**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-Q**

**(Mark One)**

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

**Forthe quarterly period ended December 31, 2006**

**OR**

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

**Forthe transition period from           to           .**

**CommissionFile 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, Building1**

**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) hasfiled all reports required to be filed by Section 13 or 15 (d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days.   Yes  x   No  o

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2 ofthe Exchange Act. (Check one):

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

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act.)   Yes  o   No  x

Asof February 13, 2007 there were 12,968,065 shares of the registrant’s commonstock outstanding.

 

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**SPACEHAB,INCORPORATED AND SUBSIDIARIESDECEMBER 31, 2006 QUARTERLY REPORT ON FORM 10-Q**

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

 

1

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# **DEFINITIONS**

As used in thisForm 10-Q, the abbreviations and acronyms contained herein have the meaningsset forth below. Additionally, the terms “SPACEHAB”, “the Company”, “we”, “us”and “our” refer to SPACEHAB, Incorporated and its subsidiaries, unless thecontext clearly indicates otherwise.
| 1994 Plan       |   | 1994 Stock Incentive Plan                     |
|-----------------|--------|-----------------------------------------------|
| Astrium         |   | Astrium GmbH                                  |
| Astrotech       |   | Astrotech Space Operations                    |
| Boeing          |   | The Boeing Company                            |
| CE&R        |   | Concept Exploration and Refinement            |
| CMC             |   | Cargo Mission Contract                        |
| Common stock    |   | SPACEHAB common stock                         |
| EPS             |   | Earnings Per Share                            |
| ESP2            |   | External Stowage Platform 2                   |
| ICC             |   | Integrated Cargo Carrier                      |
| IDIQ            |   | Indefinite-Delivery, Indefinite-Quantity      |
| ISS             |   | International Space Station                   |
| Lloyd’s    |   | Lloyd’s of London                        |
| Lockheed Martin |   | Lockheed Martin Corporation                   |
| NASA            |   | National Aeronautics and Space Administration |
| PI&C        |   | Program Integration and Control               |
| RDM             |   | Research Double Module                        |
| RSC Energia     |   | Rocket Space Corporation-Energia              |
| SEC             |   | Securities and Exchange Commission            |
| SFAS            |   | Statement of Financial Accounting Standards   |
| SFS             |   | SPACEHAB Flight Services                      |
| SGS             |   | SPACEHAB Government Services                  |
| SMI             |   | Space Media, Inc.                             |
| SMI Plan        |   | Space Media, Inc. Stock Option Plan           |
| SPF             |   | Spacecraft Processing Facility                |
| VAFB            |   | Vandenberg Air Force Base                     |
| VCC             |   | Vertical Cargo Carrier                        |

 

2

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# **PART I: FINANCIAL INFORMATION**

# **ITEM 1. Unaudited Condensed Consolidated Financial Statements**

**SPACEHAB, INCORPORATEDAND SUBSIDIARIES**

**Unaudited CondensedConsolidated Balance Sheets**

(In thousands,except share data)

 
| ** **                                                                                                                                  | ** ** | **December 31,** | ** ** | **June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                                                                                                                                  | ** ** | **2006**              | ** ** | **2006**          | ** ** |
| ** **                                                                                                                                  | ** ** | **(unaudited)**       | ** ** | ** **        | ** ** |
| ASSETS                                                                                                                                      |       |                  |       |              |       |
| Cash and cash  equivalents                                                                                                                  |       | $                     | 5,485      |              | $          | 6,317 |   |
| Restricted cash                                                                                                                             |       | 5,960                 |       | -                 |       |
| Accounts receivable,  net                                                                                                                   |       | 14,145                |       | 11,379            |       |
| Inventory                                                                                                                                   |       | 2,369                 |       | 2,369             |       |
| Prepaid expenses and  other current assets                                                                                                  |       | 1,052                 |       | 610               |       |
| Total current  assets                                                                                                                       |       | 29,011                |       | 20,675            |       |
| Property and equipment,  net of accumulated depreciation and amortization of $53,546 and $50,620,  respectively                             |       | 58,832                |       | 61,637            |       |
| Deferred financing  costs, net                                                                                                              |       | 1,861                 |       | 2,124             |       |
| Other assets, net                                                                                                                           |       | 1,251                 |       | 1,014             |       |
| Total assets                                                                                                                                |       | $                     | 90,955     |              | $          | 85,450 |   |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                                  | ** ** | ** **            |       |              |       |
| Convertible 8%  subordinated notes payable                                                                                                  |       | $                     | 10,306     |              | $          | — |   |
| Mortgage loan payable                                                                                                                       |       | —                |       | 1,636             |       |
| Accounts payable                                                                                                                            |       | 713                   |       | 1,598             |       |
| Accounts  payable-Astrium                                                                                                                   |       | 1,268                 |       | 3,386             |       |
| Accrued interest                                                                                                                            |       | 789                   |       | 804               |       |
| Accrued expenses                                                                                                                            |       | 3,238                 |       | 2,394             |       |
| Accrued subcontracting  services                                                                                                            |       | 11,646                |       | 6,562             |       |
| Advances on  construction contract                                                                                                          |       | 5,960                 |       | -                 |       |
| Deferred gains on sale  of buildings                                                                                                        |       | 221                   |       | 221               |       |
| Deferred revenue,  current portion                                                                                                          |       | 1,329                 |       | 1,321             |       |
| Total current  liabilities                                                                                                                  |       | 35,470                |       | 17,922            |       |
| Accrued contract cost  and other                                                                                                            |       | 128                   |       | 96                |       |
| Deferred gains on sale  of buildings                                                                                                        |       | 1,262                 |       | 1,373             |       |
| Convertible 8%  subordinated notes payable                                                                                                  |       | -                     |       | 10,306            |       |
| Senior convertible 5.5%  notes payable                                                                                                      |       | 52,944                |       | 52,944            |       |
| Total  liabilities                                                                                                                          |       | 89,804                |       | 82,641            |       |
| Commitments and contingencies                                                                                                               |       |                  |       |              |       |
| Stockholders’ equity                                                                                                                   |       |                  |       |              |       |
| Preferred stock,  no par value, convertible, authorized 2,500,000 shares, issued and 1,333,334  shares, (liquidation preference of $12,000) |       | 11,892                |       | 11,892            |       |
| Common stock, no  par value, 70,000,000 shares authorized, 13,084,165 and 12,976,264 shares  issued, respectively                           |       | 84,094                |       | 84,030            |       |
| Treasury stock,  116,100 shares, at cost                                                                                                    |       | (117                  | )          | (117              | )          |
| Additional  paid-in capital                                                                                                                 |       | 434                   |       | 284               |       |
| Accumulated  deficit                                                                                                                        |       | (95,152               | )          | (93,280           | )          |
| Total stockholders’  equity                                                                                                            |       | 1,151                 |       | 2,809             |       |
| Total liabilities and stockholders’ equity                                                                                             |       | $                     | 90,955     |              | $          | 85,450 |   |

 

See accompanying notes to unaudited condensedconsolidated financial statements.

3

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**SPACEHAB,INCORPORATED AND SUBSIDIARIES**

**Unaudited CondensedConsolidated Statements of Operations**

(In thousands,except share data)
| ** **                                               | ** ** | **Three Months**            | ** ** | **Six Months**              | ** ** |
|----------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                               | ** ** | **Ended December 31,** | ** ** | **Ended December 31,** | ** ** |
| ** **                                               | ** ** | **2006**                         | ** ** | **2005**                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenue                                                  |       | $                                | 12,851     |                             | $          | 11,793 |   | $ | 27,749 |   | $ | 23,778 |   |
| Costs of revenue                                         |       | 11,072                           |       | 9,789                            |       | 22,205 |   | 20,001 |   |
| Impairment of flight  asset                              |       | -                                |       | 6,283                            |       | - |   | 6,283 |   |
| Gross profit                                             |       | 1,779                            |       | (4,279                           | )          | 5,544 |   | (2,506 | ) |
| Operating expenses:                                      |       |                             |       |                             |       |   |   |   |   |
| Selling, general  and administrative                     |       | 2,679                            |       | 2,655                            |       | 5,366 |   | 4,935 |   |
| Research and  development                                |       | 173                              |       | 133                              |       | 365 |   | 211 |   |
| Total operating  expenses                                |       | 2,852                            |       | 2,788                            |       | 5,731 |   | 5,146 |   |
| Income (loss)  from operations                           |       | (1,073                           | )          | (7,067                           | )          | (187 | ) | (7,652 | ) |
| Interest expense                                         |       | (1,077                           | )          | (1,852                           | )          | (2,157 | ) | (3,260 | ) |
| Interest and other income,  net                          |       | 241                              |       | 63                               |       | 403 |   | 172 |   |
| Loss before income  taxes                                |       | (1,909                           | )          | (8,856                           | )          | (1,941 | ) | (10,740 | ) |
| Income tax (expense)  benefit                            |       | 69                               |       | -                                |       | 69 |   | (32 | ) |
| Net loss                                                 |       | $                                | (1,840     | )                                | $          | (8,856 | ) | $ | (1,872 | ) | $ | (10,772 | ) |
| Loss per share:                                          |       |                             |       |                             |       |   |   |   |   |
| Net loss per share—basic                            |       | $                                | (0.14      | )                                | $          | (0.70 | ) | $ | (0.15 | ) | $ | (0.85 | ) |
| Shares used in  computing net loss per share—basic  |       | 12,920,109                       |       | 12,718,242                       |       | 12,890,459 |   | 12,694,909 |   |
| Net loss per share—diluted                          |       | $                                | (0.14      | )                                | $          | (0.70 | ) | $ | (0.15 | ) | $ | (0.85 | ) |
| Shares used in computing net loss per share—diluted |       | 12,920,109                       |       | 12,718,242                       |       | 12,890,459 |   | 12,694,909 |   |

See accompanying notes to unaudited condensedconsolidated financial statements.

 

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**SPACEHAB, INCORPORATEDAND SUBSIDIARIES**

**Unaudited CondensedConsolidated Statements of Cash Flows**

**(In thousands)**

** **
| ** **                                                                                       | ** ** | **Six Months Ended  December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                       | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| **Cash flows from operating  activities**                                                        |       |                                              |       |   |   |
| Net loss                                                                                         |       | $                                                 | (1,872     | ) | $ | (10,772 | ) |
| Adjustments to reconcile  net loss to net cash provided by operating activities:                 |       |                                              |       |   |   |
| Stock-based  compensation                                                                        |       | 150                                               |       | 176 |   |
| Impairment of flight  assets                                                                     |       | -                                                 |       | 6,283 |   |
| Depreciation and  amortization, including debt issuance cost of $0.3 million and $0.3 million    |       | 3,189                                             |       | 2,924 |   |
| Write-off of debt  placement fees                                                                |       | -                                                 |       | 591 |   |
| Recognition of deferred  gain                                                                    |       | (111                                              | )          | (111 | ) |
| Changes in assets and  liabilities:                                                              |       |                                              |       |   |   |
| (Increase)  decrease in accounts receivable                                                      |       | (3,039                                            | )          | 3,473 |   |
| Increase in  prepaid expenses and other current assets                                           |       | (368                                              | )          | (454 | ) |
| Increase in  other assets                                                                        |       | (37                                               | )          | (183 | ) |
| Increase in  deferred revenue                                                                    |       | 8                                                 |       | 3 |   |
| Decrease in  accounts payable, accounts payable-Astrium, accrued interest, and accrued  expenses |       | (2,174                                            | )          | (2,817 | ) |
| Increase in  accrued subcontracting services and other                                           |       | 5,084                                             |       | 708 |   |
| Increase in  advance on construction contract                                                    |       | 5,960                                             |       | - |   |
| Increase  (decrease) in long-term accrued contract costs and other liabilities                   |       | 31                                                |       | (69 | ) |
| Net cash  provided by (used in) operating activities                                             |       | 6,821                                             |       | (248 | ) |
| **Cash flows from investing  activities**                                                        |       |                                              |       |   |   |
| Purchases of property,  equipment and leasehold improvements, net of reimbursements              |       | (121                                              | )          | (1,340 | ) |
| Increase in restricted  cash                                                                     |       | (5,960                                            | )          | (1,580 | ) |
| Net cash used in  investing activities                                                           |       | (6,081                                            | )          | (2,920 | ) |
| **Cash flows from financing  activities**                                                        |       |                                              |       |   |   |
| Payment of mortgage  loan                                                                        |       | (1,636                                            | )          | (1,013 | ) |
| Increase in deferred  financing costs                                                            |       | -                                                 |       | (1,927 | ) |
| Proceeds from issuance  of common stock, net of expenses                                         |       | 64                                                |       | 77 |   |
| Net cash used in  financing activities                                                           |       | (1,572                                            | )          | (2,863 | ) |
| Net change in  cash and cash equivalents                                                         |       | (832                                              | )          | (6,031 | ) |
| Cash and cash  equivalents at beginning of period                                                |       | 6,317                                             |       | 7,327 |   |
| Cash and cash equivalents at end of period                                                       |       | $                                                 | 5,485      |   | $ | 1,296 |   |

See accompanying notes tounaudited condensed consolidated financial statements.

5

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**SPACEHAB, INCORPORATED ANDSUBSIDIARIES**

**Notes to Unaudited CondensedConsolidated Financial Statements**

### **1.  The Company**

SPACEHAB is adeveloper and operator of space flight hardware assets, a provider of mannedand unmanned payload processing services, and an entrepreneurial force in spacecommerce applications.

A substantialportion of our revenue has been generated under contracts with the NationalAeronautics and Space Administration (“NASA”) and our contracts are subject toperiodic funding allocations by the agency. NASA’s funding is dependent onreceiving annual appropriations from the U.S. Government. During the yearsended June 30, 2006, 2005, and 2004 approximately 80%, 81%, and 54% of ourrevenues were generated under U.S. Government contracts, respectively.

Our FlightServices (“SFS”) business unit is continuing operations for the U.S. spaceshuttle program, supporting the June 2007 scheduled launch of space shuttlemission STS-118 through the use of our pressurized laboratory and logisticssupply module and cargo carrier. In support of our space flight hardware, weare providing cargo processing services, including payload packing and crewtraining for payload operations at the International Space Station during themission.

Our AstrotechSpace Operations (“Astrotech”) subsidiary provides commercial spacecraft launchprocessing services and payload processing facilities in the U.S. Theseservices are offered at the Astrotech facilities in Titusville, Florida andVandenberg Air Force Base (“VAFB”) in California, and are provided on afixed-price basis. Additionally, Astrotech supplies payload processing andfacilities maintenance support services to Sea Launch Company, LLC for its SeaLaunch program at the Home Port facilities in Long Beach, California.

Our SPACEHABGovernment Services (“SGS”) subsidiary manages space related projects in needof comprehensive engineering and administrative solutions and provides uniquecapabilities such as specialty engineering, hardware design and development,and configuration and data management. SGS also designs and fabricates spaceflight hardware. We continuously review and seek new business opportunitieswith NASA, either through current contract expansion or teaming with otheraerospace companies on new contract bid initiatives.

Our business todayis highly dependent on the U.S. space program in general and on NASA and itsspace shuttle and International Space Station programs in particular. TheCompany’s space shuttle configured cargo module completed mission STS-116 inDecember and is now being configured to participate in mission STS-118scheduled for launch in June 2007. The Company has no further contractedmissions for its modules after STS-118, although our modules remain availableand we believe offer significant cost savings to NASA on future space shuttlemanifests. In addition, under agreement with Astrium GmbH, (“Astrium”) theCompany has withdrawn from soliciting future space shuttle missions utilizingthe integrated cargo carriers (“ICC”) developed by the Company, but previouslyoperated under leases from Astrium. All future ICC missions will be marketed byAstrium with the Company providing support services on an as-needed basis.

As of December 31,2006, the Company had unrestricted cash on hand of $5.5 million and cashrestricted to performance under a long term construction contract of $6.0million. The Company’s 8% subordinated notes in the amount of $10.3 millionmature in October 2007. For the six months ended December 31, 2006 the Companygenerated $6.8 million of cash from operating activities. We expect to generatepositive cash flows from operations through completion of space shuttle missionSTS-118. Thereafter, the Company’s ability to generate cash flow fromoperations will be dependent upon its success in attracting new or incrementalbusiness and continued performance under our current backlog of contractedmissions.

The Company’s $5.0million bank revolving line of credit expired on February 11, 2007 and theCompany does not intend to renew or replace the facility at this time, but theCompany is pursuing alternative credit sources. Our ability to redeem ourmaturing debt and to execute new business initiatives will be dependent uponour ability to renegotiate our leases with Astrium for our ICC assets; attractand implement new business initiatives; and restructure our maturing debt.

On October 3, 2006the Company received a letter from The NASDAQ     StockMarket notifying the Company of its failure to maintain compliance with the$1.00 per share of common stock minimum closing bid price requirement over thepreceding 30 consecutive trading days as required by Marketplace Rule4310(c)(4). The letter stated that the 

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Company has untilApril 2, 2007 to demonstrate compliance by maintaining a minimum closing bidprice of $1.00 per share of common stock for a minimum of 10 consecutivetrading days or its common stock will be delisted from The NASDAQ Stock Market.

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

In the opinion ofmanagement, the accompanying unaudited condensed consolidated financialstatements reflect all adjustments, consisting of only normal recurringaccruals necessary for a fair presentation of the consolidated financialposition of SPACEHAB, Incorporated and its subsidiaries as of December 31,2006, and the results of its operations and cash flows for the periods endedDecember 31, 2006 and 2005. However, the unaudited condensed consolidatedfinancial statements do not include all related footnote disclosures.

The consolidatedresults of operations for the six month period ended December 31, 2006 are notnecessarily indicative of the results that may be expected for the full year.Our results of operations typically fluctuate significantly from quarter toquarter. The interim unaudited condensed consolidated financial statementsshould be read in conjunction with our audited consolidated financialstatements appearing in our Annual Report on Form 10-K for the fiscal yearended June 30, 2006.

### **3.  Loss per Share**

The following is a reconciliation of the numerator anddenominator of the basic and diluted loss per share computations for the threeand six month periods ended December 31, 2006 and December 31, 2005 (inthousands, except share and per share data):
| ** **                                     | ** ** | **Three months ended** | ** ** | **Three months ended** | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                     | ** ** | **December 31, 2006**  | ** ** | **December 31, 2005**  | ** ** |
| ** **                                     | ** ** | **Loss**                         | ** ** | **Shares**                       | ** ** | **Per Share** | ** ** | **Loss** | ** ** | **Shares** | ** ** | **Per Share** | ** ** |
| ** **                                     | ** ** | **(Numerator)**                  | ** ** | **(Denominator)**                | ** ** | **Amount** | ** ** | **(Numerator)** | ** ** | **(Denominator)** | ** ** | **Amount** | ** ** |
| Basic EPS:                                     |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Income (loss) available tocommon stockholders  |       | $                                | (1,840     | )                                | 12,920,109 |   | $ | (0.14 | ) | $ | (8,856 | ) | 12,718,242 |   | $ | (0.70 | ) |
| Diluted EPS:                                   |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Income (loss) available to common stockholders |       | $                                | (1,840     | )                                | 12,920,109 |   | $ | (0.14 | ) | $ | (8,856 | ) | 12,718,242 |   | $ | (0.70 | ) |

 
| ** **                                      | ** ** | **Six months ended**  | ** ** | **Six months ended**  | ** ** |
|-------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                      | ** ** | **December 31, 2006** | ** ** | **December 31, 2005** | ** ** |
| ** **                                      | ** ** | **Loss**                        | ** ** | **Shares**                      | ** ** | **Per Share** | ** ** | **Loss** | ** ** | **Shares** | ** ** | **Per Share** | ** ** |
| ** **                                      | ** ** | **(Numerator)**                 | ** ** | **(Denominator)**               | ** ** | **Amount** | ** ** | **(Numerator)** | ** ** | **(Denominator)** | ** ** | **Amount** | ** ** |
| Basic EPS:                                      |       |                            |       |                            |       |   |   |   |   |   |   |   |   |
| Income (loss) available to                      |       |                            |       |                            |       |   |   |   |   |   |   |   |   |
| common  stockholders                            |       | $                               | (1,872     | )                               | 12,890,459 |   | $ | (0.15 | ) | $ | (10,772 | ) | 12,694,909 |   | $ | (0.85 | ) |
| Diluted EPS:                                    |       |                            |       |                            |       |   |   |   |   |   |   |   |   |
| Income (loss) available  to common stockholders |       | $                               | (1,872     | )                               | 12,890,459 |   | $ | (0.15 | ) | $ | (10,772 | ) | 12,694,909 |   | $ | (0.85 | ) |

 

Convertiblesubordinated notes payable outstanding as of December 31, 2006, convertibleinto 756,404 shares of common stock at $13.625 per share and due October 2007,were not included in the computation of diluted EPS for the three months andsix months ended December 31, 2006 and 2005 as the conversion price of theconvertible notes payable per share was greater than the average market priceof the common shares during the periods.

Senior convertiblenotes payable outstanding as of December 31, 2006 due 2010 convertible into35,296,000 shares of common stock at $1.50 per share, which include a mandatoryconversion feature once the Company’s stock price reaches $1.95 per share, havenot been included in the computation of diluted EPS for the three months andsix months ended December 31, 2006 and 2005 as the conversion price(s) of theconvertible notes payable per share 

7

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were greater thanthe average market price of the shares during the period and no value has beenassigned to the mandatory conversion feature.

Options topurchase 1,719,956 shares of common stock outstanding at December 31, 2006 werenot included in diluted EPS for the three months and six months ended December31, 2006 as they were anti-dilutive due to our net loss. The options expirebetween July 1, 2008 and December 12, 2016.

Options topurchase 1,602,786 shares of common stock outstanding at December 31, 2005 werenot included in diluted EPS for the three months and six months ended December31, 2005 as they were anti-dilutive due to our net loss. The options expirebetween April 25, 2007 and December 1, 2015.

### **4.  Revenue Recognition**

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

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

  For multi-year contract payments recognized ratably over the contract period |
|                         |       |                                                                             |       |                                                                                                 |       |                                                                                                                                                                               |
|                         |       |                                                                             |       |                                                                                                 |       |                                                                                                                                                                               |
| SPACEHAB Government Services |       | Configuration Management, Engineering Services                                   |       | Cost Plus Award/Fixed Fee Fixed Rate GSA                                                             |       | Earned as reimbursable costs incurred plus  award/fixed fee Earned as billed costs incurred                                                                                        |

 

We, from time to time,make expenditures for specific enhancements and/or additions to our facilitiesas required by certain contracts where the customer agrees to reimburse us forall or substantially all of such expenditures. We account for suchreimbursements as a reduction in the cost of such investments and recognize anyexcess of such reimbursements over the required investment as revenue. Therecently awarded $20.0 million contract to design and construct a new payloadprocessing facility for a governmental agency will be accounted for under thismethod.

Lockheed MartinCorporation (“Lockheed Martin”) has committed to a one-year option extension ofour satellite ground processing contract at our Astrotech Florida facility.Under the terms of this contract option, Lockheed Martin commits to a guaranteeof four missions for calendar year 2007. We account for this revenue asguaranteed period revenues over calendar year 2007. As of December 31, 2006 wehave credited Lockheed Martin for three missions in calendar year 2006 that arescheduled to be processed by The Boeing Corporation (“Boeing”) in 

8

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calendar year2007. This credit in the amount of $2.6 million is reflected in our quarter endedDecember 31, 2006 revenue. Revenue for the missions, scheduled to fly duringcalendar year 2007, will be recognized over the period the satellites areprocessed.

Revenues for theLockheed Martin subcontract in our SFS business unit are being accounted forunder the percentage-of-completion method based on costs incurred over theperiod of the agreement. During the six month period ended December 31, 2006SGS sold the Destiny module to the Seattle Museum of Flight on a fixed-pricecontract for $350,000

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

(a)          Cash paid for interestcosts was $1.9 million and $3.0 million for the six months ended December 31,2006 and 2005, respectively. We did not capitalize any interest costs duringthe six months ended December 31, 2006 or 2005. During the six months endedDecember 31, 2005 there was $0.6 million of non-cash charges due to theacceleration of debt placement fees related to the convertible subordinatednotes. The bond exchange of $52,944,000 of 8% convertible subordinated notesfor 5.5% of senior convertible notes was an exchange of notes which resulted inno cash inflow or outflow for the Company.

(b)         We paid no income taxesfor the six months ended December 31, 2006 and 2005.

### **6.  Credit Facilities**

Our revolving credit facility with a bank, whichexpired on February 11, 2007, provided for loans up to $5.0 million secured byour accounts receivable. 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.The facility provided that we must secure advances with cash balances if the requiredtangible net worth or cash flow ratio is not met. As of December31, 2006 there have been no borrowings under thisrevolving credit facility. We have no immediate plans to extend or replace thiscredit facility, but the Company is pursuing alternative credit sources.

Our Astrotechsubsidiary had a mortgage loan with a financial institution for our SpacecraftProcessing Facility (“SPF”) expansion project in Titusville, Florida. Althoughthe loan agreement was scheduled to mature in January 2007 and bears interestat 5.5%, we made the final payment on the loan in December 2006. For the sixmonths ended December 31, 2006, the remaining $1.6 million on the mortgage notewas repaid.

On November 22,2005 we exchanged $52.9 million of our $63.3 million 8% convertible notes dueOctober 15, 2007 for a like amount of 5.5% senior convertible notes due October15, 2010. The 5.5% senior convertible notes are convertible into 35.3 millionshares of common stock at $1.50 per share. The 8.0% convertible notes mature inOctober 2007 and are included as a current liability in our financialstatements. Our ability to redeem these notes upon maturity will be dependentupon our ability to renegotiate our leases for our ICC assets and attract andimplement new business initiatives.

### **7.  Segment Information**

Based on our organization, we operate in three business segments: SFS,Astrotech, and SGS. SFS was founded to commercially develop space carriers thatoperate in the cargo bay of the space shuttles. SFS provides space flight assetsand integration and operations support services for both NASA and commercialcustomers. Astrotech provides payload processing facilities and services toserve the spacecraft manufacturing and launch services industry. SGS isprimarily engaged in providing engineering services and products to theGovernment, including NASA.

Our chief operating decision maker utilizes both revenue and income(loss) before income taxes in assessing performance and making overalloperating decisions and resource allocations. 

9

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| **Three Months Ended December 31, 2006   (in thousands):** | ** ** | ** **  | ** ** | ** **                        | ** ** | ** ** | ** ** | ** **       | ** ** |
|-----------------------------------------------------------------------------------------------|------------|-------------|------------|-----------------------------------|------------|------------|------------|------------------|------------|
| ** **                                                                                    | ** ** | ** **  | ** ** | ** **                        | ** ** | **Net**    | ** ** | **Depreciation** | ** ** |
| ** **                                                                                    | ** ** | ** **  | ** ** | **Income (Loss)**            | ** ** | **Fixed**  | ** ** | **And**          | ** ** |
| ** **                                                                                    | ** ** | **Revenue** | ** ** | **before income taxes** | ** ** | **Assets** | ** ** | **Amortization** | ** ** |
| SFS                                                                                           |       | $           | 9,837      |                              | $          | 1,827      |       | $                | 15,067     |   | $ | 898 |   |
| Astrotech                                                                                     |       | 1,115       |       | (1,141                            | )          | 43,174     |       | 533              |       |
| SGS                                                                                           |       | 1,855       |       | 467                               |       | -          |       | -                |       |
| Corporate and Other                                                                           |       | 44          |       | (3,062                            | )          | 591        |       | 168              |       |
|                                                                                          |       | $           | 12,851     |                              | $          | (1,909     | )          | $                | 58,832     |   | $ | 1,599 |   |

 
| **Three Months Ended December 31, 2005  (in thousands):** | ** ** | ** **  | ** ** | **Income (Loss)**            | ** ** | **Net**    | ** ** | **Depreciation** | ** ** |
|-----------------------------------------------------------------------------------------|------------|-------------|------------|-----------------------------------|------------|------------|------------|------------------|------------|
| ** **                                                                              | ** ** | ** **  | ** ** | ** **                        | ** ** | **Fixed**  | ** ** | **And**          | ** ** |
| ** **                                                                              | ** ** | **Revenue** | ** ** | **Before Income Taxes** | ** ** | **Assets** | ** ** | **Amortization** | ** ** |
| SFS                                                                                     |       | $           | 7,029      |                              | $          | (6,204     | )          | $                | 17,761     |   | $ | 841 |   |
| Astrotech                                                                               |       | 3,210       |       | 1,114                             |       | 45,353     |       | 535              |       |
| SGS                                                                                     |       | 1,260       |       | 70                                |       | -          |       | -                |       |
| SMI                                                                                     |       | 294         |       | 6                                 |       | -          |       | -                |       |
| Corporate and Other                                                                     |       | -           |       | (3,842                            | )          | 672        |       | 211              |       |
|                                                                                    |       | $           | 11,793     |                              | $          | (8,856     | )          | $                | 63,786     |   | $ | 1,587 |   |

 
| **Six Months Ended December 31, 2006  (in thousands):** | ** ** | ** **  | ** ** | ** **                        | ** ** | **Net**    | ** ** | **Depreciation** | ** ** |
|---------------------------------------------------------------------------------------|------------|-------------|------------|-----------------------------------|------------|------------|------------|------------------|------------|
| ** **                                                                            | ** ** | ** **  | ** ** | **Income (Loss)**            | ** ** | **Fixed**  | ** ** | **And**          | ** ** |
| ** **                                                                            | ** ** | **Revenue** | ** ** | **before income taxes** | ** ** | **Assets** | ** ** | **Amortization** | ** ** |
| SFS                                                                                   |       | $           | 19,907     |                              | $          | 4,105      |       | $                | 15,067     |   | $ | 1,822 |   |
| Astrotech                                                                             |       | 4,288       |       | (626                              | )          | 43,174     |       | 1,037            |       |
| SGS                                                                                   |       | 3,315       |       | 658                               |       | -          |       | -                |       |
| Corporate and Other                                                                   |       | 239         |       | (6,078                            | )          | 591        |       | 330              |       |
|                                                                                  |       | $           | 27,749     |                              | $          | (1,941     | )          | $                | 58,832     |   | $ | 3,189 |   |

 
| **Six Months Ended December 31, 2005  (in thousands):** | ** ** | ** **  | ** ** | ** **                        | ** ** | **Net**    | ** ** | **Depreciation** | ** ** |
|---------------------------------------------------------------------------------------|------------|-------------|------------|-----------------------------------|------------|------------|------------|------------------|------------|
| ** **                                                                            | ** ** | ** **  | ** ** | **Income (Loss)**            | ** ** | **Fixed**  | ** ** | **And**          | ** ** |
| ** **                                                                            | ** ** | **Revenue** | ** ** | **before income taxes** | ** ** | **Assets** | ** ** | **Amortization** | ** ** |
| SFS                                                                                   |       | $           | 15,525     |                              | $          | (4,863     | )          | $                | 17,761     |   | $ | 1,499 |   |
| Astrotech                                                                             |       | 5,189       |       | 983                               |       | 45,353     |       | 1,066            |       |
| SGS                                                                                   |       | 2,547       |       | 140                               |       | -          |       | -                |       |
| SMI                                                                                   |       | 517         |       | 8                                 |       | -          |       | -                |       |
| Corporate and Other                                                                   |       | -           |       | (7,008                            | )          | 672        |       | 359              |       |
|                                                                                  |       | $           | 23,778     |                              | $          | (10,740    | )          | $                | 63,786     |   | $ | 2,924 |   |

 

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

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

 

10

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### **Non-qualifiedOptions**

Non-qualifiedoptions are granted at the sole discretion of the Board of Directors. Prior tothe adoption of the 1994 Stock Incentive Plan (“1994 Plan”), stock optionsgranted to certain officers and employees were part of their employmentcontract or offer. The number and price of the options granted were defined inthe employment agreements and such options vest incrementally over a period offour years and generally expire within ten years of the date of grant.

### **The1994 Plan**

Under the terms ofthe 1994 Plan, the number and price of the options granted to employees isdetermined by the Board of Directors and such options vest, in most cases,incrementally over a period of four years and expire no more than ten yearsafter the date of grant.

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

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

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

We adopted anemployee stock purchase plan that permits eligible employees to purchase sharesof common stock of the Company at prices no less than 85% of the current marketprice. Eligible employees may elect to participate in the plan by authorizingpayroll deductions from 1% to 10% of gross compensation for each payrollperiod. On the last day of each quarter, each participant’s contribution accountis used to purchase the maximum number of whole and fractional shares of commonstock determined by dividing the contribution account’s balance by the lesserof 85% of the price of a share of common stock on the first day of the quarteror the last day of a quarter. The number of shares of common stock that may bepurchased under the plan is 1,500,000. Through December 31, 2006, employeeshave purchased 1,423,514 shares under this plan. Employees purchased anaggregate of 107,901 shares at an average price of $0.59 during the six-monthperiod ended December 31, 2006. The shares purchased under this plan areconsidered compensatory for accounting and reporting purposes.

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

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

### **Accountingfor Stock Issued to Employees**

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

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

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

·                  Therisk-free interest rate is based on the U.S. Treasury yield curve in effect atthe time of grant for the expected term of the option.

11

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·                  Theexpected dividend yield is based on our current dividend yield and the bestestimate of projected dividend yield for future periods within the expectedlife of the option.
| ** **               | ** ** | **Quarter Ended**          | ** ** | **Quarter Ended**          | ** ** |
|--------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **               | ** ** | **December 31, 2006** | ** ** | **December 31, 2005** | ** ** |
| Dividend yield           |       |                            | 0.00       | %                               |       |   | 0.00 | % |   |
| Volatility               |       |                            | 1.08       |                            |       |   | 1.68 |   |   |
| Risk-free interest rate  |       |                            | 4.83       | %                               |       |   | 4.31 | % |   |
| Expected life (in years) |       |                            | 4.0        |                            |       |   | 4.0 |   |   |

 

A summary of our stockoption activity as of December 31, 2006 and changes during the first six monthsof fiscal year 2007 are presented in the following table:
| ** **                        | ** ** | **Shares Under  Fixed Options** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted-  Average  Remaining**

**Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|-----------------------------------|------------|-------------------------------------------|------------|----------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding at  June 30, 2006     |       | 1,577,201                                 |       | $                                      | 2.96       |                                                     | 5.52       |                            | $          | - |   |
| Granted                           |       | 340,000                                   |       | $                                      | 1.11       |                                                     | 9.47       |                            | $          | - |   |
| Exercised                         |       | -                                         |       | $                                      | -          |                                                     | -          |                            | $          | - |   |
| Forfeited/Expired                 |       | (197,245                                  | )          | $                                      | 3.62       |                                                     | -          |                            | $          | - |   |
| Outstanding at  December 31, 2006 |       | 1,719,956                                 |       | $                                      | 2.53       |                                                     | 5.77       |                            | $          | - |   |
| Exercisable                       |       | 1,198,956                                 |       | $                                      | 3.03       |                                                     | 5.77       |                            | $          | - |   |
|                              |       |                                      |       |                                   |       |                                                     |       |                            |       |

 

Theweighted-average grant-date fair value of options granted during the first sixmonths of fiscal year 2007 was $0.94 per share. The intrinsic value for stockoptions is defined as the difference between the current market value and thegrant price. The total intrinsic value of options exercised during the firstsix months of fiscal year 2007 was $0.0. As of December 31, 2006 there was$496,897 of unamortized expense related to our stock option plans.

During the firstsix months of fiscal year 2007 there were no options exercised.

### **9.  Gain on Sale of The Space Store LLC**

On October 13,2006 the Company consummated a transaction in which Space Media, Inc., amajority-owned subsidiary of SPACEHAB, Inc., sold the assets of The Space StoreLLC, consisting of retail and internet identity, inventory, furniture,fixtures, and other items. Due to the immaterial amount and insignificantimpact this transaction will have on our financial statements, we elected tonot present this discontinued operation as a separate component in ourconsolidated statements of operations for the three months ended December 31,2006. The gain on the sale is reflected in the interest and other income sectionon our financial statements.

### **10.  Related Party Transactions**

We engaged incertain transactions with directors, executive officers, shareholders, andcertain former officers during the three and six months ended December 31,2006. Following is a description of these transactions:

### **AstriumGmbH**

Dr. Stefan-FritzGraul, a member of SPACEHAB’s Board of Directors, is the Executive VicePresident for Astrium GmbH. Astrium provides unpressurized payload andintegration efforts to SPACEHAB on a fixed-price basis in addition to providingengineering services as required. For the three months ended December 31, 2006and 2005, Astrium’s payload and integration services included in cost ofrevenue were approximately $3.9 million and $2.4 million, respectively. For thesix months ended December 31, 2006 and 2005, Astrium’s payload and integrationservices included in cost of revenue were approximately $7.8 million and $5.4million, respectively.

12

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### **DanielA. Bland**

OnJune 27, 2005 we entered into an agreement with Daniel A. Bland whereas Mr.Bland provided consulting services to us. The initial term of the agreementbegan July 2, 2005 and ended July 1, 2006 with additional optional periods ofsix months each until terminated by either party by notifying the other partyof such termination at least thirty days prior to the end of the initial termor any subsequent term. We paid Mr. Bland a retainer fee at the rate of $6,000per month. SPACEHAB removed the retainer clause prior to the exercise of theoptional periods identified in the agreement. Mr. Bland was paid at a rate of$125 per hour worked plus related travel expenses during the option periodexercised. We terminated this agreement in January 2007. Mr. Bland retired asSenior Vice President of our SPACEHAB Flight Services business unit as of June30, 2005. During the three months ended December 31, 2006 and 2005, we paid Mr. Bland $33,974 and$23,500, respectively. During the six months ended December 31, 2006 and 2005we paid Mr. Bland $61,088 and $45,633, respectively.

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

In July 2006 theFinancial Accounting Standards Board issued Interpretation No. 48, *Accounting for Uncertainty in Income Taxes* (FIN No. 48).This interpretation clarifies the accounting for uncertainty in income taxes recognizedin an entity’s financial statements in accordance with SFAS No. 109, *Accounting for Income Taxes*. It prescribes a recognitionthreshold and measurement attribute for financial statement disclosure of taxpositions taken or expected to be taken on a tax return. We will adoptprovisions of this interpretation beginning with the Company’s first quarter offiscal year 2008. We do not expect the application of the standard to have amaterial impact on our consolidated financial position or results of operations.

Staff AccountingBulletin (SAB) 108, “Considering the Effects of Prior-Year Misstatements whenQuantifying Misstatements in Current Year Financial Statements” — TheSecurities and Exchange Commission released SAB 108 to provide interpretive guidanceon how the effects of the carry over or reversal of prior year misstatementsshould be considered in quantifying a current year misstatement. There havebeen two approaches commonly used to quantify such errors. Under one approach,the error is quantified as the amount by which the current year incomestatement is misstated. The other approach quantifies the error as thecumulative amount by which the current year balance sheet is misstated. The SECstaff believes that companies should quantify errors using both a balance sheetand an income statement approach and evaluate whether either approach resultsin quantifying a misstatement that, when all relevant quantitative andqualitative factors are considered, is material. We do not expect the applicationof this interpretation to have a material impact on our consolidated financialposition or results of operations. SAB 108 is effective for fiscal yearsbeginning after November 15, 2007.

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

### **12. Legal Proceedings**

*ContractClaim.*In January 2004 we filed a formal proceeding withNASA seeking indemnification under our Research and Logistics Mission Supportcontract in the amount of $87.7 million for the value of our research doublemodule (“RDM”) and related equipment that was destroyed during the SpaceShuttle *Columbia*tragedy. NASAresponded to this contract claim on October 5, 2004. NASA’s determinationclaims that its liability is limited to $8.0 million. We received payment fromNASA of $8.2 million, which included $0.2 million of interest, in October 2004.In January 2005 we filed an appeal of NASA’s decision to deny its claim forindemnification in excess of $8.0 million with the Armed Services Board ofContract Appeals. On July 12, 2006 the court denied NASA’s motion for summaryjudgment in the matter and directed the parties to proceed with discovery. NASAand the Company have proposed a discovery plan that would lead to a hearing bythe court in July 2008. In accordance with that plan, the parties havecommitted to a non-binding settlement conference on a to-be-determined date inFebruary 2007.

*TortClaim.*On November 8, 2004 we filed a second claim withNASA seeking damages of $79.7 million under the federal tort claims act for theloss of our RDM resulting from NASA’s alleged negligence leading to thedestruction of the space shuttle C*olumbia*and the loss of our module. The claim represents our loss of $87.7 million lessthe $8.0 million recovered from NASA. NASA failed to respond to this claim. OnFebruary 3, 2006 we filed a complaint 

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in the FederalDistrict Court for the Southern District of Texas seeking damages of $79.7million under the federal tort claims act. On June 30, 2006 the court granted amotion by the Department of Justice to stay the case until resolution of theCompany’s appeal (the Contract Claim) before the Armed Services Board ofContract Appeals.

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

### **13.  Restricted Cash**

In December 2006our Astrotech subsidiary was awarded a contract with a governmental agency tomodify one of our payload processing facilities to specific requirements of aprogrammed mission. Under the terms of this $20.0 million fixed price contract,we will own the improvements after completion of the contract obligations. Wehave entered into a firm fixed price construction subcontract with J. P.Donovan Construction, Inc. to provide a significant portion of the design andconstruction work that will be required under our contract. In accordance withour contracts, payments will be received from our customer on a milestoneschedule that generally provides receipt of cash before payments are requiredto the contractor under their milestone schedule. Receipts in advance ofdisbursements will be retained in a restricted cash account within oursubsidiary company and used exclusively for purposes of the contractobligations. As of December 31, 2006, cash receipts of $6.0 million have beendesignated as restricted cash.

### **14.  Subsequent Events**

On January 18,2007 we announced a reduction in staff resulting in the elimination ofapproximately 36 positions or 16% of our workforce. Planned cash expendituresassociated with the restructuring are estimated at $450,000. This reduction inforce is anticipated to result in cost reductions of approximately $3.9 millionon an annual basis.

Our $5.0 millionrevolving credit facility with a bank expired on February 11, 2007. We have nocurrent plans to extend or replace this credit facility, but the Company ispursuing alternative credit sources.

On January 19,2007 the Company filed Form 8-K with the SEC announcing a change in the Company’sindependent registered public accounting firm from Grant Thornton LLP to PMBHelin Donovan LLP. The document can be found at www.sec.gov.

On January 30,2007 Sea Launch experienced a launch explosion resulting in the loss of asatellite and damage to the floating launch platform. A full inspection andevaluation of the damage incurred and the impact on future launch schedules hasyet to be completed, however, preliminary reports indicate that one or morescheduled future launches will be deferred. We are paid under our contract withSea Launch upon launch of each mission; therefore, anticipated future revenueswill be impacted.

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# **ITEM 2.  MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

*Thefollowing discussion and analysis should be read together with our consolidatedfinancial statements and notes thereto and the discussion “Management’s Discussionand Analysis of Financial Condition and Results of Operations” and Item 1A. ―“Risk Factors” included in our 2006 Annual Report Form 10-K. The followinginformation contains forward-looking statements, which are subject to risks anduncertainties. Should one or more of these risks or uncertainties materialize,our actual results may differ from those expressed or implied by theforward-looking statements.*

**OVERVIEW**

### **ForwardLooking Statements**

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

### **FinancialSummary**

SPACEHAB’s firstsix months operating results were below management’s expectations, however, theCompany’s revenues significantly exceeded the first six months of the priorfiscal year and the net loss of $1.9 million improved substantially from theloss of $10.8 million in the first six months of the prior fiscal year. Theprior year’s comparable periods included a charge of $6.3 million for the writedown of book value of one of our two space shuttle logistics modules. Theremaining module recently completed STS-116 and is scheduled to fly on STS-118in June and July 2007.

The followingtable illustrates financial highlights for the six months ended December 31,2006 and December 31, 2005:
| **For the Six Months Ended** | ** ** | **2006**                                                            | ** ** | **2005** | ** ** | **Percent  Change** | ** ** |
|--------------------------------------------------|------------|---------------------------------------------------------------------|------------|----------|------------|---------------------|------------|
| ** **                                       | ** ** | **(in millions except per share amounts)** | ** ** |
| December 31:                                     |       |                                                                |       |     |       |                |       |
| Revenue                                          |       | 27.7                                                                |       | 23.8     |       | 24                  | %          |
| Net Loss                                         |       | (1.9                                                                | )          | (10.8    | )          | 98                  | %          |
| Diluted EPS                                      |       | (0.15                                                               | )          | (0.85    | )          | 85                  | %          |
| As of December 31:                               |       |                                                                |       |     |       |                |       |
| Cash and Cash  Equivalents                       |       | 5.4                                                                 |       | 3.8      |       | 200                 | %          |
| Restricted Cash                                  |       | 6.0                                                                 |       | -        |       |                |       |
| Total Debt                                       |       | 63.3                                                                |       | 65.4     |       | (3                  | %)         |
| Stockholders Equity                              |       | 1.2                                                                 |       | 4.3      |       | (35                 | %)         |

 

### **Industry and MarketOverview**

We providefacilities and services to the space industry, which encompasses governmental,commercial, and defense sectors. Our research and logistics modules weredesigned and developed to provide enhanced payload capability and flexibilityto the U.S. Space Shuttle Program which is operated by NASA. Our Astrotechoperations provide facilities for pre-launch preparation of spacecraft insupport of the commercial communications satellite industry, 

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NASA’s exploratoryspacecraft programs and the Department of Defense satellite programs. We alsoprovide engineering and administrative support services to NASA.

We are pleasedthat the White House is maintaining its vision for U.S. space leadership. Weview the President’s commitment to space exploration, the human spaceflightprogram, and the plan for missions to the Moon, Mars, and beyond as positiveindicators that will reinvigorate the space program, likely yielding benefitsto the aerospace and space commerce industries. We believe that this visionprovides NASA with a clear focus, will stabilize the NASA program, and willincrease funding for new pursuits.

We believe theimpacts of this vision are materializing over time, and we will continue toalign our business direction to remain a constructive force in NASA’sspaceflight program while positioning for a greater commercial role in thedeveloping space industry. In the long term we believe that our core competenciesoffer opportunities to continue to provide services as well as to design,build, and operate assets that could support commercial initiatives in lowearth orbit and beyond. We plan to pursue these new opportunities. In the nearterm our primary objective is to continue providing services to NASA and thespace community in support of the space shuttle and the International SpaceStation programs. We expect that the space shuttle and International SpaceStation will remain an integral part of the human spaceflight program through2010 and the International Space Station will continue to support humanspaceflight beyond 2010.

We are engaged indefining commercial payload service solutions capable of meeting theInternational Space Station on-orbit re-supply and return requirements createdby the mandated retirement of the space shuttle. These activities, some ofwhich leverage our international strategic partnerships and intellectualproperty rights, include the potential development of an affordable cargotransportation system based on existing commercial launch vehicles and ourmodular payload integration architecture to transport pressurized andunpressurized cargo to and from space. We further believe that our experienceand expertise in the conceptual design, development, ground processing, andon-orbit operations support of payload and crew accommodations position us wellfor a role in the development of commercial access to space as well as NASA’sspace exploration systems, the envisioned next phase in human exploration ofspace.

We also look for agrowing commercial role in the servicing and fleet management of commercialcommunications satellites. Our long term critical role in preparing commercialcommunications satellites for launch positions us for expanding our serviceofferings to satellite on-orbit operations and potentially spacecraftservicing.

We operate inthree main areas generally related to spaceflight activities within theaerospace industry: space assets and mission support services for manned andunmanned space exploration and research missions; commercial and exploratoryspacecraft pre-launch services; and engineering and administrative services insupport of government space operations. Because of the diversity among theoperations of our activities, we report the results of each business as aseparate segment in our consolidated financial statements. Our consolidatedfinancial results also reflect corporate-level expenses such as general andadministrative, interest, and depreciation and amortization, which due to theirnature, are not reported as a separate segment.

### **BusinessSegments**

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

*SPACEHABFlight Services*. This business unit generates revenue byproviding space shuttle-based, turnkey services that include customer access tospace via our pressurized modules and unpressurized integrated cargo carriers;integration and operations support to logistics suppliers transporting theircargo aboard our modules and integrated cargo carriers to and from the orbitingInternational Space Station; and/or integration and operations support toscientists and technologists responsible for experiments performed aboardmodule and integrated cargo carrier research platforms.

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

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Additionally, weprovide cargo shipment coordination services to NASA for all U.S. cargo shippedto the International Space Station via the Russian *Progress*space vehicle. These services are provided under contract with Lockheed Martin,the prime Cargo Mission Contract contractor to NASA. We also provide researchaccess to space and on the International Space Station to the JapaneseAerospace Exploration Agency through Rocket Space Corporation-Energia (“RSC-Energia”),a major Russian aerospace enterprise.

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

·                  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

·                  Therole of international space research projects flying on future space shuttleand Russian and European Space Agency missions

·                  Thegrowth of space exploration programs within NASA and NASA’s commitment to thePresident’s Vision for Space Exploration regarding enhancement of the role ofcommercial enterprise in space exploration programs

·                  Ouroperating lease commitments to Astrium GmbH for the ICC/VCC cargo carriers

·                  Ourability to control our capital expenditures, particularly those for spare orreplacement parts for space assets

*AstrotechSpace Operations*. Revenue is generated from variousfixed-price contracts with launch service providers in both the commercial andgovernment markets. The services and facilities we provide to our customerssupport the final assembly, checkout, and countdown functions associated withpreparing a spacecraft for launch.

The earnings andcash flows generated from our Astrotech operations are related to the number ofcommercial spacecraft launches, which reflects the growth in thesatellite-based communication industries and the requirement to replace agingsatellites. Other factors that have impacted, and are expected to continue toimpact, earnings and cash flows for this business include:

·                  Ourability to control our capital expenditures which are primarily limited tomodifications to accommodate payload processing for new launch vehicles,maintenance and safety, environmental and reliability projects, and othercosts, through disciplined management and safe, efficient operations

·                  Thecontinuing limited availability of competing facilities at the major domesticlaunch sites that can offer compatible services, leading to an increase ingovernment use of our services

*SPACEHABGovernment Services*. Our SGS business unit generates revenueby providing support to the U.S. Government in the areas of large-scaleconfiguration and data management programs such as the International SpaceStation; specialized hardware design, development, and fabrication; low- tohigh-fidelity mockup design and construction; and safety and quality supportservices. This business unit offers a wide array of products and services inthese varied fields. Our SGS business unit currently provides configurationmanagement services as a subcontractor of ARES Corporation under ARES’ ProgramIntegration and Control (“PI&C”) contract with NASA.

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

·                  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

·                  Ourability to maintain small business qualification for our SGS business unitunder NASA contracting rules

·                  Ourability to control costs within our budget commitments

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

·                  Interestexpense on our convertible notes, cost relative to the refinancing of our long-termdebt during fiscal year 2006, and interest savings on the now repaid mortgageloan on our Astrotech Florida assets

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·                  Theultimate settlement of our claim against NASA for indemnification of our assetlosses on the Space Shuttle *Columbia*mission and/or our tort claim

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

### **Revenue**

Our revenue forthe six months ended December 31, 2006 and 2005 was generated primarily fromthe Lockheed Martin CMC subcontract and contracts with related commercialcustomers in the SFS segment; the PI&C contract in the SGS segment; and ourcontracts with Lockheed Martin, Boeing, NASA and other commercial satelliteproviders in the Astrotech segment.

Our SFS businesssegment is supporting NASA’s space shuttle and ISS assembly activities and iscontinuing operations in preparation for shuttle mission STS-118. Our patentedmodule and ICC are scheduled for use on the STS-118 mission. For this mission,the ICC has been modified to serve as a deployable pallet which will bepermanently attached to the ISS and serve as a commercially-provided spaceparts warehouse. Shuttle mission STS-118 is the last mission currently undercontract for our modules although we believe that future mission manifestscould benefit from the additional cargo capacity and flexibility the modulesoffer and will continue to keep our modules available as NASA finalizes theremaining space shuttle flights manifests. We have also returned our ICC andVCC pallets to Astrium GmbH for their marketing and operation of possiblefuture missions. We will continue to provide support services to Astrium on anas-needed basis.

Astrotech derivesits revenue by providing support necessary for its customers to successfullyprocess their spaceflight hardware for launch, including advance planning; useof unique facilities; and spacecraft checkout, encapsulation, fueling,transport, and remote control through launch. During the six months endedDecember 31, 2006 we were awarded a new indefinite-delivery,indefinite-quantity (“IDIQ”) contract with NASA in the amount of $9.5 millionfor payload processing support on several future NASA spacecraft.

During the quarterended December 31, 2006, Astrotech was awarded a $20.0 million contract for theU.S. Government, Office of Sea Launch for the design and construction ofmodifications to our payload processing facility at the VAFB location. Duringthe three months ended December 31, 2006, Astrotech received $6.0 million fromthe U.S. Government, Office of Sea Launch as an initial payment under thiscontract. We have designated this cash as restricted cash, recognizing itscommitment to obligations under the contract and have recognized a liabilityfor those anticipated obligations.

SPACEHABGovernment Services continues its support of NASA’s ISS program, with much ofits revenue generated in the areas of configuration and data managementsupporting the final acceptance of space station hardware and software for NASAand the sixteen international partners.

During the threemonths ended December 31, 2006, deferred revenue decreased by $0.5 million.During the six months ended December 31, 2006 deferred revenue increased by aninsignificant amount. This is a result of us receiving cash for contractualobligated work that has not been performed as of the end of the period.

### **Costsof Revenue**

We have severaltypes of costs of revenue in our business segments. Costs of revenue for SFSinclude integration and operations expenses associated with the performance oftwo types of efforts: (i) sustaining engineering in support of all missionsunder a contract and (ii) mission specific support. Costs associated with theperformance of the contracts, using the percentage-of-completion method ofrevenue recognition, are expensed as incurred. Costsassociatedwith the cost-plusaward and fixed-fee contracts are expensedas incurred by SGS. Other costs of revenue include depreciation expenseand costs associated with the Astrotech payload processing facilities. Selling, general and administrative,interest, and other expenses are recognized when incurred.

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**RESULTSOF OPERATIONS**

*For thethree months ended December 31, 2006 as compared to the three months endedDecember 31, 2005.*

Revenue.Revenue increased approximately 9% to $12.9 million for the three months endedDecember 31, 2006 as compared to $11.8 million for the three months ended December31, 2005 (in millions).

|                               | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **  | ** ** |
|-------------------------------|------------|----------------------------------|------------|------------|------------|-------------|------------|
| ** **                    | ** ** | **December 31,**            | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **                    | ** ** | **2006**                         | ** ** | **2005**   | ** ** | **Change**  | ** ** | **Change** | ** ** |
| SPACEHAB Flight  Services     |       | $                                | 9.9        |       | $          | 7.0         |       | $ | 2.9 |   | 41 | % |
| Astrotech Space  Operations   |       | 1.1                              |       | 3.2        |       | (2.1        | )          | (66 | %) |
| SPACEHAB  Government Services |       | 1.9                              |       | 1.3        |       | 0.6         |       | 46 | % |
| Other                         |       | -                                |       | 0.3        |       | (0.3        | )          | 100 | % |
|                          |       | $                                | 12.9       |       | $          | 11.8        |       | $ | 1.1 |   | 9 | % |

Revenue from our SFSbusiness unit increased by $2.9 million for the period ending December 31, 2006as compared to the same period ending December 31, 2005. The followingsummarizes the significant items that affected the quarter ended December 31,2006 as compared to the quarter ended December 31, 2005:

·                  Increasein revenue from STS-116 and STS-118 under the CMC with Lockheed Martin of $4.3million due to increased mission activities and change orders due to the launchof STS-116 in December 2006 and the scheduled launch of STS-118 in June 2007

·                  Decreasein revenue from External Stowage Platform 2 (“ESP2”) of $0.1 million due to thelaunch of STS-114 in July 2005

·                  Decreasein revenue from STS-121 of $1.1 million due to the launch of STS-121 in July2006

·                  Othercontract revenue decrease of $0.2 million

Revenue from ourAstrotech business unit decreased by $2.1 million for the three months endedDecember 31, 2006 as compared to the three month period ending December 31,2005. The following summarizes significant items that affected the three monthsended December 31, 2006 as compared to the same period ended December 31, 2005:

·                  Increasein revenue of $0.1 million from a new contract to design a satellite processingfacility

·                  Increasein revenue of $0.5 million due to three different satellites in our Floridafacility for processing for all of or portions of the three month period endingDecember 31, 2006. Whereas, for the same period last fiscal year, there wereonly two satellites in our Florida facility

·                  Decreasein revenue of $0.9 million due to the recognition of one floater mission underour Lockheed Martin guaranteed missions during the three month period endingDecember 31, 2005

·                  Decreasein revenue of $2.6 million due to the reduction of revenue on our LockheedMartin guaranteed missions contract for two future missions that will beprocessed for Boeing on Atlas launch vehicles partially offset by one Atlasmission currently being processed at the Titusville facility that wascontracted directly with Boeing

Revenue from ourSGS business unit increased by $0.6 million for the period ending December 31,2006 as compared to the same period ending December 31, 2005. The followingsummarizes the significant items that affected the quarter ended December 31,2006 as compared to the quarter ended December 31, 2005:

·                  Increasein revenue from the sale of our Destiny module to the Seattle Space Museum inthe amount of $0.3 million during the three month period ending December 31,2006

·                  Increasein revenue from a new contract with USA for support of the ConstellationProgram of $0.3 million

Cost of Revenue. Cost of revenue forthe three months ended December 31, 2006 decreased by 31% to approximately$11.1 million, as compared to $16.1 million for the same period of the prioryear (in millions).

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|                               | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **  | ** ** |
|-------------------------------|------------|----------------------------------|------------|------------|------------|-------------|------------|
| ** **                    | ** ** | **December 31,**            | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **                    | ** ** | **2006**                         | ** ** | **2005**   | ** ** | **Change**  | ** ** | **Change** | ** ** |
| SPACEHAB Flight  Services     |       | $                                | 7.5        |       | $          | 12.8        |       | $ | (5.3 | ) | (41 | %) |
| Astrotech Space  Operations   |       | 2.2                              |       | 2.0        |       | 0.2         |       | 10 | % |
| SPACEHAB  Government Services |       | 1.3                              |       | 1.1        |       | 0.2         |       | 18 | % |
| Other                         |       | 0.1                              |       | 0.2        |       | (0.1        | )          | (50 | %) |
|                          |       | $                                | 11.1       |       | $          | 16.1        |       | $ | (5.0 | ) | (31 | %) |

 

The following summarizessignificant items that affected the three months ended December 31, 2006 ascompared to the same period ended December 31, 2005 for SFS:

·                  Increasein cost of revenue, other than direct depreciation cost of revenue, for STS-116and STS-118 under the CMC with Lockheed Martin of $2.1 million due to increasedmission activities due to the launch of STS-116 in December 2006 and thescheduled launch of STS-118 in June 2007

·                  Decreasein cost of revenue of $0.9 million for STS-121 due to the launch of STS-121 inJuly 2006

·                  Decreasein cost of revenue of $6.3 million due to the write-down of our flight assetduring the three month period ending December 31, 2005

·                  Othercost of revenue decrease of $0.1 million

The increase incost of revenue of $0.2 million in our Astrotech business unit is primarily dueto the startup of our contract to design a new satellite processing facilityand an increase in other mission specific expenses due to the mission activityduring the period.

The increase incost of revenue of $0.2 million in our SGS business unit is primarily due tothe startup of our contract with USA on the Constellation Program, andincreased contract activities on the PI&C contract.

OperatingExpenses. Operating expenses increased to $2.9 million forthe three months ended December 31, 2006 as compared to approximately $2.8million for the three months ended December 31, 2005. The following summarizesthe significant differences between the two periods:

·                  Legalexpenses increased by $0.1 million. This increase is mainly due to the claimsagainst NASA for the loss of the RDM

Interest Expense.Interest expense was approximately $1.1 million for the three months endedDecember 31, 2006 as compared to approximately $1.9 million for the threemonths ended December 31, 2005. The decrease in interest expense is primarilydue to the conversion of $52.9 million of 8% convertible subordinated notes dueOctober 2007 into 5.5% senior convertible notes due October 2010 and thewrite-off of $0.6 million of debt placement costs due to the conversion of thenotes during the three month period ended December 31, 2005.

Interest and OtherIncome. Interest income is earned on our mortgage receivabledue to the sale of our payload processing facility in our SFS segment.Additionally the gain on the sale of The Space Store, LLC of $189,000 wasrecorded as other increase for the period ended December 31, 2006.

Income Taxes.Based on our projected effective tax rate for fiscal year 2007 and 2006, werecorded a tax benefit of $69,000 for the three month period ending December31, 2006 and no tax expense for the three month period ending December 31,2005.

Net Loss.Net loss for the three months ended December 31, 2006 was approximately $1.8million or $0.14 per share as compared to net loss of approximately $8.9million or $0.70 per share for the three months ended December 31, 2005.

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*For thesix months ended December 31, 2006 as compared to the six months ended December31, 2005.*

Revenue.Revenue increased approximately 16% to $27.7 million for the six months endedDecember 31, 2006 as compared to $23.8 million for the six months endedDecember 31, 2005 (in millions).

|                               | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** | ** **  | ** ** |
|-------------------------------|------------|--------------------------------|------------|------------|------------|-------------|------------|
| ** **                    | ** ** | **December 31,**          | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **                    | ** ** | **2006**                       | ** ** | **2005**   | ** ** | **Change**  | ** ** | **Change** | ** ** |
| SPACEHAB Flight  Services     |       | $                              | 20.0       |       | $          | 15.5        |       | $ | 4.5 |   | 29 | % |
| Astrotech Space  Operations   |       | 4.2                            |       | 5.3        |       | (1.1        | )          | (26 | %) |
| SPACEHAB  Government Services |       | 3.3                            |       | 2.5        |       | 0.8         |       | 32 | % |
| Other                         |       | 0.2                            |       | 0.5        |       | (0.3        | )          | (60 | %) |
|                          |       | $                              | 27.7       |       | $          | 23.8        |       | $ | 3.9 |   | 16 | % |

 

Revenue from our SFSbusiness unit increased by $4.5 million for the period ending December 31, 2006as compared to the same period ending December 31, 2005. The followingsummarizes the significant items that affected the period ended December 31,2006 as compared to the period ended December 31, 2005:

·                  Increasein revenue from STS-116 and STS-118 under the CMC with Lockheed Martin of $8.1million due to increased mission activities and change orders due to the launchof STS-116 in December 2006 and the scheduled launch of STS-118 in June 2007

·                  Decreasein revenue from ESP2 of $0.7 million due to the launch of STS-114 in July 2005

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

·                  Decreasein revenue from STS-121 of $2.1 million due to the launch of STS-121 in July2006

·                  Othercontract revenue decrease of $0.4 million

Revenue from our Astrotech business unitdecreased by $1.1 million for the six months ended December 31, 2006 ascompared to the six month period ending December 31, 2005. The followingsummarizes significant items that affected the six months ended December 31,2006 as compared to the same period ended December 31, 2005:

·                  Increasein revenue of $0.7 million from a new contract to design a satellite processingfacility

·                  Astrotechsupported two satellite launches at its Sea Launch facility during the periodending December 31, 2006 which resulted in an increase in revenue of $0.5million. In the period ending December 31, 2005, Astrotech  supported one satellite launch at its SeaLaunch facility

·                  Increasein revenue of $0.4 million due to three different satellites in our Floridafacility for all of or portions of the six month period ending December 31,2006.  Whereas, for the same period lastfiscal year, there were only two satellites in our Florida facility

·                  Decreasein revenue of $0.9 million due to us recognizing one additional guaranteedmission under our Lockheed Martin contract for the period ending December 31,2005

·                  Decreasein revenue of $2.6 million due to the reduction of revenue on our LockheedMartin guaranteed missions contract for two future missions that will beprocessed for Boeing on Atlas launch vehicles partially offset by one Atlasmission currently being processed at the Titusville facility that wascontracted directly with Boeing

Revenue from ourSGS business unit increased by $0.8 million for the period ending December 31,2006 as compared to the same period ending December 31, 2005. The following summarizesthe significant items that affected the period ended December 31, 2006 ascompared to the period ended December 31, 2005:

·                  Increasein revenue from our subcontract with ARES on the PI&C contract of $0.2million. This increase is due to an increase of contract activities during theperiod as compared to the same period last year

·                  Increasein revenue from a new contract with USA for support of the ConstellationProgram of $0.3 million

·                  Increasein revenue from the sale of our Destiny module to the Seattle Space Museum inthe amount of $0.3 million during the six month period ending December 31, 2006

Cost of Revenue.Cost of revenue for the six months ended December 31, 2006 decreased by 16% toapproximately $22.2 million, as compared to $26.3 million for the same periodof the prior year (in millions).

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|                               | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** | ** **  | ** ** |
|-------------------------------|------------|--------------------------------|------------|------------|------------|-------------|------------|
| ** **                    | ** ** | **December 31,**          | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **                    | ** ** | **2006**                       | ** ** | **2005**   | ** ** | **Change**  | ** ** | **Change** | ** ** |
| SPACEHAB Flight  Services     |       | $                              | 14.8       |       | $          | 19.8        |       | $ | (5.0 | ) | (25 | %) |
| Astrotech Space  Operations   |       | 4.8                            |       | 4.0        |       | 0.8         |       | 20 | % |
| SPACEHAB  Government Services |       | 2.5                            |       | 2.2        |       | 0.3         |       | 14 | % |
| Other                         |       | 0.1                            |       | 0.3        |       | (0.2        | )          | (67 | %) |
|                          |       | $                              | 22.2       |       | $          | 26.3        |       | $ | 4.1 |   | (16 | %) |

 

The following summarizessignificant items that affected the six months ended December 31, 2006 ascompared to the same period ended December 31, 2005 for SFS:

·                  Increasein cost of revenue, other than direct depreciation cost of revenue, for STS-116and STS-118 under the CMC with Lockheed Martin of $4.1 million due to increasedmission activities due to the launch of STS-116 in December 2006 and thescheduled launch of STS-118 in June 2007

·                  Increasein depreciation expense of $0.4 million due to the change of depreciable livesof the flight assets from June 30, 2016 to December 31, 2010 during the secondquarter of fiscal year 2006 to align with the end of the space shuttle life

·                  Decreasein cost of revenue of $6.3 million due to the write-down of our flight assetsduring the six month period ending December 31, 2005

·                  Decreasein cost of revenue of $1.8 million for STS-121 due to the launch of STS-121 inJuly 2006

·                  Decreasein cost of revenue of $0.5 million for ESP2 due to the launch of STS-114 inJuly 2005

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

·                  Othercost of revenue decrease of $0.7 million partially due to the completion of theJETIS contract during the six month period ending December 31, 2005

The increase in cost of revenue of $0.8million in our Astrotech business unit is primarily due to the startup of ourcontract to design a new satellite processing facility and an increase in othermission specific expenses due to the mission activity during the period.

The increase incost of revenue of $0.3 million in our SGS business unit is primarily due toincreased contract activities for the PI&C subcontract and the startup ofour contract with USA on the Constellation Program.

OperatingExpenses. Operating expenses increased to $5.7 million forthe six months ended December 31, 2006 as compared to approximately $5.2million for the six months ended December 31, 2005. The following summarizesthe significant differences between the two periods:

·                  Legalexpenses increased by $0.2 million. This increase is mainly due to the claimsagainst NASA for the loss of the RDM

·                  Researchand development costs increased by approximately $0.1 million. This increase isdue to increased efforts on the Micro Electro Mechanical System program

·                  SFSoperating expenses increased by approximately $0.2 million. This increase isdue to expenses shifting from cost of revenue to operating expenses due to thecompletion of the CE&R contract during the period ending December 31, 2005

Interest Expense.Interest expense was approximately $2.2 million for the six months ended December31, 2006 as compared to approximately $3.3 million for the six months endedDecember 31, 2005. The decrease in interest expense is primarily due to theconversion of $52.9 million of 8% convertible subordinated notes due October2007 into 5.5% senior convertible notes due October 2010 and the write-off of$0.6 million of debt placement costs due to conversion of the notes during thesix month period ending December 31, 2005.

Interest and OtherIncome. Interest income is earned on our mortgage receivabledue to the sale of our payload processing facility in our SFS segment. Interestand other income was not significant for the six months ended December 31, 2006and 2005. Additionally the gain on the sale of The Space Store, LLC of $189,000was recorded as other increase for the period ended December 31, 2006.

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Income Taxes.Based on our projected effective tax rate for fiscal year 2007 and 2006, werecorded a tax benefit of $69,000 for the six month period ending December 31,2006 and $32,000 in tax expense for the six month period ending December 31,2005.

Net Loss.Net loss for the six months ended December 31, 2006 was approximately $1.9million or $0.15 per share as compared to net loss of approximately $10.8million or $0.85 per share for the six months ended December 31, 2005.

### **Liquidityand Capital Resources**

Our primary sourceof liquidity is cash flow from operations. The principal uses of cash flow thataffect our liquidity position are operational expenditures, including leases oncertain space assets. In October 2007 our $10.3 million of subordinated convertiblenotes mature. Although the Company has cash on hand as of December 31, 2006 of$11.4 million, $6.0 million of that cash is restricted to performance under along term contract. In addition, the Company’s only remaining contractutilizing our space shuttle configured cargo module is expected to be completedin July 2007.

Our $5.0 millionbank revolving line of credit expired on February 11, 2007 and we elected notto renew or replace the facility at this time, but the Company is pursuingalternative credit sources. Our ability to redeem our maturing debt and toexecute new business initiatives will be dependent upon our ability tore-negotiate our leases for our space assets; attract and implement newbusiness initiatives; and restructure our maturing debt.

*CashFlows From Operating Activities.*Cash provided by (used in)operations for the six months ended December 31, 2006 and 2005 was $6.8 million and ($0.2) million, respectively.The significant items affecting the differences in cash flows from operatingactivities for the six months ended December 31, 2006 as compared to the sixmonths ended December 31, 2005 are discussed below:

·                  Netloss for the six months ended December 31,2006 was $1.9 million as compared to net loss for the six months ended December 31, 2005 of $10.8 million. Included inthe net loss for the six months ended December 31, 2005 is $6.3 millionrecognized as a result of the write-down of our flight unit three asset

·                  Depreciationand amortization for the six months ended December31, 2006 was $3.2 million as compared to $2.9 million for the six monthsperiod ended December 31, 2005 mainly dueto the change in estimated depreciable lives of our flight assets to align withNASA’s current launch planning manifest in the second quarter of fiscal year2005

·                  Forthe six months ended December 31, 2006,changes in assets used cash from operations of $3.4 million resulted primarilyfrom an increase in accounts receivable and prepaid expenses. For the sixmonths ended December 31, 2005, changes inassets provided cash of $2.8 million

·                  Forthe six months ended December 31, 2005, we recorded a non-cash charge of $0.6million due to the acceleration of debt placement costs due to the conversionof $52.9 million of 8% convertible subordinated notes due October 2007 into5.5% senior convertible notes due October 2010

·                  Changesin liabilities for the six months ended December31, 2006 provided cash from operations of $8.9 million. This change wasdue primarily to the increases in accounts payable, accrued expenses, and otherliabilities of $2.9 million and an increase of $6.0 million in advances on ourconstruction contract. The increase in advances on the construction contractwas primarily due to receiving the initial milestone payment on our contractwith a governmental agency to design and build a new processing facility. Forthe six months ended December 31, 2005,changes in liabilities consumed cash from operations of $2.2 million. Thischange in liabilities was primarily due to the decreases in accounts payableand accrued expenses of $2.2 million

*CashFlows From Investing Activities*. For the six months endedDecember 31, 2006 and 2005, cash flows used in investing activities were $6.1million and $2.9 million, respectively. The significant items affecting thedifferences in cash flows from investing activities for the six months endedDecember 31, 2006 as compared to the six months ended December 31, 2005 arediscussed below:

·                  Purchasesof property and equipment of $0.1 million for the six months ended December 31, 2006 as compared to $1.3 millionfor the six months ended December 31,2005. This difference was primarily due to capital expenditures for ourAstrotech SPF in Florida for ongoing capital improvements and to replace flightassets lost during the *Columbia*accident for our SFS business unit during the period ended December 31, 2005

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·                  Forthe six months ended December 31, 2006 cash flows from investing activitiesincluded an increase in restricted cash of $6.0 million as compared to anincrease in restricted cash of $1.6 million for the six months ended December31, 2005

*CashFlows From Financing Activities.*For the six months ended December 31, 2006 and 2005, cash flows used in financing activities were $1.6million and $2.9 million, respectively. The significant items affecting thedifferences in cash flows from financing activities for the six months endedDecember 31, 2006 as compared to the six months ended December 31, 2005 arediscussed below:

·                  Forthe six months ended December 31, 2006 we had net payments on our Astrotechpayload processing facility of $1.6 million as compared to $1.0 million for thesix months ended December 31, 2005. We have completely paid this mortgage as ofDecember 31, 2006

·                  Forthe six months ended December 31, 2005 we incurred $1.9 million of financingcosts related to the exchange of our 8% convertible subordinated notes

On March 25, 2003the Board of Directors authorized us to repurchase up to $1.0 million of ouroutstanding common stock at market prices. Any purchases under our stockrepurchase program may be made from time to time in the open market throughblock trades or otherwise in accordance with applicable regulations of the SEC.As of December 31, 2006 we had repurchased 116,100 shares at a cost of $117,320under the program. We will continue to evaluate the stock repurchase programand the funds authorized for the program, which represents an average cost of$1.01 per share. This stock repurchase program remains available for purchasesof our stock.

Managementcontinues to focus its efforts on improving our overall liquidity throughidentifying new business opportunities within the areas of our corecompetencies, reducing operating expenses, and limiting cash commitments forfuture capital investments and new asset development. Additionally, managementcontinues to evaluate operating expenses in an effort to reduce or eliminatecosts not required to effectively operate the Company. On January 18, 2007, weannounced a reduction in staff of approximately 36 positions or 16% of ourworkforce. This reduction resulted from the completion of space shuttle missionSTS-116 in December 2006, leaving the Company with only the June 2007 spaceshuttle mission STS-118 under contract. We expect this reduction in force toresult in savings of $3.9 million annually. Planned cash expendituresassociated with the restructuring are estimated at $450,000.

Even with costsavings from reduction in staff and potential future staff reductions if spaceshuttle missions beyond STS-118 cannot be obtained, our ability to redeem ourmaturing debt and to execute new business initiatives will be dependent uponour ability to re-negotiate our leases for our space assets; attract andimplement new business initiatives; and restructure our maturing debt.

Our contractualobligations as of December 31, 2006 are asfollows (in thousands):
| ** **                         | ** ** | **At**       | ** ** | **Remaining**        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** |
|------------------------------------|------------|--------------|------------|----------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|
| ** **                         | ** ** | **December** | ** ** | **in**               | ** ** | **Fiscal** | ** ** | **Fiscal** | ** ** | **Fiscal** | ** ** | **Fiscal** | ** ** | **Fiscal** | ** ** | ** **     | ** ** |
| ** **                         | ** ** | **31,**      | ** ** | **Fiscal Year** | ** ** | **Year**   | ** ** | **Year**   | ** ** | **Year**   | ** ** | **Year**   | ** ** | **Year**   | ** ** | ** **     | ** ** |
| **Contractual Obligations**   | ** ** | **2006**     | ** ** | **2007**             | ** ** | **2008**   | ** ** | **2009**   | ** ** | **2010**   | ** ** | **2011**   | ** ** | **2012**   | ** ** | **Thereafter** | ** ** |
| Long-term Debt                     |       | $            | 63,250     |                 | $          | —     |       | $          | 10,306     |       | $          | —     |       | $          | —     |           | $          | 52,944 |   | $ | — |   | $ | — |   |
| Leases on ICC/VCC Assets1          |       | 9,903        |       | 1,845                |       | 3,932      |       | 4,126      |       | —     |       | —     |       | —     |       | —         |       |
| Other Operating Leases2            |       | 12,128       |       | 1,034                |       | 1,254      |       | 951        |       | 962        |       | 750        |       | 529        |       | 6,649          |       |
| Total Contractual Cash Obligations |       | $            | 85,281     |                 | $          | 2,879      |       | $          | 15,492     |       | $          | 5,077      |       | $          | 962        |           | $          | 53,694 |   | $ | 529 |   | $ | 6,649 |   |
| (excluding interest payments)      |       |         |       |                 |       |       |       |       |       |       |       |       |       |       |       |           |       |

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1                     Infiscal year 2006 we exercised a four-year option on our ICC/VCC leases withAstrium. We have returned the ICC/VCC assets to Astrium GmbH and arere-negotiating the terms of the lease obligations.

2                     Infiscal year 2005 we executed sale leaseback transactions for our corporate andSPPF buildings. For the remainder of fiscal year 2007 we expect to receive netpayments of $0.3 million for subleases. For fiscal years 2008 and 2009 weexpect to receive net payments of approximately $0.4 million and $0.1 million,respectively for subleases.

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As of December 31, 2006 we had a contract backlog forcalendar year 2007 of $43.4 million, which if executed in accordance withcurrent expectations, which are subject to significant risk factors (see Risksin our Form 10-K filed for our fiscal year ended June 30, 2006), is expected toyield the following cash inflows and outflows:
| ** **                                 | ** ** | ** **    | ** ** | **(Dollars in thousands)** | ** ** | ** **    | ** ** |
|--------------------------------------------|------------|---------------|------------|--------------------------------------|------------|---------------|------------|
| ** **                                 | ** ** | **Quarter**   | ** ** | **Quarter**                          | ** ** | **Quarter**   | ** ** | **Quarter** | ** ** |
| ** **                                 | ** ** | **Ending**    | ** ** | **Ending**                           | ** ** | **Ending**    | ** ** | **Ending** | ** ** |
| ** **                                 | ** ** | **3/31/2007** | ** ** | **6/30/2007**                        | ** ** | **9/30/2007** | ** ** | **12/31/2007** | ** ** |
| Cash receipts  expected on contracted work |       | 17,063        |       | 12,844                               |       | 8,358         |       | 5,151 |   |
|                                       |       |          |       |                                 |       |          |       |   |   |
| Expected cash  cost of operations          |       | (16,516)      |       | (7,950)                              |       | (7,130)       |       | (6,138) |   |
|                                       |       |          |       |                                 |       |          |       |   |   |
| Astrium ICC/VCC  leases                    |       | (3,704)       |       | —                               |       | —        |       | — |   |
|                                       |       |          |       |                                 |       |          |       |   |   |
| Interest and  debt service                 |       | —        |       | (1,868)                              |       | —        |       | (12,174) |   |
|                                       |       |          |       |                                 |       |          |       |   |   |
| Net change in  cash                        |       | (3,157)       |       | 3,026                                |       | 1,228         |       | (13,161) |   |
|                                       |       |          |       |                                 |       |          |       |   |   |
| Projected ending cash  balance             |       | 2,328         |       | 5,354                                |       | 6,582         |       | (6,579) |   |

### **Off-Balance SheetArrangements**

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

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**ITEM 3.  QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

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

# **ITEM 4.  CONTROLSAND PROCEDURES**

Under the supervision and with the participation of our management,including our principal executive officer and principal financial officer, wehave evaluated the effectiveness of the design and operation of our disclosurecontrols and procedures as of the end of the period covered by this quarterlyreport, and, based on our evaluation, our principal executive officer andprincipal financial officer have concluded that these controls and proceduresare effective. There have been no changes in our internal control overfinancial reporting that occurred during our last fiscal quarter that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

Disclosure controls and procedures are our controls and other proceduresthat are designed to ensure that information required to be disclosed by us inthe reports that we file or submit under the Exchange Act is recorded,processed, summarized, and reported within the time periods specified in theSEC’s rules and forms. Disclosure controls and procedures include, withoutlimitation, controls and procedures designed to ensure that informationrequired to be disclosed by us in the reports that we file or submit under theExchange Act is accumulated and communicated to our management, including ourprincipal executive officer and principal financial officer, as appropriate toallow timely decisions regarding required disclosure.

# **PART II: OTHER INFORMATION**

# **ITEM 1. LEGAL PROCEEDINGS**

*ContractClaim.*In January 2004 we filed a formal proceeding withNASA seeking indemnification under our Research and Logistics Mission Supportcontract in the amount of $87.7 million for the value of our RDM and relatedequipment that was destroyed during the Space Shuttle *Columbia*tragedy. NASA responded to thiscontract claim on October 5, 2004. NASA’s determination claims that itsliability is limited to $8.0 million. We received payment from NASA of $8.2million, which included $0.2 million of interest, in October 2004. In January2005 we filed an appeal of NASA’s decision to deny its claim forindemnification in excess of $8.0 million with the Armed Services Board ofContract Appeals. On July 12, 2006 the court denied NASA’s motion for summaryjudgment in the matter and directed the parties to proceed with discovery. NASAand the Company have proposed a discovery plan that would lead to a hearing bythe court in July 2008. In accordance with that plan, the parties havecommitted to a non-binding settlement conference on a to-be-determined date inFebruary 2007.

*TortClaim.*On November 8, 2004 we filed a second claim withNASA seeking damages of $79.7 million under the federal tort claims act for theloss of our RDM resulting from NASA’s alleged negligence leading to thedestruction of the space shuttle *Columbia* and the loss of ourmodule. The claim represents our loss of $87.7 million less the $8.0 millionrecovered from NASA. NASA failed to respond to this claim. On February 3, 2006we filed a complaint in the Federal District Court for the Southern District ofTexas seeking damages of $79.7 million under the federal tort claims act. OnJune 30, 2006 the court granted a motion by the Department of Justice to staythe case until resolution of the Company’s appeal (the Contract Claim) beforethe Armed Services Board of Contract Appeals.

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

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# **ITEM1A.  RISK FACTORS**

Item 1A of Part Iof our Annual Report on Form 10-K for the fiscal year ended June 30, 2006includes a detailed discussion of the risk factors that could materially affectour business, financial condition or future results of operations. Theinformation presented below is a discussion of the material changes and/orupdates to these risk factors and should be read in conjunction with the riskfactors and information disclosed in the Form 10-K.

As previouslydiscussed in our fiscal year ended 2006 Form 10-K, the Company has identified arisk that our financial condition and results of operations could be materiallyadversely affected if our flight assets are not utilized beyond the singleremaining mission as of December 31, 2006, in which our single module iscurrently scheduled for a June 2007 launch on the space shuttle.

# **ITEM 2.  UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

During the sixmonths ended December 31, 2006 we did not issue any unregistered securities.

# **ITEM 3.  DEFAULTSUPON SENIOR SECURITIES**

During the sixmonths ended December 31, 2006 we did not have any defaults upon seniorsecurities.

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

The Annual Meetingof Shareholders was held on December 12, 2006. A quorum of at least one-thirdof the issued and outstanding Common Stock and Series B Senior ConvertiblePreferred Stock of the Company, voting together, was present and voting.

(a)          At the Annual Meeting ofShareholders, candidates for the Board of Directors stood for and were dulyelected, with each nominee receiving a vote of at least 9,924,169 votes.

The directors elected bythe holders of the Common Stock are:
| ** **                | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|---------------------------|------------|------------|------------|--------------|------------|
| Dr. Edward E.  David, Jr. |       | 10,090,341 |       | 433,494      |       |
| Myron J. Goins            |       | 10,096,394 |       | 427,441      |       |
| Michael E.  Kearney       |       | 10,095,959 |       | 427,876      |       |
| Roscoe M. Moore,  III     |       | 10,028,915 |       | 494,920      |       |
| Thomas B.  Pickens, III   |       | 9,924,169  |       | 599,666      |       |
| Barry A. Williamson       |       | 9,955,923  |       | 567,912      |       |

The director elected by the holder of the Series BSenior Convertible Preferred Stock is:
| ** **              | ** ** | **For**   | ** ** | **Withheld** | ** ** |
|-------------------------|------------|-----------|------------|--------------|------------|
| Dr. Stefan Fritz  Graul |       | 1,333,334 |       | 0            |       |

The following matter wasbrought to a vote of the shareholders at the meeting:

(b)         The ratification of theappointment of Grant Thornton LLP as the Company’s independent auditors forfiscal year 2006.
| ** **       | ** ** | **Number of Votes** | ** ** |
|------------------|------------|-------------------------------|------------|
| For              |       | 10,187,982                    |       |
| Against          |       | 58,006                        |       |
| Abstain          |       | 277,847                       |       |
| Broker Non-Votes |       | 0                             |       |

 

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**ITEM6.  EXHIBITS**

The followingexhibits are filed herewith:
| Exhibit No. | ** ** | **Description**                                                                                              |
|-------------|------------|--------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                         |
| 10.1        |       | Separation Agreement and Mutual Release between  SPACEHAB, Inc. and Michael E. Bain.                         |
|        |       |                                                                                                         |
| 10.2        |       | Separation Agreement and Mutual Release between  SPACEHAB, Inc. and E. Michael Chewning.                     |
|        |       |                                                                                                         |
| 31.1        |       | Certification of Chief Executive Officer pursuant to  Rule 13a-14(a) of the Securities Exchange Act of 1934. |
|        |       |                                                                                                         |
| 31.2        |       | Certification of Chief Financial Officer pursuant to  Rule 13a-14(a) of the Securities Exchange Act of 1934. |
|        |       |                                                                                                         |
| 32          |       | Certification pursuant to Rule 13a-14(b) of the  Securities and Exchange Act of 1934.                        |

 

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**SIGNATURE**

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

 
|                          |   | SPACEHAB, INCORPORATED                            |
|--------------------------|--------|---------------------------------------------------|
|                     |   |                                              |
|                     |   |                                              |
|                     |   |                                              |
| Date: February  13, 2007 |   |  /s/Thomas B.  Pickens, III                  |
|                     |   | Thomas B. Pickens, III                            |
|                     |   | President and Chief Executive Officer             |
|                     |   |                                              |
|                     |   |                                              |
|                     |   |                                              |
|                     |   |  /s/Brian K.  Harrington                     |
|                     |   | Brian K. Harrington                               |
|                     |   | Senior Vice President and Chief Financial Officer |

 

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