**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q/A**

**(Amendment No. 1)**

 

(Mark One)

 

| **T** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|--------------------------------------------------------------------------------------------------------|

 

For the quarterly periodended September 30, 2007

 

**OR**

 

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

 

For the transition periodfrom                    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.) |

 

**12130 Highway 3, Building 1**

**Webster, Texas 77598-1504**

(Address of principalexecutive offices and zip code)

 

**(713) 558-5000**

(Registrant’s telephonenumber, including area code)

 

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

 

Yes x No o

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See definition of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

 

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

 

Yes o No x

 

As of November 8, 2007 there were 45,648,377 shares of theregistrant’s common stock outstanding.

 

 

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**EXPLANATORY NOTE**

 

SPACEHAB, Incorporated is amending their three months ended September 30,2007 Form 10-Q as a result of a reclassification of $14.6 million ofrestricted cash as a non current asset and the reclassification of $13.3million of advances on a construction contract as a non current liability inaccordance with ARB 43, Chapter 3, Section A, Paragraph 6 and 8. Thereclassification of the $14.6 million of restricted cash included classifyingthe net change in restricted cash of $8.3 million as a cash flow from operatingactivities in accordance with FAS 95. Amendment to this document in accordancewith these standards is outlined in the subsequent pages below.

 

The Company also reclassified its pro forma presentation ofCapitalization assuming its Exchange Transaction consummated on October 5,2007 and conversion of its Series C Convertible Preferred Stock which wereconsummated on November 29, 2007, had closed as of September 30, 2007to recognize gain on the induced conversion of convertible debt in accordancewith FAS 84, and gain of the induced conversion of preferred stock inaccordance with EITF D42.

 

Note: There are no other changes to the original Form 10-Q filingother than those outlined in this document. This Form 10-Q/A does notreflect events occurring after the filing of the original Form 10-Q, ormodify or update the disclosures therein in any way other then as required toreflect the amendment set forth below.

 

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# ** **

# **PART I:  FINANCIAL INFORMATION**

# ** **

# **ITEM1.  UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

# ** **

**SPACEHAB,INCORPORATED AND SUBSIDIARIES**

**UnauditedCondensed Consolidated Balance Sheets**

(In thousands,except share data)

 
| ** **                                                                                                                                  | ** ** | **September 30,** | ** ** | **June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-------------------|------------|
| ** **                                                                                                                                  | ** ** | **2007**               | ** ** | **2007**          | ** ** |
| ** **                                                                                                                                  | ** ** | **(unaudited)**        | ** ** | ** **        | ** ** |
| ASSETS                                                                                                                                      |       |                   |       |              |       |
| Cash and cash equivalents                                                                                                                   |       | $                      | 2,561      |              | $          | 9,724 |   |
| Accounts receivable, net                                                                                                                    |       | 6,557                  |       | 8,224             |       |
| Inventory                                                                                                                                   |       | 695                    |       | 695               |       |
| Short term note receivable, net                                                                                                             |       | 106                    |       | 95                |       |
| Prepaid expenses and other current assets                                                                                                   |       | 1,398                  |       | 906               |       |
| Total current  assets                                                                                                                       |       | 11,317                 |       | 19,644            |       |
| Property and equipment,  net of accumulated depreciation and amortization of $67,832 and $66,845,  respectively                             |       | 43,102                 |       | 43,884            |       |
| Restricted Cash                                                                                                                             |       | 14,631                 |       | 6,282             |       |
| Deferred financing costs, net                                                                                                               |       | 1,465                  |       | 1,596             |       |
| Long term note receivable, net                                                                                                              |       | 193                    |       | 178               |       |
| Other assets, net                                                                                                                           |       | 1,149                  |       | 891               |       |
| Total assets                                                                                                                                |       | $                      | 71,857     |              | $          | 72,475 |   |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                                  |       |                   |       |              |       |
| Convertible subordinated notes payable — 8.0%                                                                                          |       | $                      | 10,306     |              | $          | 10,306 |   |
| Accounts payable                                                                                                                            |       | 2,147                  |       | 1,494             |       |
| Accounts payable-EADS                                                                                                                       |       | 324                    |       | 2,955             |       |
| Accrued interest                                                                                                                            |       | 1,723                  |       | 789               |       |
| Accrued expenses                                                                                                                            |       | 1,495                  |       | 2,056             |       |
| Accrued subcontracting services                                                                                                             |       | 1,313                  |       | 3,669             |       |
| Deferred gains on sale of buildings                                                                                                         |       | 221                    |       | 221               |       |
| Customer deposits                                                                                                                           |       | —                 |       | 3,106             |       |
| Deferred revenue                                                                                                                            |       | 998                    |       | 1,153             |       |
| Total current  liabilities                                                                                                                  |       | 18,527                 |       | 25,749            |       |
| Advances on construction contract                                                                                                           |       | 13,257                 |       | 5,722             |       |
| Accrued contract cost and other                                                                                                             |       | 76                     |       | 39                |       |
| Deferred gains on sale of buildings                                                                                                         |       | 1,096                  |       | 1,152             |       |
| Senior convertible 5.5% notes payable                                                                                                       |       | 52,944                 |       | 52,944            |       |
| Total  liabilities                                                                                                                          |       | 85,900                 |       | 85,606            |       |
| 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, 13,143,296 and 13,143,296 shares  issued, respectively                           |       | 84,122                 |       | 84,122            |       |
| Treasury stock,  116,100 shares, at cost                                                                                                    |       | (117                   | )          | (117              | )          |
| Additional  paid-in capital                                                                                                                 |       | 488                    |       | 544               |       |
| Accumulated  deficit                                                                                                                        |       | (110,428               | )          | (109,572          | )          |
| Total stockholders’ deficit                                                                                                            |       | (14,043                | )          | (13,131           | )          |
| Total liabilities and stockholders’ deficit                                                                                            |       | $                      | 71,857     |              | $          | 72,475 |   |

 

See accompanying notes to unaudited condensed consolidated financialstatements.

 

 

1

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**SPACEHAB,INCORPORATED AND SUBSIDIARIES**

**UnauditedCondensed Consolidated Statements of Operations**

(In thousands,except share data)

 
| ** **                                                  | ** ** | **Three Months**             | ** ** |
|-------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                  | ** ** | **Ended September 30,** | ** ** |
| ** **                                                  | ** ** | **2007**                     | ** ** | **2006** | ** ** |
| Revenue                                                     |       | $                            | 8,596      |   | $ | 14,898 |   |
| Costs of revenue                                            |       | 6,437                        |       | 11,133 |   |
| Gross profit                                                |       | 2,159                        |       | 3,765 |   |
| Operating expenses:                                         |       |                         |       |   |   |
| Selling, general  and administrative                        |       | 1,814                        |       | 2,687 |   |
| Research and  development                                   |       | 318                          |       | 192 |   |
| Total operating  expenses                                   |       | 2,132                        |       | 2,879 |   |
| Income from  operations                                     |       | 27                           |       | 886 |   |
| Interest expense                                            |       | (1,067                       | )          | (1,080 | ) |
| Interest and other income, net                              |       | 184                          |       | 162 |   |
| Loss before income taxes                                    |       | (856                         | )          | (32 | ) |
| Income tax expense                                          |       | —                       |       | — |   |
| Net income  (loss)                                          |       | $                            | (856       | ) | $ | (32 | ) |
| Loss per share:                                             |       |                         |       |   |   |
| Net loss per share — basic                             |       | $                            | (0.07      | ) | $ | 0.00 |   |
| Shares used in computing net loss per share — basic    |       | 13,027,196                   |       | 12,860,810 |   |
|                                                        |       |                         |       |   |   |
| Net loss per share — diluted                           |       | $                            | (0.07      | ) | $ | 0.00 |   |
| Shares used in computing net loss per share —  diluted |       | 13,027,196                   |       | 12,860,810 |   |
|                                                             |            |                              |            |  |  |  |  |  |

 

See accompanying notes tounaudited condensed consolidated financial statements.

 

 

2

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**SPACEHAB,INCORPORATED AND SUBSIDIARIES**

**UnauditedCondensed Consolidated Statements of Cash Flows**

**(In thousands)**

** **
| ** **                                                                                    | ** ** | **Three Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                    | ** ** | **2007**                                   | ** ** | **2006** | ** ** |
| **Cash flows from operating activities**                                                      | ** ** | ** **                                 | ** ** | ** ** | ** ** |
| Net loss                                                                                      |       | $                                          | (856       | ) | $ | (32 | ) |
| Adjustments to reconcile net income(loss) to net  cash provided by operating activities:      |       |                                       |       |   |   |
| Stock-based compensation                                                                      |       | (56                                        | )          | 78 |   |
| Depreciation and amortization, including debt  issuance cost of $0.1 million for each period  |       | 1,117                                      |       | 1,591 |   |
| Recognition of deferred gain                                                                  |       | (56                                        | )          | (55 | ) |
| Changes in assets and liabilities:                                                            |       |                                       |       |   |   |
| Decrease  (increase) in restricted cash                                                       |       | (8,349                                     | )          | — |   |
| Decrease  (increase) in accounts receivable                                                   |       | 1,641                                      |       | (1,534 | ) |
| Increase in  prepaid expenses and other current assets                                        |       | (492                                       | )          | (193 | ) |
| Increase in  other assets                                                                     |       | (258                                       | )          | (27 | ) |
| (Decrease)  increase in deferred revenue                                                      |       | (155                                       | )          | 458 |   |
| Decrease in  accounts payable, accounts payable-EADS, accrued interest, and accrued  expenses |       | (1,605                                     | )          | (993 | ) |
| Increase in  advances from construction contract                                              |       | 7,535                                      |       | — |   |
| (Decrease)  increase in customer deposits                                                     |       | (3,106                                     | )          | 3,093 |   |
| (Decrease)  increase in accrued subcontracting services and other                             |       | (2,356                                     | )          | 1,593 |   |
| Increase in  long-term accrued contract costs and other liabilities                           |       | 37                                         |       | 63 |   |
| Net cash  provided by operating activities                                                    |       | (6,959                                     | )          | 4,042 |   |
| **Cash flows from investing activities**                                                      | ** ** | ** **                                 | ** ** | ** ** | ** ** |
| Purchases of property, equipment and leasehold  improvements, net of reimbursements           |       | (204                                       | )          | (70 | ) |
| Increase in restricted cash                                                                   |       | —                                     |       | — |   |
| Net cash used in  investing activities                                                        |       | (204                                       | )          | (70 | ) |
| **Cash flows from financing activities**                                                      | ** ** | ** **                                 | ** ** | ** ** | ** ** |
| Payment of mortgage loan                                                                      |       | —                                     |       | (533 | ) |
| Proceeds from issuance of common stock, net of  expenses                                      |       | —                                     |       | 37 |   |
| Net cash used in  financing activities                                                        |       | —                                     |       | (496 | ) |
| Net change in  cash and cash equivalents                                                      |       | (7,163                                     | )          | 3,476 |   |
| Cash and cash equivalents at beginning of period                                              |       | 9,724                                      |       | 6,317 |   |
| Cash and cash equivalents at end of period                                                    |       | $                                          | 2,561      |   | $ | 9,793 |   |

 

See accompanying notes to unaudited condensedconsolidated financial statements.

 

 

3

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** **

**SPACEHAB, INCORPORATED ANDSUBSIDIARIES**

**Notes to Unaudited CondensedConsolidated Financial Statements**

 

### **1.  Descriptionof the Company and Operating Environment**

### ** **

SPACEHAB is a developer and operator of space flighthardware assets, a provider of manned and unmanned payload processing services,and an entrepreneurial force in space commerce and developing space utilizationapplications such as microgravity processing. Specifically the Companymaintains the following core competencies:

 

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

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

·                  Engineering,analysis, and payload operations services;

·                  Programintegration and control; and

·                  Product design,development, and fabrication.

 

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

 

# **OURBUSINESS UNITS**

# ** **

For the first quarter of fiscal year 2008, our Companywas comprised of three primary business segments providing the followingproducts and services to the government and commercial markets. Our businessunits include:

 

*SPACEHAB Flight Services*. Theprimary goal of our Flight Services business unit is to enable government andcommercial enterprises to overcome the accessibility, habitability andoccupational challenges of space. To meet our clients’ specific missionrequirements, we offer a range of engineering, research, logistics,integration, operations, and ground support services. Through this businessunit, we have and will continue to offer a full range of ground-based pre- andpost-flight experiment, cargo, and payload processing services as well ason-orbit operations support. Additionally, our experience with the integrationof complex science payloads enables our entrance into the field of microgravityprocessing of high value bioscience products for the benefit of the generalpublic. We are also supporting contracts for ongoing flight hardwaremanufacturing projects in support of NASA and international customers. Duringfiscal year 2007, our Flight Services business unit accounted for 65% of ourconsolidated revenues.

 

*Astrotech Space Operations*. OurAstrotech business unit provides modern facilities and support for thepreparation of multi-million dollar satellites and payloads for launch onexpendable launch vehicles. The services and facilities we provide to ourcustomers support the final assembly, checkout, and countdown functionsassociated with preparing a spacecraft for launch. Since 1985, our Astrotechbusiness unit has been providing government and commercial customers with acommercial alternative to using government-owned facilities to prepare theirsatellites for launch in the United States. Astrotech currently has long-termcontracts in place with NASA, United Launch Alliance, National ReconnaissanceOffice and Sea Launch, LLC. During fiscal year 2007, Astrotech accounted for23% of our consolidated revenues.

 

*SPACEHAB Government Services*. Fornearly 30 years, our Government Services business unit has provided large scaleprogram technical support and specialized engineering analysis, products, andservices to NASA and other customers. Our Government Services business unitderives most of its revenue under ARES’ contract to provide configuration anddata management services within NASA’s Program Integration & Control (“PI&C”)contract for the International Space Station. Under this contract, wefacilitate the assurance that the tens of thousands of hardware and softwareparts and components meet approved design and configuration requirements forthe International Space Station.

 

### **Short Term Liquidity Issues**

### ** **

As of September 30, 2007 we had cash andrestricted cash on hand of $17.2 million and our working capital deficit was$5.8 million. Restricted cash, which consists of advance payments on agovernment contract to modify certain spacecraft processing facilities, totaled$14.6 million at September 30, 2007. We carry a current liability of $13.3

 

 

 

4

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million for obligations under this constructioncontract and treat restricted cash and the offsetting liability as non currentitems. For the three months ended September 30, 2007 we generated $1.4million from operating activities. Our $5.0 million revolving credit facilityexpired as of February 11, 2007 and we elected not to renew the facility.We do not currently have a credit facility.

 

We continue to focus our efforts on improving overallliquidity through identifying new business opportunities within the areas ofour core competencies, reducing operating expenses, and limiting cashcommitments for future capital investments and new asset development. We havecontinued to restrict new capital investment and new asset development,limiting projects to those required to support current contracts and facilitymaintenance. Additionally, we continue to evaluate operating expenses in aneffort to reduce or eliminate costs not required for us to operate effectively.

 

Subsequent to our Exchange Transaction (see SubsequentEvents, Note 14), we have a balance of $2.9 million principle amount of our 8%convertible notes due, along with accrued interest on such notes and accruedinterest on the remaining balance of $6.9 million of our 5.5% seniorconvertible notes on October 15, 2007. On October 15, 2007 weredeemed the Junior Notes, including accrued interest, for cash. With the conclusionof STS-118 in August 2007, we expected to have a material decrease in ourrevenue from our Flight Services business, which has accounted for over 65% ofour consolidated revenue during fiscal year 2007. As a result, in order tocontinue to fund our current operations, we will need additional capital. Noassurance can be given that we will be able to obtain a new source of capitalon terms that are acceptable to us. If we are unable to obtain new capital, wemay be forced to subject ourselves to bankruptcy, reorganization, liquidation,dissolution or similar proceeding. Management has implemented significantstrategies to address its liquidity requirements; however, no assurance can begiven that the Company will be successful in achieving the remaining goals.

 

### **2.  Basis ofPresentation**

### ** **

In the opinion of management, the accompanyingunaudited condensed consolidated financial statements reflect all adjustments,consisting of only normal recurring accruals necessary for a fair presentationof the consolidated financial position of SPACEHAB, Incorporated and itssubsidiaries as of September 30, 2007, and the results of its operationsand cash flows for the periods ended September 30, 2007 and 2006. However,the unaudited condensed consolidated financial statements do not include allrelated footnote disclosures.

 

The consolidated results of operations for the threemonth period ended September 30, 2007 are not necessarily indicative ofthe results that may be expected for the full year. Our results of operationstypically fluctuate significantly from quarter to quarter. The interimunaudited condensed consolidated financial statements should be read inconjunction with our audited consolidated financial statements appearing in ourAnnual Report on Form 10-K for the fiscal year ended June 30, 2007.

 

### **3.  Earnings perShare**

### ** **

The following is a reconciliation of the numerator anddenominator of the basic and diluted earnings per share (“EPS”) computationsfor the three month period ended September 30, 2007 and September 30,2006 (in thousands, except share and per share data):

 
| ** **                                      | ** ** | **Three months ended**      | ** ** | **Three months ended**      | ** ** |
|-------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                      | ** ** | **September 30, 2007** | ** ** | **September 30, 2006** | ** ** |
| ** **                                      | ** ** | **Income**                  | ** ** | **Shares**                  | ** ** | **Per Share** | ** ** | **Income** | ** ** | **Shares** | ** ** | **Per Share** | ** ** |
| ** **                                      | ** ** | **(Numerator)**             | ** ** | **(Denominator)**           | ** ** | **Amount** | ** ** | **(Numerator)** | ** ** | **(Denominator)** | ** ** | **Amount** | ** ** |
| Basic EPS:                                      |       |                        |       |                        |       |   |   |   |   |   |   |   |   |
| Income (loss) available  to common stockholders |       | $                           | (856       | )                           | 13,027,196 |   | $ | (0.07 | ) | $ | (32 | ) | 12,860,810 |   | $ | 0.00 |   |
| Diluted EPS:                                    |       |                        |       |                        |       |   |   |   |   |   |   |   |   |
| Income (loss) available  to common stockholders |       | $                           | (856       | )                           | 13,027,196 |   | $ | (0.07 | ) | $ | (32 | ) | 12,860,810 |   | $ | 0.00 |   |

 

Convertible subordinated notes payable outstanding asof September 30, 2007, convertible into 756,404 shares of common stock at$13.625 per share and due October 2007, were not included in thecomputation of diluted EPS for 

 

 

5

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the three months ended September 30, 2007 and2006 as the conversion price of the convertible notes payable per share wasgreater than the average market price of the common shares during the periods.

 

Senior convertible notes payable outstanding as of September 30,2007 due 2010 convertible into 35,296,000 shares of common stock at $1.50 pershare, which include a mandatory conversion feature once the Company’s stockprice reaches $1.95 per share, have not been included in the computation ofdiluted EPS for the three months ended September 30, 2007 and 2006 as theconversion price(s) of the convertible notes payable per share weregreater than the average market price of the shares during the period.

 

Options to purchase 1,074,000 shares of common stockoutstanding at September 30, 2007 were not included in diluted EPS for thethree months ended September 30, 2007 as they were anti-dilutive to ournet loss. The options expire between October 12, 2007 and August 9,2016.

 

Options to purchase 1,824,329 shares of common stockoutstanding at September 30, 2006 were not included in diluted EPS for thethree months ended September 30, 2006 as they were anti-dilutive to ournet loss. The options expire between October 21, 2006 and August 9,2016.

 

### **4.  RevenueRecognition**

### ** **

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

 

We, from time to time, make expenditures for specificenhancements and/or additions to our facilities as required by certaincontracts where the customer agrees to reimburse us for all or substantiallyall of such expenditures. We account for such reimbursements as a reduction inthe cost of such investments and recognize any excess of such reimbursementsover the required investment as revenue.

 

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

 
| **Business Segment**          | ** ** | **Services/Products  Provided**                                                       | ** ** | **Contract Type**                                      | ** ** | **Method of Revenue  Recognition**                                                                  |
|-------------------------------|------------|---------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|
| SPACEHAB Flight  Services     |       | Commercial Space  Habitat Modules, Integration & Operations Support Services |       | Firm Fixed Price                                       |       | Percentage-of-completion  based on costs incurred                                                   |
| Astrotech Space  Operations   |       | Payload Processing  Facilities                                                        |       | Firm Fixed Price —  Mission Specific              |       | Ratably, over the  occupancy period of a satellite within the facility from arrival through  launch |
|                          |       |                                                                                  |       |                                                   |       |                                                                                                |
|                          |       |                                                                                  |       | Firm Fixed Price —  Guaranteed Number of Missions |       | Ratably, for multi-year  contract payments recognized 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                                         |

 

 

6

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Revenues for the Lockheed Martin Corporation (“LockheedMartin”) subcontract are being accounted for under the percentage-of-completionmethod based on costs incurred over the period of the agreement.

 

### **5.  Statementsof Cash Flows - Supplemental Information**

### ** **

(a)          Cash paid for interest costs was zero and$15,000 for the three months ended September 30, 2007 and 2006,respectively. We did not capitalize any interest costs during the three monthsended September 30, 2007 or 2006.

 

(b)         We paid no income taxes for the threemonths ended September 30, 2007 and September 30, 2006.

 

### **6.  CreditFacilities**

### ** **

On February 11, 2005 weentered into a revolving one-year credit facility with a bank providing forloans up to $5.0 million secured by the Company’s accounts receivable. In February 2006the revolving credit facility was renewed and the term extended until February 11,2007 with substantially the same terms as the original agreement. The interestrate for the revolving credit facility was prime plus one percent (9.25% as of June 30,2006). The unused revolving credit facility balance was subject to interestcharges of 0.25% to 0.5%. Funds available under the revolving credit facilitywere limited to 80% of eligible accounts receivable, and we were subject tovarious financial and other covenants including a minimum tangible net worthcovenant, a cash flow coverage covenant, and a secured debt coverage covenant.This credit facility expired on February 11, 2007 and we elected not torenew. We do not currently have a credit facility.

 

### **7.  SegmentInformation**

### ** **

Based on our organization forthe first quarter of fiscal year 2008, we operated in three business segments:SFS, Astrotech, and SGS. SFS was founded to commercially develop space habitatmodules that operate in the cargo bay of the space shuttles. SFS providesaccess to the modules and integration and operations support services for bothNASA and commercial customers. Astrotech provides payload processing facilitiesand services to serve the spacecraft manufacturing and launch servicesindustry. SGS is primarily engaged in providing engineering services andproducts to the Government, 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, 2007  (in thousands):** | ** ** | ** **  | ** ** | ** **              | ** ** | **Net**    | ** ** | **Depreciation** | ** ** |
|---------------------------------------------------------------------|------------|-------------|------------|-------------------------|------------|------------|------------|------------------|------------|
| ** **                                                          | ** ** | ** **  | ** ** | **Income (Loss)**       | ** ** | **Fixed**  | ** ** | **and**          | ** ** |
| ** **                                                          | ** ** | **Revenue** | ** ** | **before income taxes** | ** ** | **Assets** | ** ** | **Amortization** | ** ** |
| SFS                                                                 |       | $           | 3,583      |                    | $          | 181        |       | $                | 294        |   | $ | 422 |   |
| Astrotech                                                           |       | 3,713       |       | 1,282                   |       | 42,295     |       | 532              |       |
| SGS                                                                 |       | 1,300       |       | 145                     |       | —     |       | —           |       |
| Corporate and Other                                                 |       | —      |       | (2,464                  | )          | 513        |       | 163              |       |
|                                                                |       | $           | 8,596      |                    | $          | (856       | )          | $                | 43,102     |   | $ | 1,117 |   |

 
| **Three  Months Ended****September 30, 2006  (in thousands):** | ** ** | ** **  | ** ** | ** **              | ** ** | **Net**    | ** ** | **Depreciation** | ** ** |
|---------------------------------------------------------------------|------------|-------------|------------|-------------------------|------------|------------|------------|------------------|------------|
| ** **                                                          | ** ** | ** **  | ** ** | **Income (Loss)**       | ** ** | **Fixed**  | ** ** | **and**          | ** ** |
| ** **                                                          | ** ** | **Revenue** | ** ** | **before income taxes** | ** ** | **Assets** | ** ** | **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 |   |

### ** **

### ** **

7

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### ** **

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

### ** **

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

 

### **Non-qualified Options**

### ** **

Non-qualified options are granted at the solediscretion of the Board of Directors. Prior to the adoption of the 1994 StockIncentive Plan (“1994 Plan”), stock options granted to certain officers andemployees were part of their employment contract or offer. The number and priceof the options granted were defined in the employment agreements and suchoptions vest incrementally over a period of four years and generally expirewithin ten years of the date of grant.

 

### **The 1994 Plan**

### ** **

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

 

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

### ** **

Each new non-employee director receives a one-timegrant of an option to purchase 10,000 shares of common stock at an exerciseprice equal to the fair market value on the date of grant. In addition,effective as of the date of each annual meeting of our stockholders, eachnon-employee director who is elected or continues as a member of the Board ofDirectors of the Company shall be awarded an option to purchase 5,000 shares ofcommon stock. Options under the Director’s Plan vest after one year and expireseven years from the date of grant.

 

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

### ** **

We adopted an employee stock purchase plan thatpermits eligible employees to purchase shares of common stock of the Company atprices no less than 85% of the current market price. Eligible employees mayelect to participate in the plan by authorizing payroll deductions from 1% to10% of gross compensation for each payroll period. On the last day of eachquarter, each participant’s contribution account is used to purchase themaximum number of whole and fractional shares of common stock determined bydividing the contribution account’s balance by the lesser of 85% of the priceof a share of common stock on the first day of the quarter or the last day of aquarter. The number of shares of common stock that may be purchased under theplan is 1,500,000. Through September 30, 2007, employees have purchased1,482,645 shares under this plan. During the fourth quarter of fiscal year2007, we suspended purchases in this plan. The shares purchased under this planare considered compensatory for accounting and reporting purposes.

 

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

### ** **

During the year ended June 30, 2000, Space Media, Inc.,a majority-owned subsidiary, adopted an option plan (“SMI Plan”) for employees,officers, directors and consultants of SMI. Under the terms of the SMI Plan,1,500,000 shares have been reserved for future grants for which the number andprice of the options granted is determined by the Board of Directors and suchoptions vest, in most cases, incrementally over a period of four years and expireno more than ten years after the date of grant.

 

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

### ** **

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

 

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

 

 

8

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·                  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.

 

A summary of our stockoption activity as of September 30, 2007 and changes during the firstthree months of fiscal year 2008 are presented in the following table:

 
| ** **                             | ** ** | **Shares Under  Fixed Options** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Weighted-  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|----------------------------------------|------------|---------------------------------|------------|-----------------------------------------|------------|------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding at June 30, 2007      |       | 1,076,935                       |       | $                                       | 2.61       |                                                 | 4.94       |                            | $          | — |   |
| Granted                                |       | 10,000                          |       | $                                       | 0.44       |                                                 | 7.0        |                            | $          | — |   |
| Exercised                              |       | —                          |       | $                                       | —     |                                                 | —     |                            | $          | — |   |
| Forfeited/Expired                      |       | (12,935                         | )          | $                                       | 11.75      |                                                 | —     |                            | $          | — |   |
| Outstanding at September 30, 2007 |       | 1,074,000                       |       | $                                       | 2.48       |                                                 | 4.77       |                            | $          | — |   |
| Exercisable                            |       | 841,000                         |       | $                                       | 2.82       |                                                 | 4.77       |                            | $          | — |   |

 

The weighted-average grant-date fair value of optionsgranted during the first three months of fiscal year 2007 was $0.32 per share.The intrinsic value for stock options is defined as the difference between thecurrent market value and the grant price. The total intrinsic value of optionsexercised during the first three months of fiscal year 2007 was zero. As of September 30,2007 there was $304,599 of unamortized expense related to our stock optionplans.

 

During the first three months of fiscal year 2008,there were no options exercised.

 

### **9.  RelatedParty Transactions**

### ** **

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

 

### **Astrium GmbH**

### ** **

Dr. Graul, a member of SPACEHAB’s Board ofDirectors until his resignation in August 2007, is the Executive VicePresident for Astrium GmbH (“Astrium”). Astrium provides unpressurized payloadand integration efforts to SPACEHAB on a fixed-price basis in addition toproviding engineering services as required. For the three months ended September 30,2007 and 2006, Astrium’s payload and integration services included in cost ofrevenue were approximately $1.0 million and $3.9 million, respectively. In August 2007SPACEHAB terminated its ICC/VCC lease agreements with Astrium North America(see Note 13). We agreed to reimburse Astrium North America $1.4 million upontermination of these leases.

 

### **Executive Credit Cards**

### ** **

Certain named executive officers of the Company havecompany paid credit cards for ordinary business expenses. Although the Companypays the amounts on the credit cards, the executive officer is obligated tosubstantiate the charges and reimburse the Company for any non-business relatedcharges. As of September 30, 2007 the Company has a receivable due from anexecutive officer for $16,075.

 

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

### ** **

In July 2006, the Financial Accounting StandardsBoard issued Interpretation No. 48, *Accounting for Uncertaintyin Income Taxes* (FIN No. 48). This interpretation clarifies theaccounting for uncertainty in income taxes recognized in an entity’s financialstatements in accordance with SFAS No. 109, *Accountingfor Income Taxes*. It prescribes a recognition threshold andmeasurement attribute for financial statement disclosure of tax positions takenor expected to be taken on a tax return. We will adopt provisions of thisinterpretation beginning with the Company’s first-quarter of fiscal year 2008.We do not expect the application of the standard to have a material impact onour financial position or results of operations.

 

 

9

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Staff Accounting Bulletin (SAB) 108, “Considering theEffects of Prior-Year Misstatements when Quantifying Misstatements in CurrentYear Financial Statements” — The Securities and Exchange Commission releasedSAB 108 to provide interpretive guidance on how the effects of the carry-overor reversal of prior year misstatements should be considered in quantifying acurrent year misstatement. There have been two approaches commonly used toquantify such errors. Under one approach, the error is quantified as the amountby which the current year income statement is misstated. The other approachquantifies the error as the cumulative amount by which the current year balancesheet is misstated. The SEC staff believes that companies should quantify errorsusing both a balance sheet and an income statement approach and evaluatewhether either approach results in quantifying a misstatement that, when allrelevant quantitative and qualitative factors are considered, is material. Wedo not expect the application of this interpretation to have a material impacton our financial position or results of operations.

 

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

 

### **11. Restricted Cash, Advances on ConstructionContract, and Contingency**

### ** **

In December 2006, our Astrotech subsidiary wasawarded a contract with a governmental agency to modify one of our payloadprocessing facilities to specific requirements of a programmed mission. Underthe terms of this $20.0 million fixed-price contract, which has subsequentlybeen increased to $34.0 million, we will own the improvements after completionof the contract obligations. We have entered into a firm fixed priceconstruction subcontract with J. P. Donovan Construction, Inc. to providea significant portion of the design and construction work that will be requiredunder our contract. In accordance with our contracts, payments will be receivedfrom our customer on a milestone schedule that generally provides receipt ofcash before payments are required to the contractor under their milestoneschedule. Receipts in advance of disbursements will be retained in a restrictedcash account within our subsidiary company and used exclusively for purposes ofthe contract obligations. As of September 30, 2007, net cash receipts of$14.6 million have been designated as restricted cash and $13.3 million hasbeen designated as a liability.

 

Restricted cash is excluded from current assets underARB 43 as resources designated for expenditure in the acquisition or constructionof non current assets and is classified as an other asset. The liability foradvances of such construction contract is included as a non current liability.

 

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

 

### **12.  CustomerDeposits**

### ** **

During the quarter ended September 30, 2007 wepaid $3.1 million for in-flight insurance on our pressurized module for use onSTS-118, which launched mid-August 2007. This $3.1 million was previouslyrecorded as a current liability. This amount is included as a cash outlay incash flows from operating activities during the three month period ending September 30,2007.

 

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

### ** **

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

 

### ** **

10

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### ** **

### **14.  SubsequentEvents**

### ** **

### **Exchange Offer**

### ** **

On October 5, 2007, we announced the successfulclosing of our offer to exchange any and all of our outstanding 8% ConvertibleSubordinated Notes due 2007 (the *“JuniorNotes”*) and any and all of our outstanding 5.5% Senior ConvertibleNotes due 2010 (the *“Senior Notes”*).

 

As a result of the closing of the Exchange Offer, forthe approximately $7.4 million in principal amount of Junior Notes tendered, theholders received approximately 550,000 shares of common stock and 8,927 sharesof Series C Convertible Preferred Stock. Following the closing of theExchange Offer, approximately $2.9 million of Junior Notes remained outstandingpursuant to the original terms of the indenture governing the Junior Notes. On October 15,2007 we redeemed the outstanding Junior Notes, including accrued interest, forcash. In addition, for the approximately $46.1 million in principal amount ofoutstanding Senior Notes tendered, the holders received approximately 30.7million shares of common stock and 46,083 shares of Series C ConvertiblePreferred Stock. Following the closing of the Exchange Offer, approximately$6.9 million of Senior Notes remained outstanding pursuant to an indenturegoverning the Senior Notes that was amended through the elimination ofsubstantially all of the indenture’s restrictive covenants.

 

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

 

Each share of Series C Convertible PreferredStock will automatically be converted into 1,461 shares of common stock uponstockholder approval and filing of an amendment to the Company’s articles ofincorporation to increase the number of authorized shares of common stock tonot less than 250,000,000.

 

### **NASDAQ Deficiency Letters**

### ** **

On October 2, 2007, we received a NASDAQ StaffDetermination letter indicating that we failed to comply with NASDAQMarketplace Rules 4310(c)(4) and 4310(c)(3), and that our securitieswere, therefore, subject to delisting from The NASDAQ Capital Market.

 

Marketplace Rule 4310(c)(4) requiresthat we maintain a $1.00 bid price. Following earlier notices of non-compliancewith the requirement, we were granted a grace period, which expired on October 1,2007. We were also not in compliance with Marketplace Rule 4310(c)(3) whichrequires us to have $500,000 of net income from continuing operations for themost recently completed fiscal year or two of the three most recently completedfiscal years; or $35,000,000 market value of listed securities; or $2,500,000in stockholders’ equity.

 

On October 22, 2007, we announced that as aresult of the resignation of Myron J. Goins as a director of SPACEHAB, Inc.effective October 16, 2007, we received a letter from The NASDAQ StockMarket notifying us that we no longer comply with the NASDAQ independentdirector and audit committee requirements.

 

Consistent with Marketplace Rule 4350(c)(1),which requires that a majority of the board of directors consist of independentdirectors, and 4350(d)(4) requiring the participation of three independentdirectors on the audit committee, NASDAQ will provide us a cure period in orderto regain compliance until the earlier of the Company’s next annual shareholder’smeeting, or October 16, 2008; or, if the next annual shareholder’s meetingis held before April 14, 2008, then we must evidence compliance no laterthan April 14, 2008.

 

 

11

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# ** **

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

# ** **

*You should read the following discussion andanalysis together with our consolidated financial statements and notes theretoand the discussion “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” and Item 1A* — *“Risk Factors” included inour 2007 Annual Report Form 10-K. The following information containsforward-looking statements, which are subject to risks and uncertainties. Shouldone or more of these risks or uncertainties materialize, our actual results maydiffer from those expressed or implied by the forward-looking statements.*

 

**OVERVIEW**

** **

### **Forward LookingStatements**

### ** **

This document may contain “forward-looking statements”within the meaning of Section 27A of the Securities Act of 1933 and Section 21Eof the Securities Exchange Act of 1934, including (without limitation)statements under “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” and “Liquidity and Capital Resources.” Suchstatements are subject to risks and uncertainties that could cause actualresults to differ materially from those projected in the statements. Inaddition to those risks and uncertainties discussed herein, such risks anduncertainties include, but are not limited to, whether we will fully realizethe economic benefits under our NASA and other customer contracts, completionof the International Space Station (“ISS”), continued availability and use ofthe U.S. space shuttle system, technological difficulties, product demand,market acceptance risks, the effect of economic conditions, uncertainty ingovernment funding, and the impact of competition, delays, and uncertainties infuture space shuttle and ISS programs.

 

### **Financial Summary**

### ** **

SPACEHAB’s first quarter operating results was a $0.9million loss. For the first quarter of fiscal year 2006 we recorded a net lossof $0.03 million.

 

The following table illustratesfinancial highlights for the quarters ended September 30, 2007 and September 30,2006:

 

 
| ** **                     | ** ** | ** **                                 | ** ** | ** ** | ** ** | **Percent** | ** ** |
|--------------------------------|------------|--------------------------------------------|------------|------------|------------|-------------|------------|
| **For the Three Months Ended** | ** ** | **2007**                                   | ** ** | **2006**   | ** ** | **Change**  | ** ** |
| ** **                     | ** ** | **(in millions except per share amounts)** | ** ** |
| September 30:             |       |                                       |       |       |       |        |       |
| Revenue                        |       | 8.6                                        |       | 14.9       |       | (42         | )%         |
| Net loss                       |       | (856                                       | )          | —     |       |        |       |
| Diluted EPS                    |       | (0.07                                      | )          | —     |       |        |       |
| As of September 30:       |       |                                       |       |       |       |        |       |
| Cash and Cash  Equivalents*    |       | 2.6                                        |       | 9.8        |       | (73         | )%         |
| Total Debt                     |       | 63.4                                       |       | 64.4       |       | (2          | )%         |
| Stockholders  Equity (deficit) |       | (14.0                                      | )          | 2.9        |       | (582        | )%         |

----

| *excluding restricted cash |   |   |   |   |   |   |   |
|----------------------------|--------|--------|--------|--------|--------|--------|--------|

### ** **

### **Business Segments**

### ** **

For the first quarter of fiscal year 2008, our Companywas comprised of three primary business segments. Follows is a brief discussionof each of these segments, including a list of key factors that have affected,and are expected to continue to affect, their respective earnings and cashflows. We also present a brief discussion of our corporate-level expenses alongwith a summary of our current liquidity position and items that could impactour liquidity position in fiscal year 2008 and beyond.

 

*SPACEHAB Flight Services*. Thisbusiness unit generates revenue by providing space shuttle-based, turnkeyservices that include customer access to space via our pressurized modules;integration and operations support to logistics suppliers transporting theircargo aboard our modules to and from the orbiting International Space Station;and/or, integration and operations support to scientists and technologistsresponsible for experiments performed aboard the module research platforms.

 

12

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Additionally, we provide cargo shipment coordinationservices to NASA for all U.S. cargo shipped to the International Space Stationvia the Russian *Progress* space vehicle. Theseservices are provided under contract with Lockheed Martin, the prime CargoMission Contract contractor to NASA.

 

The primary factors impacting our SFS business unitearnings and cash flows are the number of space shuttle missions manifestedwith SPACEHAB assets 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:

 

·                  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 launch schedule and mission manifests

·                  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 commercial enterpriserole in the ISS and space exploration programs

 

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

 

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

 

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

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

 

*SPACEHAB Government Services*. OurSGS business unit generates revenue by providing support to the U.S. Governmentin the areas of large-scale configuration and data management programs such asthe International Space Station; specialized hardware design, development, andfabrication; low- to high-fidelity mockup design and construction; and safetyand quality support services. This business unit offers a wide array ofproducts and services in these varied fields. Our SGS business unit currentlyprovides configuration management services as a subcontractor of ARESCorporation under ARES’ PI&C contract with NASA.

 

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

 

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

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

·                  Our ability tocontrol costs within our budget commitments

 

13

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

 

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

·                  Interestexpense on our convertible notes, costs relative to the refinancing of ourlong-term debt during fiscal year 2006, and interest savings on the now repaidmortgage loan on our Astrotech Florida assets

·                  Income taxes,of which we currently only pay alternative minimum tax and minimal state incometaxes; income taxes will also be impacted by our ability to realize oursignificant deferred tax assets, including loss carry forwards

 

### **New Business Initiatives**

### ** **

In anticipation of the planned 2010 space shuttleretirement, we began developing new products and services. We are now focusingour business on using our core capabilities for the commercial exploitation ofspace. These new business initiatives include the following:

 

·                  Processingproducts and services in microgravity;

·                  Commercializingproducts manufactured in microgravity;

·                  Commercializingproducts developed for use in the space industry;

·                  Acquiring otherU.S. space contractors; and

·                  Providingend-to-end services for commercial and government satellite operations.

 

Although we are developing products and services insupport of the new business initiatives, we currently do not have contracts orother arrangements to provide these products and services. We cannot assure youthat we will be able to successfully develop these new products and services inthe future. We anticipate that we will require substantial additional capitalto develop these new products and services, and that this additional financingwill likely substantially dilute current holders of our common stock.

 

Many of our identified new business initiatives arefocused on space-based life sciences and end-to-end space mission assuranceservices, which are natural extensions of our 23 years of space industryexperience and our core capabilities in these fields. These new businessinitiatives will require large investments of capital and technical expertise.

 

*Microgravity*. In the early daysof the space program, it was determined that the effects of microgravityprovide a unique environment that could potentially benefit humans. Since theinception of the Space Shuttle Program and extending through the InternationalSpace Station Program, NASA has spent billions of dollars on microgravityinfrastructure and research. We have been logistically responsible for severalhundred of these experiments on the space shuttle, the Russian Progress vehicleand the International Space Station.

 

On August 14, 2007, NASA announced that it wasseeking private industry proposals for research and manufacturing concepts andopportunities onboard the International Space Station. This announcementindicates NASA’s desire to open the International Space Station to commercialprojects. Because of our experience with microgravity, we responded to thesolicitation and believe that we are well positioned to transition identifiedmicrogravity processing candidates from space research projects to fullycommercialized microgravity processing operations.

 

*Advanced Research and Conventional TechnologyUtilization Spacecraft (ARCTUS)*. We have assembled a team ofindustry partners with a common goal of developing a commercial transportationsystem providing lower cost, lower risk space transportation services thanconventional, government-developed transportation systems. ARCTUS is designedto provide cargo transportation services to the International Space Stationunder the unfunded Space Act Agreement signed with NASA in June 2007 andan additional means of transportation for our microgravity processing business.

 

*End-to-End Space Mission Assurance*.We believe that Astrotech is a recognized leader in providing commercialspacecraft processing services. Astrotech intends to expand its market byoffering end-to-end assurance services to both commercial and governmentcustomers. These new end-to-end space mission assurance services would extendAstrotech’s current relationships with customers’ spacecraft from a condensedfew weeks of ground processing at an Astrotech facility to multiple years of spacemission assurance services throughout the satellite’s lifecycle.

 

14

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*SPACETECH*. In 2007, we formed a “technologyincubator” called SPACETECH. The purpose of SPACETECH is to cultivatetechnology developed for and from space into commercial applications. Thefollowing are two examples of new initiatives already underway withinSPACETECH:

 

·                  Under anunfunded Space Act Agreement with NASA, we began development of a mini-massspectrometer which we hope to turn into a small, portable, low power unitcapable of detecting chemical compounds such as explosives, weapons of massdestruction, and toxic gases. We negotiated an agreement for the licensing,sale and distribution of the mini mass spectrometer.

·                  The FederalAviation Administration and Department of Transportation have enacted newregulations for air transportation of oxygen containers to enhance safety inthe event of a fire. Applying decades of experience in the development ofspecialized containers, we have been working with an industry partner todevelop and certify a container to meet these new requirements. If successful,this project will provide us an opportunity to enter a new market.

 

### **Our Business Strategy**

### ** **

Our strategic vision is to be a recognized marketleader in providing services to support space operations and utilization withconsistent growth while increasing shareholder value. Our business strategiesto achieve this are:

 

·                  Deliverexcellence on current work, including providing technical support on spaceprograms and remaining space shuttle missions;

·                  Leveragedecades of experience facilitating bioscience space payloads and developing andoperating successful space hardware for expansion into microgravity processing;

·                  Bring maturespace technology and space-based processing to the commercial markets;

·                  Provide accessto space on alternative launch systems for proprietary space processing and forcommercial customers;

·                  Designsolutions that encourage private commercial investment in space; and

·                  Continue todevelop space-related hardware.

 

# **RESULTSOF OPERATIONS**

# ** **

*For the three months ended September 30, 2007as compared to the three months ended September 30, 2006.*

 

Revenue. Revenue decreased approximately 42% to $8.6 millionfor the three months ended September 30, 2007 as compared to $14.9 millionfor the three months ended September 30, 2006.

 
| ** **                   | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **  | ** ** |
|------------------------------|------------|------------------------|------------|------------|------------|-------------|------------|
| ** **                   | ** ** | **September 30,** | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| **(in millions)**            | ** ** | **2007**               | ** ** | **2006**   | ** ** | **Change**  | ** ** | **Change** | ** ** |
| SPACEHAB Flight Services     |       | $                      | 3.6        |       | $          | 10.0        |       | $ | (6.4 | ) | (64 | )% |
| Astrotech Space Operations   |       | 3.7                    |       | 3.2        |       | 0.5         |       | 16 |  % |
| SPACEHAB Government Services |       | 1.3                    |       | 1.5        |       | (0.2        | )          | (13 | )% |
| Other                        |       | 0.0                    |       | 0.2        |       | (0.2        | )          | (100 | )% |
|                         |       | $                      | 8.6        |       | $          | 14.9        |       | $ | (6.3 | ) | (42 | )% |

 

Revenue from our SFS business unit decreased by $6.4million for the three months ended September 30, 2007 as compared to thethree months ended September 30, 2006. The following summarizes thesignificant items that affected the quarter ended September 30, 2007 ascompared to the quarter ended September 30, 2006:

 

·                  Decrease inrevenue from STS-118 under the CMC with Lockheed Martin of $0.9 million due tothe launch of STS-118 in August 2007. STS-118 was the last mission we haveunder contract to utilize our modules on the space shuttle.

·                  Decrease inrevenue from STS-116 of $5.2 million due to the launch of STS-116 in December 2006.

·                  Decrease inrevenue from STS-121 of $0.6 million due to the launch of STS-121 in July 2006.

·                  Other contract revenue increase of $0.3 million mainlydue to various flight hardware manufacturing purchase orders.

 

15

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Revenue from our Astrotechbusiness unit increased by $0.5 million for the three months ended September 30,2007 as compared to the three months ended September 30, 2006. The followingsummarizes significant items that affected the quarter ended September 30,2007 as compared to the quarter ended September 30, 2006:

 

·                  Increase inrevenue of $0.4 million at our Florida facility due to two satellites in-housefor the period ending September 30, 2007 whereas, for the same period lastfiscal year, only one satellite was in the facility for most of the period.

·                  Increase inrevenue of $0.8 million at our VAFB facility due to one mission processedduring the three month period ending September 30, 2007, as compared to nomissions being processed during the same period last fiscal year.

·                  Astrotechsupported one satellite launch at its Sea Launch facility during the periodending September 30, 2006 which resulted in revenue of $0.5 million. Inthe period ending September 30, 2007, Astrotech did not support asatellite launch at its Sea Launch facility. This is attributed to the January 30,2007 launch failure experienced by Sea Launch that resulted in the loss of asatellite and damage to their ground support equipment on the floating launchplatform. A full inspection, evaluation, and repair of the damage incurred andpreliminary reports indicate that Sea Launch will launch their return to flightsatellite in November 2007.

·                  Other revenuedecrease of $0.2 million.

 

Revenue from our SGS business unit decreased by $0.2million for the three months ended September 30, 2007 as compared to thethree months ended September 30, 2006. The following summarizes thesignificant items that affected the quarter ended September 30, 2007 ascompared to the quarter ended September 30, 2006:

 

·                  Decrease inrevenue from our subcontract with ARES on the PI&C contract of $0.3million. This decrease is due to a decrease in required staffing under ourstatement of work during the period as compared to the same period last year.

·                  Increase inrevenue from our contract with USA for support of the Constellation Program of$0.1 million.

 

In the three months ended September 30, 2006 werecognized revenue of $0.2 million from our Space Media business unit that hasbeen discontinued.

 

Cost of Revenue. Cost of revenue forthe three months ended September 30, 2007 decreased by 42% toapproximately $6.4 million, as compared to $11.1 million for the three monthsended September 30, 2006.

 
| ** **                   | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **  | ** ** |
|------------------------------|------------|------------------------|------------|------------|------------|-------------|------------|
| ** **                   | ** ** | **September 30,** | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| **(in millions)**            | ** ** | **2007**               | ** ** | **2006**   | ** ** | **Change**  | ** ** | **Change** | ** ** |
| SPACEHAB Flight Services     |       | $                      | 3.0        |       | $          | 7.2         |       | $ | (4.2 | ) | (58 | )% |
| Astrotech Space Operations   |       | 2.4                    |       | 2.6        |       | (0.2        | )          | (8 | )% |
| SPACEHAB Government Services |       | 1.0                    |       | 1.2        |       | (0.2        | )          | (17 | )% |
| Other                        |       | 0.0                    |       | 0.1        |       | (0.1        | )          | (100 | )% |
|                         |       | $                      | 6.4        |       | $          | 11.1        |       | $ | (4.7 | ) | (42 | )% |

 

Cost of revenue for our SFS business unit decreased$4.2 million for the three months ended September 30, 2007 compared to thethree months ended September 30, 2006. The following summarizessignificant items that affected the three months ended September 30, 2007as compared to the same period ended September 30, 2006 for SFS:

 

·                  Decrease incost of revenue from STS-118, other than depreciation expense, of $0.3 milliondue to the launch of STS-118 in August 2007. STS-118 was the last missionwe have under contract to utilize our modules on the space shuttle.

·                  Decrease incost of revenue from STS-116 and STS-121 of $2.8 million due to the launch ofSTS-116 in December 2006.

·                  As a result ofthe reduction of our SFS workforce during the third quarter of fiscal year2007, there is a $0.6 million decrease in salaries and related costs during thethree months ended September 30, 2007, as compared to the three monthsended September 30, 2006.

·                  Depreciationexpense for our flight assets decreased by $0.5 million due to the impairmentof SFS assets recognized during the fourth quarter of fiscal year 2007.

 

16

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The decrease in cost of revenue of $0.2 million in ourAstrotech business unit for the three months ended September 30, 2007compared to the three months ended September 30, 2006 is primarily due todecreased mission specific activities at our VAFB and Florida facilities.

 

Cost of revenue from our SGS business unit decreasedby $0.2 million for the quarter ended September 30, 2007 as compared tothe same quarter ended September 30, 2006. The following summarizes thesignificant items that affected the quarter ended September 30, 2007 ascompared to the quarter ended September 30, 2006:

 

·                  Decrease incost of revenue from our subcontract with ARES on the PI&C contract of $0.2million. This decrease is due to a decrease in required staffing under ourstatement of work during the three months ended September 30, 2007 ascompared to the same three months ended September 30, 2006.

 

Operating Expenses. Operating expensesdecreased to $2.1 million for the three months ended September 30, 2007 ascompared to approximately $2.9 million for the three months ended September 30,2006. The following summarizes the significant differences between the threemonths ended September 30, 2007 and the three months ended September 30,2006:

 

·                  Legal expensesdecreased by $0.3 million. This decrease is mainly due to our dropping of theclaims against NASA for the loss of the RDM during the third quarter of fiscalyear 2007

·                  Stock optionexpense decreased by $0.1 million due to multiple stock options beingterminated or expiring

·                  Decrease inaudit fees $0.1 million due to our changing auditors during the third quarterof fiscal year 2007

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

·                  SFS operatingexpenses decreased by approximately $0.3 million. This decrease is due to staffreductions during the third quarter of fiscal year 2007 which includedtermination of SFS’ Vice President of Operations

·                  Decrease inoperating expenses of $0.1 million for SMI due to selling The Space Store, LLCduring the second quarter of fiscal year 2007

 

Interest Expense. Interest expensewas approximately $1.1 million for the three months ended September 30,2007 as compared to approximately $1.1 million for the three months ended September 30,2006.

 

Interest and Other Income. Interestincome is earned on our mortgage receivable due to the sale of our payloadprocessing facility in our SFS segment and upon cash balances primarily in ourrestricted account. Interest and other income was approximately $0.2 millionfor the three months ended September 30, 2007 and 2006.

 

Income Taxes. Based on our projectedeffective tax rate for fiscal year 2008 and 2007, we recorded no tax expensefor the three month period ending September 30, 2007 and September 30,2006.

 

Net Income (Loss). Net loss for thethree months ended September 30, 2007 was approximately $0.9 million or$0.07 per share as compared to net loss of approximately $32,000 or $0.00 pershare for the three months ended September 30, 2006.

 

### **Liquidity and CapitalResources**

### ** **

Currently our primary source of liquidity is cash flowfrom operations. The principal uses of cash flow that affect our liquidityposition include both operational expenditures and debt service payments.Management is focused on increasing cash flow and on managing cash effectivelythrough limiting cash investments in long-term assets.

 

*Cash Flows From Operating Activities.*Cashused by operations for the three months ended September 30, 2007 was $7.0 million compared tocash provided by operations of $4.0 million for the three months ended September 30,2006. The significant items affecting the differences in cash flows fromoperating activities for the three months ended September 30, 2007 ascompared to the three months ended September 30, 2006 are discussed below:

 

·                  Net loss forthe three months ended September 30,2007 was $0.9 million as compared to net loss for the three months ended September 30, 2006 of $32,000.

·                  Depreciationand amortization for the three months ended September 30,2007 was $1.1 million as compared to $1.6 million for the three months periodended September 30, 2006 mainly dueto the decrease in depreciation expense for our flight assets of $0.5 milliondue to the impairment of SFS assets completed during the fourth quarter offiscal year 2007.

 

17

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·                  Restrictedcash, a non current asset, increased by $8.3 million during the three monthsended September 30, 2007.

·                  For the threemonths ended September 30, 2007changes in assets provided cash from operations of $0.8 million resultingprimarily from a decrease in accounts receivable of $1.6 million offset by anincrease in other assets of $0.8 million. For the three months ended September 30, 2006, changes in assets usedcash of $1.7 million mainly due to an increase in accounts receivable of $1.5million and an increase of other assets of $0.2 million

·                  Changes inliabilities for the three months ended September 30,2007 used cash from operations of $0.4 million. This change was due primarilyto the decreases in accounts payable, accrued expenses, and other liabilitiesof $3.9 million, a decrease of $0.1 million in deferred revenue, an increase inadvances from construction contract of $7.5 million, and a decrease in customerdeposits of $3.1 million. The decrease in deferred revenue was primarily due tothe WGS-1 mission being processed at Astrotech during the three months ended September 30,2007 that was originally contracted and paid by our customer during FY2005.This mission resulted in a decrease in deferred revenue of $0.8 million. Thisdecrease was partially offset by increases for future NASA IDIQ missions. Theincrease in advances on the construction contract of $7.5 million was due toreceiving the initial milestone payments on our contract with a governmentalagency to design and build a new payload processing facility. For the threemonths ended September 30, 2006 thechange in liabilities provided cash from operations of $4.3 million. This wasdue primarily to the increases in accounts payable, accrued expenses, and otherliabilities of $0.7 million, an increase of $0.5 million in deferred revenue,and an increase in customer deposits 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.

 

*Cash Flows From InvestingActivities*. For the three months ended September 30, 2007and 2006, cash flows used in investing activities were $0.2 million and $0.1million, respectively. The significant items affecting the differences in cashflows from investing activities for the three months ended September 30,2007 as compared to the three months ended September 30, 2006 werepurchases of property and equipment of $0.2 million for the three months ended September 30, 2007 as compared to $0.1million for the three months ended September 30,2006. This difference was primarily due to capital expenditures for ourAstrotech facility in Florida for ongoing capital programs.

 

*Cash Flows From Financing Activities.*Forthe three months ended September 30, 2007 and 2006, cash flows used infinancing activities were $0.0 million and $0.5 million, respectively. Thesignificant items affecting the differences in cash flows from financingactivities for the three months ended September 30, 2007 as compared tothe three months ended September 30, 2006 are discussed below:

 

·                  For the threemonths ended September 30, 2006 we paid $0.5 million on our mortgage loanfor our Astrotech building

 

On March 25, 2003 the Board of Directorsauthorized us to repurchase up to $1.0 million of our outstanding common stockat market prices. Any purchases under our stock repurchase program may be madefrom time to time, in the open market, through block trades or otherwise inaccordance with applicable regulations of the SEC. As of September 30,2007 we had repurchased 116,100 shares at a cost of $117,320 under the program,which represents an average cost of $1.01 per share. We will continue toevaluate the stock repurchase program and the funds authorized for the program.This stock repurchase program remains available for purchases of our stock.

 

On August 28, 2007, the Company and Astrium, GmbHmutually agreed to terminate the lease agreement dated as of February 28,2001 in regards to the Company’s lease of the Integrated Cargo Carriers (ICC)assets from Astrium, GmbH. Also, we mutually agreed to terminate the leaseagreement dated as of July 3, 2001 in regards to the Company’s lease ofthe Vertical Cargo Carrier (VCC) assets from Astrium, GmbH. The ICC and VCCassets are specifically designed cargo carrying equipment used from time totime in the U.S. space shuttle. In order to terminate these two leases, we havemutually agreed that the Company will reimburse Astrium, GmbH $1.4 million forthe period of March 1, 2007 through August 31, 2007 for the ICC andVCC assets and incur no financial obligations for either the ICC or VCC after August 31,2007. During the quarter end September 30, 2007, we made the payment toAstrium, GmbH.

 

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

 

18

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During the first quarter of fiscal year 2008, we had areduction in staff of approximately 13 positions. This reduction resulted fromthe completion of space shuttle mission STS-118 in August 2007, leaving uswith no shuttle missions under contract. We expect this reduction in force toresult in savings of $0.7 million annually. Cash expenditures associated withthe restructuring estimated at $85,000 will be paid during the second quarterof fiscal year 2008.

 

As of September 30, 2007 we had cash andrestricted cash on hand of $17.2 million and our working capital deficit was$5.8 million. Restricted cash, which consists of advance payments on agovernment contract to modify certain spacecraft processing facilities and iscarried as a non current asset, totaled $14.6 million at September 30,2007. We carry a non current liability of $13.3 million for obligations underthis construction contract. For the three months ended September 30, 2007our operating activities use cash of $8.4 million. Our $5.0 million revolvingcredit facility expired as of February 11, 2007 and we elected not torenew the facility. We do not currently have a credit facility.

 

Upon consummation of our Exchange Transaction on October 5,2007 (see below), we have a balance of $2.9 million principle amount of our 8%convertible notes due, along with accrued interest on such notes and accruedinterest on the remaining balance of $6.9 million of our 5.5% seniorconvertible notes on October 15, 2007. On October 15, 2007 weredeemed the Junior Notes, including accrued interest, for cash. With theconclusion of STS-118 in August 2007, we expected to have a materialdecrease in our revenue from our Flight Services business unit, which hasaccounted for over 65% of our consolidated revenue during fiscal year 2007. Asa result, in order to continue to fund our current operations, we will needadditional capital. No assurance can be given that we will be able to obtain anew source of capital on terms that are acceptable to us. If we are unable toobtain new capital, we may be forced to subject ourselves to bankruptcy,reorganization, liquidation, dissolution or similar proceeding. Management hasimplemented significant strategies to address its liquidity requirements;however, no assurance can be given that the Company will be successful inachieving the remaining goals.

 

Our contractual obligations as of September 30, 2007 are as follows (inthousands):

 

 

 

 
| ** **                                                            | ** ** | **At**                     | ** ** | **Remaining  in** | ** ** | **Fiscal** | ** ** | **Fiscal** | ** ** | **Fiscal** | ** ** | **Fiscal** | ** ** | **Fiscal** | ** ** | ** **     | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------|------------|-------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|
| ** **                                                            | ** ** | **September 30****,** | ** ** | **Fiscal  Year**  | ** ** | **Year**   | ** ** | **Year**   | ** ** | **Year**   | ** ** | **Year**   | ** ** | **Year**   | ** ** | ** **     | ** ** |
| **Contractual Obligations**                                           | ** ** | **2007**                   | ** ** | **2008**          | ** ** | **2009**   | ** ** | **2010**   | ** ** | **2011**   | ** ** | **2012**   | ** ** | **2013**   | ** ** | **Thereafter** | ** ** |
| Short-term Debt (3)                                                   |       | $                          | 10,306     |              | $          | 10,306     |       | $          | —     |       | $          | —     |       | $          | —     |           | $          | — |   | $ | — |   | $ | — |   |
| Long-term Debt (3)                                                    |       | 52,944                     |       | $                 | —     |       | $          | —     |       | $          | —     |       | $          | 52,944     |       | $              | —     |   | $ | — |   | $ | — |   |
| ICC/VCC (2)                                                           |       | $                          | —     |              | $          | —     |       | $          | —     |       | $          | —     |       | $          | —     |           | $          | — |   | $ | — |   | $ | — |   |
| Operating leases (1)                                                  |       | 10,916                     |       | 999               |       | 970        |       | 982        |       | 769        |       | 547        |       | 548        |       | 6,101          |       |
| Total Contractual  Cash Obligations (2) (excluding interest payments) |       | $                          | 74,166     |              | $          | 11,305     |       | $          | 970        |       | $          | 982        |       | $          | 53,713     |           | $          | 547 |   | $ | 548 |   | $ | 6,101 |   |

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1.     For the remainder of fiscal year 2008 we expect to receive netpayments of $0.2 million for sub leases. For fiscal year 2009 the Companyexpects to receive net payments of approximately $0.1 million. There arecurrently no subleases beyond fiscal year 2009.

2.     We terminated our ICC/VCC lease agreement with Astrium NorthAmerica on August 28, 2007. There are no more cash obligations remaining.

3.     Please see the “Subsequent Events” section of this document.

 

### **Construction ContractContingency**

### ** **

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

 

### **Capitalization**

### ** **

On October 5, 2007 we consummated our offer toexchange our outstanding 8% convertible subordinated notes due 2007, 5.5%senior convertible notes due 2010, and Series B Convertible PreferredStock for common stock and Series C Convertible Preferred Stock. The followingtable sets forth our unaudited consolidated indebtedness and capitalization asof September 30, 2007 and our pro forma consolidated indebtedness andcapitalization as of September 30, 2007 assuming the Exchange Transactionhad closed as of such date. You should read this information in conjunctionwith “Management’s Discussion and Analysis of Financial Condition and Resultsof Operations” and our consolidated financial statements and notes thereto.

 

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| ** **                                                                                                                                                                          | ** **   | **September 30, 2007** | ** **   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------|-----------------------------|--------------|
| **(amounts in thousands except  share and per share data)**                                                                                                                         | ** **   | **Reported**                | ** **   | **Pro Forma** | ** ** |
| ***Cash & Investments:***                                                                                                                                                  | * *     | * *                    | * *     | * * | * * |
| Cash and cash equivalents (excluding restricted  cash)                                                                                                                              |         | $                           | 2,561        |   | $ | 2,561 |   |
|                                                                                                                                                                                |         |                        |         |   |   |
| ***Capitalization:***                                                                                                                                                               | *** *** | *** ***                | *** *** | *** *** | *** *** |
| Debt:                                                                                                                                                                               |         |                        |         |   |   |
| 8.0% Subordinated  Convertible Notes due October 15, 2007 (4)                                                                                                                  |         | 10,306                      |         | 2,867 |   |
| 5.5% Senior  Convertible notes due October 15, 2010                                                                                                                            |         | 52,944                      |         | 6,861 |   |
| Total debt                                                                                                                                                                          |         | $                           | 63,250       |   | $ | 9,728 |   |
| Shareholders  equity:                                                                                                                                                               |         |                        |         |   |   |
| Preferred stock,  no par value, 2,500,000 shares authorized                                                                                                                         |         |                        |         |   |   |
| Series B  Convertible Preferred Stock, 1,333,334 shares issued and outstanding at  March 31, 2007 (liquidation preference of $12,000)                                     |         | 11,892                      |         | — |   |
| Series C  Convertible Preferred Stock, 61,550 shares issued and outstanding on pro  forma basis, convertible into 89,924,258 common shares, no liquidation  preference (1) (2) |         | —                      |         | — |   |
| Common stock, no  par value, 70,000,000 shares authorized, 13,027,196 shares outstanding at  September 30, 2007 and 45,648,377 shares pro forma                                |         | 84,122                      |         | 182,390 |   |
| Treasury stock,  116,100 shares at cost                                                                                                                                             |         | (117                        | )            | (117 | ) |
| Additional  paid-in capital                                                                                                                                                         |         | 488                         |         | 488 |   |
| Accumulated  deficit (3) (5)                                                                                                                                                        |         | (110,428                    | )            | (147,167 | ) |
| Total  stockholders equity                                                                                                                                                          |         | (14,043                     | )            | 35,594 |   |
| ***Total Capitalization***                                                                                                                                                          |         | $                           | 49,207       |   | $ | 45,322 |   |

----

1.               Common stock is valued at $0.35 per share as ofthe pro forma date of the exchange.

2.               Each share of Series C ConvertiblePreferred Stock will convert into 1,461 shares of common stock.

3.               Deficit on pro forma basis includes financingcosts of $1,922.

4.               The remaining $2,867 of 8% Subordinated ConvertibleNotes were redeemed for cash at their maturity on October 15, 2007.

5.               A non cash debt conversion expense of $31,473 isto be recognized on the exchange measured as the value as of the date of theexchange of the Series C convertible preferred stock issued as aninducement for conversion of the convertible debt.

6.               Accumulated deficit is increased by a deemeddividend of $3,344 to the Series B convertible preferred stockholders forthe Series C convertible preferred stock issued as an inducement forconversion of the preferred stock.

 

### **Off-Balance SheetArrangements**

### ** **

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

 

20

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# ** **

# **ITEM6.  EXHIBITS**

# ** **

The following exhibits are 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.                        |

 

** **

**21**

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** **

**SIGNATURE**

** **

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 
|                      | SPACEHAB, INCORPORATED                             |
|---------------------------|----------------------------------------------------|
|                      |                                               |
|                      |                                               |
|                      |                                               |
| Date: March 4,  2008 | /s/Thomas  B. Pickens, III                    |
|                      | Thomas B.  Pickens, III                       |
|                      | Chief  Executive Officer                           |
|                      |                                               |
|                      |                                               |
|                      |                                               |
|                      | /s/Brian  K. Harrington                            |
|                      | Brian K. Harrington                                |
|                      | Senior  Vice President and Chief Financial Officer |
|                      |                                               |
|                      |                                               |
|                      |                                               |
|                      |                                               |

 

 

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