths of fiscal year 2007 are presented in the following table:
| ** **                         | ** ** | **Shares Under  Fixed Options** | ** ** | **Weighted-Average  Exercise Price** | ** ** | **Weighted-Average  Remaining  Contractual Term** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|--------------------------------------------------------|------------|-------------------------------------|------------|
| Outstanding at June 30,  2006      |       | 1,577,201                                 |       | $                                         | 2.96       |                                                   | 5.52       |                                | $          | — |   |
| Granted                            |       | 310,000                                   |       | $                                         | 1.15       |                                                   | 10.00      |                                | $          | — |   |
| Exercised                          |       | —                                    |       | $                                         | —     |                                                   | —     |                                | $          | — |   |
| Forfeited/Expired                  |       | (62,872                                   | )          | $                                         | 6.30       |                                                   | —     |                                | $          | — |   |
| Outstanding at  September 30, 2006 |       | 1,824,329                                 |       | $                                         | 2.54       |                                                   | 6.13       |                                | $          | — |   |
| Exercisable                        |       | 1,182,329                                 |       | $                                         | 3.17       |                                                   | 6.13       |                                | $          | — |   |

 

The weighted-averagegrant-date fair value of options granted during the first three months offiscal year 2007 was $0.98 per share. The intrinsic value for stock options isdefined as the difference between the current market value and the grant price.The total intrinsic value of options exercised during the first three months offiscal year 2007 was $0.0. As of September 30, 2006 there was $548,284 ofunamortized expense related to our stock option plans.

During the first threemonths of fiscal year 2007, there were no options exercised.

### **9. Related Party Transactions**

We engaged in certaintransactions with directors, executive officers, shareholders, and certainformer officers during the three months ended September 30, 2006. Following isa description of these transactions:

### **Astrium GmbH**

Dr. Graul, a member ofSPACEHAB’s Board of Directors, is the Executive Vice President for Astrium GmbH(“Astrium”). Astrium provides unpressurized payload and integration efforts to SPACEHABon a fixed-price basis in addition to providing engineering services asrequired. For the three months ended September 30, 2006 and 2005, Astrium’spayload and integration services included in cost of revenue were approximately$3.9 million and $2.7 million, respectively.

### **Daniel A. Bland**

On June27, 2005 we entered into an agreement with Daniel A. Bland whereas Mr. Blandwill provide consulting services to us. The initial term of the agreement beganJuly 2, 2005 and ended July 1, 2006 with additional optional periods of sixmonths each until terminated by either party by notifying the other party ofsuch termination at least thirty days prior to the end of the initial term orany subsequent term. We paid Mr. Bland a retainer fee at the rate of $6,000 permonth. SPACEHAB removed the retainer clause prior to the exercise of theoptional periods identified in the agreement. Mr. Bland shall be paid at a rateof $125 per hour worked plus related travel expenses during the option periodexercised. Mr. Bland retired as Senior Vice President of our SPACEHAB FlightServices business unit as of June 30, 2005. During the three months ended September30, 2006 and 2005, we paid Mr. Bland $27,114 and$22,133 respectively.

### **10. Recent Accounting Pronouncement**

In July 2006, theFinancial Accounting Standards Board issued Interpretation No. 48, *Accounting for Uncertainty in Income Taxes* (FIN No. 48).This interpretation clarifies the accounting for uncertainty in income taxesrecognized in an entity’s financial statements in accordance with SFAS No. 109,*Accounting for Income Taxes*. Itprescribes a recognition threshold and measurement attribute for financialstatement disclosure of tax positions taken or expected to be taken on a taxreturn. We will adopt provisions of this interpretation beginning with theCompany’s first-quarter of fiscal year 2008. We do not expect the applicationof the standard to have a material impact on our financial position or resultsof operations.

Staff Accounting Bulletin(SAB) 108, “Considering the Effects of Prior-Year Misstatements whenQuantifying Misstatements in Current Year Financial Statements” — TheSecurities and Exchange Commission released SAB 108 to provide interpretiveguidance on how the effects of the carry over or reversal of prior yearmisstatements should

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be considered inquantifying a current year misstatement. There have been two approachescommonly used to quantify such errors. Under one approach, the error isquantified as the amount by which the current year income statement ismisstated. The other approach quantifies the error as the cumulative amount bywhich the current year balance sheet is misstated. The SEC staff believes thatcompanies should quantify errors using both a balance sheet and an incomestatement approach and evaluate whether either approach results in quantifyinga misstatement that, when all relevant quantitative and qualitative factors areconsidered, is material. We do not expect the application of thisinterpretation to have a material impact on our financial position or resultsof operations.

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

### **11.  Legal Proceedings**

*ContractClaim.*In January 2004 we filed a formal proceeding withNASA seeking indemnification under our Research and Logistics Mission Supportcontract in the amount of $87.7 million for the value of our research doublemodule (“RDM”) and related equipment that was destroyed during the SpaceShuttle *Columbia*tragedy. NASAresponded to this contract claim on October 5, 2004. NASA’s determinationclaims that its liability is limited to $8.0 million. We received payment fromNASA of $8.2 million, which included $0.2 million of interest, from NASA, inOctober 2004. In January 2005 we filed an appeal of NASA’s decision to deny itsclaim for indemnification in excess of $8.0 million with the Armed ServicesBoard of Contract Appeals. On July 12, 2006 the court denied NASA’s motion forsummary judgment in the matter and directed the parties to proceed withdiscovery. NASA and the Company have proposed a discovery plan that would leadto a hearing by the court in July 2008.

*Lloyd’sComplaint.*In January 2004 Lloyd’s of London, our insurerfor the RDM, filed a complaint in the United States District Court for theWestern District of Washington seeking the return of the $17.7 million Lloyd’shad paid to us under the RDM insurance policy. On May 12, 2005 we and Lloyd’sagreed to jointly pursue recovery against NASA, with us in full control of theappeals process. Lloyd’s will participate in any recovery, both pursuant to ouradministrative claim and our tort claim against NASA, net of legal costs, inaccordance with a pre-agreed schedule under which our liability to Lloyd’sranges from a minimum of $0.5 million if we do not recover any additionalamounts to approximately $17.7 million if we recover over $70.0 million fromNASA. Also, in accordance with the agreement, Lloyd’s dismissed its complaintagainst us with prejudice. We recorded a charge in our fourth quarter fiscalyear 2005 financial statements of $0.5 million pending a final resolution ofour actions against NASA.

*TortClaim.*On November 8, 2004 we filed a second claim withNASA seeking damages of $79.7 million under the federal tort claims act for theloss of our RDM resulting from NASA’s alleged negligence leading to thedestruction of the space shuttle C*olumbia*and the loss of our module. The claim represents our loss of $87.7 million lessthe $8.0 million recovered from NASA. NASA failed to respond to this claim. OnFebruary 3, 2006 we filed a complaint in the Federal District Court for theSouthern District of Texas seeking damages of $79.7 million under the federaltort claims act. On June 30, 2006 the court granted a motion by the Departmentof Justice to stay the case until resolution of the Company’s appeal (theContract Claim) before the Armed Services Board of Contract Appeals.

### **12. Subsequent Events**

On October 13, 2006 theCompany consummated a transaction in which Space Media, Inc., a majority-ownedsubsidiary of SPACEHAB, Inc., sold the assets of The Space Store LLC,consisting of inventory, furniture, fixtures, and other items. Due to theamount and impact this transaction will have on our financial statements, wedecided not to show this discounted operation as a separate component in ourconsolidated statements of operations for the three months ended September 30,2006.

On October 3, 2006 theCompany received a letter from The NASDAQ Stock Market notifying the Company ofits failure to maintain compliance with the $1.00 per share of common stockminimum closing bid price requirement over the preceding 30 consecutive tradingdays as required by Marketplace Rule 4310(c)(4). The letter stated that theCompany has until April 2, 2007 to demonstrate compliance by maintaining aminimum closing bid price of $1.00 per share of common stock for a minimum of10 consecutive trading days or its common stock will be delisted from TheNASDAQ Stock Market.

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### **13. Customer Deposits**

During the quarter endedSeptember 30, 2006 we billed and received from our customer payment of $3.1million for in-flight insurance on our pressurized module for use on STS-116.STS-116 is scheduled to launch mid-December 2006. This amount is included incash and cash equivalents as of September 30, 2006. The insurance payment isdue to the insurance carrier one month prior to the launch date.

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**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS**

*You should read the followingdiscussion and analysis together with our consolidated financial statements andnotes thereto and the discussion “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” and Item 1A. ― “RiskFactors” included in our 2006 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 the meaning of Section 27A of theSecurities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,including (without limitation) statements under “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” and “Liquidity andCapital Resources.” Such statements are subject to risks and uncertainties thatcould cause actual results to differ materially from those projected in thestatements. In addition to those risks and uncertainties discussed herein, suchrisks and uncertainties include, but are not limited to, whether we will fullyrealize the economic benefits under our NASA and other customer contracts,continued utilization by NASA and others of our habitat modules and relatedcommercial space assets, completion of the International Space Station (“ISS”),continued availability and use of the U.S. space shuttle system, technologicaldifficulties, product demand, and market acceptance risks, the effect ofeconomic conditions, uncertainty in government funding, and the impact ofcompetition, delays, and uncertainties in future space shuttle and ISSprograms, uncertainties related to the Government’s commitment to PresidentBush’s Vision for Space Exploration, and resolution of our claims against NASAarising from the loss of our RDM on the *Columbia*orbiter during the STS-107 mission.

### **Financial Summary**

SPACEHAB’s first quarteroperating results were below management’s expectations, however, the Company’srevenues significantly exceeded the first quarter of the prior fiscal year andthe net loss of $32,000 improved substantially from the loss of $1.9 million inthe first quarter of the prior fiscal year.

The following tableillustrates financial highlights for the quarters ended September 30, 2006 andSeptember 30, 2005:

|                                           | ** ** | **2006**                                                            | ** ** | **2005** | ** ** | **Percent  Change** | ** ** |
|-------------------------------------------|------------|---------------------------------------------------------------------|------------|----------|------------|---------------------|------------|
| ** **                                | ** ** | **(in millions except per share amounts)** | ** ** |
| For the Three Months  Ended September 30: |       |                                                                |       |     |       |                |       |
| Revenue                                   |       | 14.9                                                                |       | 12.0     |       | 24                  | %          |
| Net Loss                                  |       | 0                                                                   |       | (1.9     | )          | —              |       |
| Diluted EPS                               |       | 0                                                                   |       | (0.15    | )          | —              |       |
| As of September 30:                       |       |                                                                |       |     |       |                |       |
| Cash and Cash  Equivalents                |       | 9.8                                                                 |       | 4.4      |       | 123                 | %          |
| Total Debt                                |       | 64.4                                                                |       | 66.4     |       | (3                  | )%         |
| Stockholders Equity                       |       | 2.9                                                                 |       | 13.0     |       | (78                 | )%         |

 

### **Industry andMarket Overview**

We are pleased that theWhite House is maintaining its vision for U.S. space leadership. We view thePresident’s commitment to space exploration, the human spaceflight program, andthe plan for missions to the Moon, Mars, and beyond as positive indicators thatwill reinvigorate the space program, likely yielding benefits to the aerospaceand space commerce industries. We believe that this vision provides NASA with aclear focus, will stabilize the NASA program, and will increase funding for newpursuits.

We believe the impacts ofthis vision are materializing over time, and we will continue to align ourbusiness direction to remain a constructive force in the human spaceflightprogram. In the long term, we believe that our core competencies offeropportunities to continue to provide services as well as to design, build, andoperate assets that

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could support initiativesbeyond low earth orbit. We plan to pursue these new opportunities. In the nearterm, our primary objective is to continue providing services to NASA and thespace community in support of the space shuttle and the International SpaceStation programs. We expect that the space shuttle and International SpaceStation will remain an integral part of the human spaceflight program through2010 and the International Space Station will continue to support humanspaceflight beyond 2010.

We are engaged indefining commercial payload service solutions capable of meeting theInternational Space Station on-orbit re-supply and return requirements moreefficiently than the space shuttle. These activities, some of which leverageour international strategic partnerships and intellectual property rights,include the potential development of an affordable cargo transportation systembased on existing commercial launch vehicles and our modular payloadintegration architecture to transport pressurized and unpressurized cargo toand from space. We further believe that our experience and expertise in theconceptual design, development, ground processing, and on-orbit operationssupport of payload and crew accommodations position us well for a role in thedevelopment of commercial access to space as well as NASA’s space explorationsystems, the envisioned next phase in human exploration of space.

We operate in three mainareas generally related to spaceflight activities within the aerospaceindustry: space assets and mission support services for manned and unmannedspace exploration and research missions; commercial and exploratory satellitepre-launch services; and engineering services in support of government spaceoperations. We also operate a retail space merchandise business and providespace-related educational services. Because of the diversity among theoperations of our activities, we report the results of each business as aseparate segment in our consolidated financial statements. Our consolidatedfinancial results also reflect corporate-level expenses such as general andadministrative, interest, and depreciation and amortization, but because oftheir nature, these items are not reported as a separate segment.

### **Business Segments**

Follows is a briefdiscussion of each of our four business segments, including a list of keyfactors that have affected, and are expected to continue to affect, theirrespective earnings and cash flows. We also present a brief discussion of ourcorporate-level expenses along with a summary of our current liquidity positionand items that could impact our liquidity position in fiscal year 2007 andbeyond.

*SPACEHAB Flight Services*.This business unit generates revenue by providing space shuttle-based, turnkeyservices that include customer access to space via our pressurized modules andunpressurized integrated cargo carriers; integration and operations support tologistics suppliers transporting their cargo aboard our modules and integratedcargo carriers to and from the orbiting International Space Station; and/orintegration and operations support to scientists and technologists responsiblefor experiments performed aboard module and integrated cargo carrier researchplatforms.

We also offer on aspace-available basis for each mission, access to space onboard the spaceshuttle, Russian *Progress*, and European SpaceAgency automated transfer vehicle cargo vehicles under commercial contractswith non-NASA customers, including both government and private customers.Commercial contracts with non-NASA customers will continue to be establisheddirectly between us and our commercial customers.

Additionally, we providedcargo shipment coordination services to NASA for all U.S. cargo shipped to theInternational Space Station via the Russian *Progress* spacevehicle. These services are provided under contract with Lockheed Martin, theprime Cargo Mission Contract contractor to NASA. We also provide researchaccess to space and on the International Space Station to the JapaneseAerospace Exploration Agency through Rocket Space Corporation-Energia (“RSC-Energia”),a major Russian aerospace enterprise. We contracted through V.J.F. RussianConsulting with RSC-Energia for construction of certain space researchequipment, access to Russian *Progress* launchvehicles, and research space aboard the International Space Station when theoriginally-scheduled services on the space shuttle were suspended due to the *Columbia* tragedy.

The primary factorsimpacting our SFS business unit earnings and cash flows are the number of spaceshuttle missions flown and the configuration of the cargo handling and researchlogistics required for each mission. Our revenues and earnings, if any, fromeach mission are dependent upon the space assets required in the cargo orresearch logistics configuration and the mission support services required toemploy those assets. Other factors that have impacted, and are expected tocontinue to impact, earnings and cash flows for this business unit include:

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·                  Congress’funding for NASA and the allocation of that funding to International SpaceStation operations and space shuttle cargo missions

·                  Thedependability of the U.S. space shuttle manifest

·                  The role ofinternational space research projects flying on future space shuttle andRussian and European Space Agency missions

·                  The growth ofspace exploration programs within NASA and NASA’s commitment to the President’sVision for Space Exploration regarding enhancement of the role of commercialenterprise in space exploration programs

·                  Our ability tocontrol our capital expenditures, particularly those for spare or replacementparts for space assets

*Astrotech Space Operations*.Revenue is generated from various fixed-price contracts with launch serviceproviders in both the commercial and government markets. The services andfacilities we provide to our customers support the final assembly, checkout,and countdown functions associated with preparing a spacecraft for launch.

The earnings and cashflows generated from our Astrotech operations are related to the number ofcommercial spacecraft launches, which reflects the growth in the satellite-basedcommunication industries, and the requirement to replace aging satellites.Other factors that have impacted, and are expected to continue to impact,earnings and cash flows for this business include:

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

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

*SPACEHAB Government Services*.Our SGS business unit generates revenue by providing support to the U.S.Government in the areas of large-scale configuration and data managementprograms such as the International Space Station; specialized hardware design,development, and fabrication; low- to high-fidelity mockup design andconstruction; and safety and quality support services. This business unitoffers a wide array of products and services in these varied fields. Our SGSbusiness unit currently provides configuration management services as asubcontractor of ARES Corporation under ARES’ Program Integration and Control (“PI&C”)contract with NASA.

Earnings from our SGSbusiness unit operations are dependent on our ability to continue to wincontracts with NASA or other government entities through the competitivebidding process and our performance under those contracts in achievingperformance bonuses. Other factors that have impacted, and are expected tocontinue to impact, earnings and cash flows for this business include:

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

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

·                  Our ability tocontrol costs within our budget commitments

*Space Media*.Our space media business unit operates a retail store and internet storeoffering space-themed products. Revenue and earnings in our retail operationsare dependent upon general enthusiasm for the space exploration program,advertising and promotion, and competition.

*Corporateand Other*. Significant items impacting future earnings andcash flows include:

·                  Interest expensewhich has decreased due to the repayment of a substantial portion of ourmortgage debt during fiscal year 2004 using proceeds from The Boeing Company’s(“Boeing’s”) early termination of their satellite preparation contract with ourAstrotech business unit and the refinancing of our long-term debt during fiscalyear 2006

·                  The ultimatesettlement of our claim against NASA for indemnification of our losses on theSpace Shuttle *Columbia* mission and/or our tortclaim

·                  Income taxes,with respect to which we currently only pay alternative minimum tax and minimalstate income taxes; income taxes will also be impacted by our ability torealize our significant deferred tax assets, including loss carry forwards

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### **Revenue**

Our revenue for the threemonths ended September 30, 2006 and 2005 was generated primarily from theLockheed Martin CMC subcontract and contracts with related commercial customersin the SFS segment; the PI&C contract in the SGS segment; and our contractswith Lockheed Martin, Boeing, and NASA in the Astrotech segment and othercommercial satellite providers. Revenue for SMI was approximately $0.2 millionand $0.2 million for the three months ended September 30, 2006 and 2005,respectively.

Our SFS business segmentis supporting NASA’s return-to-flight activities and is continuing operationsin preparation for shuttle missions including STS-116 and 118 (in order oftheir anticipated flight sequence). Our patented module and integrated cargocarrier (“ICC”) is scheduled for use on both the STS-116 and 118 missions. Forthe STS-118 mission, the ICC has been modified to serve as a deployable palletwhich will be permanently attached to the ISS and serve as acommercially-provided space parts warehouse.

Astrotech derives itsrevenue by providing support necessary for its customers to successfullyprocess their spaceflight hardware for launch, including advance planning; useof unique facilities; and spacecraft checkout, encapsulation, fueling,transport, and remote control through launch. During the quarter we wereawarded a new indefinite-delivery, indefinite-quantity (“IDIQ”) contract withNASA in the amount of $9.5 million. This contract is for payload processingsupport on several NASA spacecraft.

During the quarter endedSeptember 30, 2006 the KoreaSat-5 satellite successfully launched from the *Odyssey* Launch Platform. Astrotech provided payloadprocessing and facilities management support for this Sea Launch program at theHome Port facilities in Long Beach, California under a long-term contract withSea Launch Company LLC.

SPACEHAB GovernmentServices continues its support of NASA’s ISS program, with much of its revenuegenerated in the areas of configuration and data management supporting thefinal acceptance of space station hardware and software for NASA and thesixteen international partners.

During the three monthsended September 30, 2006, deferred revenue increased by $0.5 million. This isas a result of us receiving cash for contractual obligated work that has notbeen performed as of the end of the period.

### **Costs of Revenue**

We have several types ofcosts of revenue in our business segments. Costs of revenue for SFS includeintegration and operations expenses associated with the performance of twotypes of efforts: (i) sustaining engineering in support of all missions under acontract and (ii) mission specific support. Costs associated with theperformance of the contracts using the percentage-of-completion method ofrevenue recognition are expensed as incurred. Costsassociatedwith the cost-plus award and fixed-fee contracts are expensed asincurred by SGS. Other costs of revenue include depreciation expense and costsassociated with the Astrotech payload processingfacilities. Selling, general and administrative and interest and otherexpenses are recognized when incurred.

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# **RESULTS OFOPERATIONS**

*For the three months endedSeptember 30, 2006 as compared to the three months ended September 30, 2005.*

Revenue.Revenue increased approximately 24% to $14.9 million for the three months endedSeptember 30, 2006 as compared to $12.0 million for the three months ended September30, 2005 (in millions).

|                               | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **  | ** ** |
|-------------------------------|------------|----------------------------------|------------|------------|------------|-------------|------------|
| ** **                    | ** ** | **September 30,**           | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **                    | ** ** | **2006**                         | ** ** | **2005**   | ** ** | **Change**  | ** ** | **Change** | ** ** |
| SPACEHAB Flight  Services     |       | $                                | 10.0       |       | $          | 8.5         |       | $ | 1.5 |   | 18 | % |
| Astrotech Space  Operations   |       | 3.2                              |       | 2.0        |       | 1.2         |       | 60 | % |
| SPACEHAB Government  Services |       | 1.5                              |       | 1.3        |       | 0.2         |       | 15 | % |
| Space Media                   |       | 0.2                              |       | 0.2        |       | 0.0         |       | 0 | % |
|                          |       | $                                | 14.9       |       | $          | 12.0        |       | $ | 2.9 |   | 24 | % |

 

Revenue from our SFS business unit increased by $1.5 million for theperiod ending September 30, 2006 as compared to the same period ending September30, 2005. The following summarizes the significant items that affected thequarter ended September 30, 2006 as compared to the quarter ended September 30,2005:

·                  Decrease inrevenue from External Stowage Platform 2 (“ESP2”) of $0.6 million due to thelaunch of STS-114 in July 2005

·                  Decrease inrevenue from Concept Exploration and Refinement (“CE&R”) contract of $0.4million that was completed in the first quarter of fiscal year 2006

·                  Increase inrevenue from STS-116 and STS-118 under the CMC with Lockheed Martin of $3.8million due to increased mission activities and change orders due to thescheduled launch of STS-116 in December 2006 and the scheduled launch ofSTS-118 in June 2007

·                  Decrease inrevenue from STS-121 of $1.1 million due to the launch of STS-121 in July 2006

·                  Other contractrevenue decrease of $0.2 million mainly due to our contract with Astrium toprovide a new ICC pallet to replace ESP2 that was permanently affixed to thespace station during the STS-114 mission in July 2005

Revenue from ourAstrotech business unit increased by $1.2 million for the three months endedSeptember 30, 2006 as compared to the three month period ending September 30,2005. The following summarizes significant items that affected the three monthsended September 30, 2006 as compared to the same period ended September 30,2005:

·                  Increase inrevenue of $0.6 million from a new contract to design a satellite processingfacility

·                  Astrotechsupported one satellite launch at its Sea Launch facility during the periodending September 30, 2006 which resulted in an increase in revenue of $0.5million. In the period ending September 30, 2005, Astrotech did not support asatellite launch at its Sea Launch facility

·                  Other revenueincrease of $0.1 million

Revenue from our SGSbusiness unit increased by $0.2 million for the period ending September 30,2006 as compared to the same period ending September 30, 2005. The followingsummarizes the significant items that affected the quarter ended September 30,2006 as compared to the quarter ended September 30, 2005:

·                  Increase inrevenue from our subcontract with ARES on the PI&C contract of $0.1million. This increase is due to an increase of contract activities during theperiod as compared to the same period last year

·                  Increase inrevenue from a new contract with USA for support of the Constellation Programof $0.1 million

Cost of Revenue.Cost of revenue for the three months ended September 30, 2006 increased by 9%to approximately $11.1 million, as compared to $10.2 million for the sameperiod of the prior year (in millions).

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|                               | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **  | ** ** |
|-------------------------------|------------|----------------------------------|------------|------------|------------|-------------|------------|
| ** **                    | ** ** | **September 30,**           | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **                    | ** ** | **2006**                         | ** ** | **2005**   | ** ** | **Change**  | ** ** | **Change** | ** ** |
| SPACEHAB Flight  Services     |       | $                                | 7.2        |       | $          | 7.0         |       | $ | 0.2 |   | 3 | % |
| Astrotech Space  Operations   |       | 2.6                              |       | 2.0        |       | 0.6         |       | 30 | % |
| SPACEHAB Government  Services |       | 1.2                              |       | 1.1        |       | 0.1         |       | 9 | % |
| Space Media                   |       | 0.1                              |       | 0.1        |       | 0.0         |       | 0 | % |
|                          |       | $                                | 11.1       |       | $          | 10.2        |       | $ | 0.9 |   | 9 | % |

 

The following summarizes significant items that affected the threemonths ended September 30, 2006 as compared to the same period ended September30, 2005 for SFS:

·                  Decrease in costof revenue of $0.5 million for ESP2 due to the launch of STS-114 in July 2005

·                  Decrease inCE&R cost of revenue of $0.2 million that was completed in the firstquarter of fiscal year 2006

·                  Increase in costof revenue, other than direct depreciation cost of revenue, for STS-116 andSTS-118 under the CMC with Lockheed Martin of $1.9 million due to increasedmission activities due to the scheduled launch of STS-116 in December 2006 andthe scheduled launch of STS-118 in June 2007

·                  Increase indepreciation expense of $0.2 million due to the change of depreciable lives ofthe flight assets from June 30, 2016 to December 31, 2010 during the secondquarter of fiscal year 2006 to align with the end of the space shuttle life

·                  Decrease in costof revenue of $0.9 million for STS-121 due to the launch of STS-121 in July2006

·                  Other cost ofrevenue decrease of $0.3 million mainly due to our contract with Astrium toprovide a new ICC pallet to replace ESP2 that was permanently affixed to thespace station during the STS-114 mission in July 2005

The increase in cost ofrevenue of $0.6 million in our Astrotech business unit is primarily due to thestartup of our contract to design a new satellite processing facility.

The increase in cost ofrevenue of $0.1 million in our SGS business unit is primarily due to increasedcontract activities for the PI&C subcontract and the startup of ourcontract with USA on the Constellation Program.

Operating Expenses.Operating expenses increased to $2.9 million for the three months endedSeptember 30, 2006 as compared to approximately $2.4 million for the threemonths ended September 30, 2005. The following summarizes the significantdifferences between the two periods:

·                  Legal expensesincreased by $0.2 million. This increase is mainly due to the claims againstNASA for the loss of the RDM

·                  Research anddevelopment costs increased by approximately $0.1 million. This increase is dueto increased efforts on the Micro Electro Mechanical System program

·                  SFS operatingexpenses increased by approximately $0.2 million. This increase is due toexpenses shifting from cost of revenue to operating expenses due to thecompletion of the CE&R contract during the period ending September 30, 2005

Interest Expense.Interest expense was approximately $1.1 million for the three months endedSeptember 30, 2006 as compared to approximately $1.4 million for the threemonths ended September 30, 2005. The decrease in interest expense is primarily dueto the conversion of $52.9 million of 8% convertible subordinated notes dueOctober 2007 into 5.5% senior convertible notes due October 2010.

Interest and OtherIncome. Interest income is earned on our mortgage receivabledue to the sale of our payload processing facility in our SFS segment. Interestand other income was not significant for the three months ended September 30,2006 and 2005.

Income Taxes.Based on our projected effective tax rate for fiscal year 2007and 2006, werecorded no tax expense for the three month period ending September 30, 2006and $32,000 in tax expense for the three month period ending September 30,2005.

Net Income (Loss).Net loss for the three months ended September 30, 2006 was approximately$32,000 or $0.00 per share as compared to net loss of approximately $1.9million or $0.15 per share for the three months ended September 30, 2005.

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### **Liquidity and Capital Resources**

Currently our primarysource of liquidity is cash flow from operations. The principal uses of cashflow that affect our liquidity position include both operational expendituresand debt service payments. Management is focused on increasing cash flow and onmanaging cash effectively through limiting cash investments in long-termassets.

We have a revolving creditfacility with a bank providing for up to $5.0 million of loans secured by ouraccounts receivable. Funds available under the revolving credit facility arelimited to 80% of eligible accounts receivable and we are subject to variousfinancial and other covenants including a minimum tangible net worth covenant,a cash flow coverage covenant, and a secured debt coverage covenant. Thefacility provides that we must secure advances with cash balances if therequired tangible net worth or cash flow ratio are not met. As of September 30,2006 there have been no borrowings under this revolving credit facility. Therevolving credit facility expires February 11, 2007. As of September 30, 2006available borrowings on this $5.0 million credit facility was limited to usposting an equivalent amount of restricted cash.

*Cash Flows From OperatingActivities.*Cash provided by operations for the three monthsended September 30, 2006 and2005 was $4.0 million and $0.2 million, respectively. The significant itemsaffecting the differences in cash flows from operating activities for the threemonths ended September 30, 2006 as compared to the three months ended September30, 2005 are discussed below:

·                  Net loss for thethree months ended September 30, 2006 was$32,000 as compared to net loss for the three months ended September 30, 2005 of $1.9 million

·                  Depreciation andamortization for the three months ended September30, 2006 was $1.6 million as compared to $1.3 million for the threemonths period ended September 30, 2005 mainlydue to the change in estimated depreciable lives of our flight assets to alignwith NASA’s current launch planning manifest in the second quarter of fiscalyear 2005

·                  For the threemonths ended September 30, 2006 changes inassets used cash from operations of $1.8 million resulted primarily from anincrease in accounts receivable. For the three months ended September 30, 2005, changes in assets providedcash of $0.9 million

·                  Changes inliabilities for the three months ended September30, 2006 provided cash from operations of $4.2 million. This change wasdue primarily to the increases in accounts payable, accrued expenses, and otherliabilities of $0.6 million, an increase of $0.5 million in deferred revenue,and an increase in customer deposit of $3.1 million. The increase in deferredrevenue was primarily due to meeting certain performance milestones on our IDIQcontract with NASA before the arrival of the spacecraft at our facility. Forthe three months ended September 30, 2005,changes in liabilities consumed cash from operations of $0.1 million. Thischange in liabilities was primarily due to the decreases in accounts payableand accrued expenses of $0.3 million and the increase in deferred revenue of$0.2 million. The increase in deferred revenue was primarily due to the signingof the NASA IDIQ contract at Astrotech for future satellite missions

*Cash Flows From InvestingActivities*. For the three months ended September 30, 2006 and2005, cash flows used in investing activities were $0.1 million and $2.2million, respectively. The significant items affecting the differences in cashflows from investing activities for the three months ended September 30, 2006as compared to the three months ended September 30, 2005 are discussed below:

·                  There were purchasesof property and equipment of $0.1 million for the three months ended September 30, 2006 as compared to $0.6 millionfor the three months ended September 30,2005. This difference was primarily due to capital expenditures for ourAstrotech SPF in Florida for ongoing capital improvements and to replace flightassets loss during the *Columbia*accident for our SFS business unit

·                  For the threemonths ended September 30, 2005 cash flows from investing activities includedan increase in restricted cash of $1.6 million

*Cash Flows From FinancingActivities.*For the three months ended September 30, 2006 and 2005, cash flows used in financing activities were $0.5million and $1.0 million, respectively. The significant items affecting thedifferences in cash flows from financing activities for the three months endedSeptember 30, 2006 as compared to the three months ended September 30, 2005 arediscussed below:

·                  For the threemonths ended September 30, 2005 we incurred $0.5 million of financing costsrelated to the exchange of our 8% convertible subordinated notes

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On March 25, 2003 the Board of Directors authorized usto repurchase up to $1.0 million of our outstanding common stock at marketprices. Any purchases under our stock repurchase program may be made from timeto time, in the open market, through block trades or otherwise in accordancewith applicable regulations of the SEC. As of September 30, 2006 we hadrepurchased 116,100 shares at a cost of $117,320 under the program. We willcontinue to evaluate the stock repurchase program and the funds authorized forthe program, which represents an average cost of $1.01 per share. This stockrepurchase program remains available for purchases of our stock.

Management continues tofocus its efforts on improving our overall liquidity through identifying newbusiness opportunities within the areas of our core competencies, reducingoperating expenses, and limiting cash commitments for future capitalinvestments and new asset development. Additionally, management continues toevaluate operating expenses in an effort to reduce or eliminate costs notrequired to effectively operate us.

Our cash wasapproximately $9.8 million as of September 30, 2006. Management believes thatwe have sufficient liquidity, including cash and cash equivalents and cashanticipated to be generated from operations, to fund ongoing operations for thenext twelve months. In October 2007, $10.3 million of the Company’s long-termdebt will mature. Management expects that cash on hand and cash expected to begenerated from operations will be available to redeem this debt on maturity.Management also expects to have unencumbered working capital and assetsavailable that could provide additional liquidity. If the Company is notsuccessful in achieving its business development objectives and is unable toexecute its mitigation plans if anticipated business and contracts are notobtained, it may not have adequate resources to support strategies for newbusiness initiatives and redeem maturing long-term debt.

Our contractualobligations as of September 30, 2006 areas follows (in thousands):
| **Contractual Obligations**                                           | ** ** | **At**September 30,2006 | ** ** | **Remaining  in** Fiscal  Year 2007 | ** ** | **Fiscal**Year 2008 | ** ** | **Fiscal**Year 2009 | ** ** | **Fiscal**Year 2010 | ** ** | **Fiscal**Year 2011 | ** ** | **Fiscal  Year 2012** | ** ** | **Thereafter** | ** ** |
|----------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------------------------|------------|--------------------------|------------|--------------------------|------------|--------------------------|------------|--------------------------|------------|----------------------------|------------|----------------|------------|
| Long-term Debt                                                             |       | $                            | 63,250     |                                          | $          | —                   |       | $                        | 10,306     |                     | $          | —                   |       | $                          | —     |           | $          | 52,944 |   | $ | — |   | $ | — |   |
| Mortgage Loan Payable                                                      |       | 1,103                        |       | 1,103                                         |       | —                   |       | —                   |       | —                   |       | —                   |       |                       |       | —         |       |
| Operating leases(1)                                                        |       | 23,237                       |       | 4,086                                         |       | 5,185                    |       | 5,077                    |       | 962                      |       | 750                      |       | 529                        |       | 6,648          |       |
| Total Contractual Cash Obligations(2)   (excluding interest payments) |       | $                            | 87,590     |                                          | $          | 5,189                    |       | $                        | 15,491     |                     | $          | 5,077                    |       | $                          | 962        |           | $          | 53,694 |   | $ | 529 |   | $ | 6,648 |   |

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(1)             Forthe remainder of fiscal year 2007 we expect to receive net payments of $0.5million for subleases. For fiscal years 2008 and 2009 we expect to receive netpayments of approximately $0.4 million and $0.1 million, respectively forsubleases. Additionally, in fiscal year 2006, we exercised a four year optionon our ICC/VCC leases with Astrium. In fiscal year 2005 we executed saleleaseback transactions for our corporate and SPPF buildings.

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

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

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# **ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

We have no materialchanges to the disclosure made on this matter in our Annual Report on Form 10-Kfor the year ended June 30, 2006.

# **ITEM 4.  CONTROLS AND PROCEDURES**

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

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

# **PART II:  OTHER INFORMATION**

# **ITEM 1.  LEGAL PROCEEDINGS**

*ContractClaim.*In January 2004 we filed a formal proceeding withNASA seeking indemnification under our Research and Logistics Mission Supportcontract in the amount of $87.7 million for the value of our RDM and relatedequipment that was destroyed during the Space Shuttle *Columbia*tragedy. NASA responded to thiscontract claim on October 5, 2004. NASA’s determination claims that itsliability is limited to $8.0 million. We received payment from NASA of $8.2million, which included $0.2 million of interest, from NASA, in October 2004.In January 2005 we filed an appeal of NASA’s decision to deny its claim forindemnification in excess of $8.0 million with the Armed Services Board ofContract Appeals. On July 12, 2006 the court denied NASA’s motion for summaryjudgment in the matter and directed the parties to proceed with discovery. NASAand the Company have proposed a discovery plan that would lead to a hearing bythe court in July 2008.

*Lloyd’sComplaint.*In January 2004 Lloyd’s of London, our insurerfor the RDM, filed a complaint in the United States District Court for theWestern District of Washington seeking the return of the $17.7 million Lloyd’shad paid to us under the RDM insurance policy. On May 12, 2005 we and Lloyd’sagreed to jointly pursue recovery against NASA, with us in full control of theappeals process. Lloyd’s will participate in any recovery, both pursuant to ouradministrative claim and our tort claim against NASA, net of legal costs, inaccordance with a pre-agreed schedule under which our liability to Lloyd’sranges from a minimum of $0.5 million if we do not recover any additionalamounts to approximately $17.7 million if we recover over $70.0 million fromNASA. Also, in accordance with the agreement, Lloyd’s dismissed its complaintagainst us with prejudice. We recorded a charge in our fourth quarter fiscalyear 2005 financial statements of $0.5 million pending a final resolution ofour actions against NASA.

*TortClaim.*On November 8, 2004 we filed a second claim withNASA seeking damages of $79.7 million under the federal tort claims act for theloss of our RDM resulting from NASA’s alleged negligence leading to thedestruction of the space shuttle C*olumbia*and the loss of our module. The claim represents our loss of $87.7 million lessthe $8.0 million recovered from NASA. NASA failed to respond to this claim. OnFebruary 3, 2006 we filed a complaint in the Federal District Court for theSouthern District of Texas seeking damages of $79.7 million under the federaltort claims act. On June 30, 2006 the court granted a motion by the Departmentof Justice to stay the case until resolution of the Company’s appeal (theContract Claim) before the Armed Services Board of Contract Appeals.

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# **ITEM 1A.  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, 2006.

# **ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES ANDUSE OF PROCEEDS**

During the three monthsended September 30, 2006 we did not issue any unregistered securities.

# **ITEM 3.  DEFAULTS UPON SENIOR SECURITIES**

During the three monthsended September 30, 2006 we did not have any defaults upon senior securities.

# **ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**

During the three monthsended September 30, 2006 we did not have any submissions of matters to a voteof security holders.

# **ITEM 6.  EXHIBITs**

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

 

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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  9, 2006 |   | /s/ Michael E. Kearney                            |
|                    |   | Michael E. Kearney                                |
|                    |   | President and Chief Executive Officer             |
|                    |   |                                              |
|                    |   |                                              |
|                    |   |                                              |
|                    |   | /s/ Brian K. Harrington                           |
|                    |   | Brian K. Harrington                               |
|                    |   | Senior Vice President and Chief Financial Officer |

 

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