** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-Q**

** **

**(MarkOne)**

 

| **x**      | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**  |
|------------|------------|----------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                     |
| ** ** | ** ** | **For the quarterly period ended December 31,  2007**                                               |
|       |       |                                                                                                     |
| ** ** | ** ** | **OR**                                                                                                   |
| ** ** | ** ** | ** **                                                                                               |
| **o**      | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.** |

 

**For the transition period from               to             **

 

**Commission File Number: 0-27206**

 

**SPACEHAB,Incorporated**

(Exact name of registrant asspecified in this charter)

 

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

 

**12130 Highway 3, Building 1**

**Webster, Texas 77598-1504**

(Addressof principal executive offices and zip code)

 

**(713) 558-5000**

(Registrant’stelephone number, including area code)

 

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

 

Yes  x No  o

 

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

 

Large accelerated filer  o                                                   Acceleratedfiler  o                                                   Non-acceleratedfiler  x

 

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

 

Yes  o No  x

 

As of February 14,2008 there were 13,557,263 shares of the registrant’s common stock outstanding.

** **

** **

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** **

**SPACEHAB,INCORPORATED AND SUBSIDIARIES**

**DECEMBER31, 2007 QUARTERLY REPORT ON FORM 10-Q**

** **

**TABLEOF CONTENTS**

** **
| ** **                                                                                           | **Page** |
|------------------------------------------------------------------------------------------------------|----------|
| DEFINITIONS                                                                                          | 2        |
|                                                                                                 |     |
| **PART I: FINANCIAL INFORMATION**                                                               | 3        |
|                                                                                                 |     |
| ITEM  1. Unaudited Condensed Consolidated  Financial Statements                                      | 3        |
|                                                                                                 |     |
| ITEM 2.  Management’s Discussion and Analysis  of Financial Condition and Results of Operations | 17       |
|                                                                                                 |     |
| ITEM 3. Quantitative and Qualitative Disclosures  about Market Risk                                  | 27       |
|                                                                                                 |     |
| ITEM 4. Controls and Procedures                                                                      | 27       |
|                                                                                                 |     |
| **PART II: OTHER  INFORMATION**                                                                 | 28       |
|                                                                                                 |     |
| ITEM  1. LEGAL PROCEEDINGS                                                                           | 28       |
|                                                                                                 |     |
| ITEM  1a. risk factors                                                                               | 28       |
|                                                                                                 |     |
| ITEM 2. Unregistered Sales of Equity Securities and  Use of Proceeds                                 | 28       |
|                                                                                                 |     |
| ITEM 3. Defaults Upon Senior Securities                                                              | 28       |
|                                                                                                 |     |
| ITEM 4. SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS                                         | 28       |
|                                                                                                 |     |
| ITEM  6. EXHIBITs                                                                                    | 29       |

 

1

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# ** **

# **DEFINITIONS**

# ** **

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

 
| 1994 Plan       |   | 1994 Stock Incentive Plan                                            |
|-----------------|--------|----------------------------------------------------------------------|
| ARCTUS          |   | Advanced Research and Conventional Technology Utilization Spacecraft |
| Astrium         |   | Astrium GmbH                                                         |
| Astrotech       |   | Astrotech Space Operations                                           |
| Boeing          |   | The Boeing Company                                                   |
| CE&R        |   | Concept Exploration and Refinement                                   |
| CMC             |   | Cargo Mission Contract                                               |
| COTS            |   | Commercial Orbital Transportation Services                           |
| 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                                          |
| IT              |   | Information Technology                                               |
| Lloyd’s    |   | Lloyd’s of London                                               |
| Lockheed Martin |   | Lockheed Martin Corporation                                          |
| MMS             |   | Mini Mass Spectrometer                                               |
| 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                          |
| SES             |   | SPACEHAB Engineering Services                                        |
| SFS             |   | SPACEHAB Flight Services                                             |
| SGS             |   | SPACEHAB Government Services                                         |
| SMI             |   | Space Media, Inc.                                               |
| SMI Plan        |   | Space Media, Inc. Stock Option Plan                             |
| SPF             |   | Spacecraft Processing Facility                                       |
| VAFB            |   | Vandenberg Air Force Base                                            |
| VCC             |   | Vertical Cargo Carrier                                               |

 

2

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# **PART I:  FINANCIAL INFORMATION**

# ** **

# **ITEM1.  UNAUDITED CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

# ** **

**SPACEHAB,INCORPORATED AND SUBSIDIARIES**

**UnauditedCondensed Consolidated Balance Sheets**

(In thousands,except share data)

 
|                                                                                                                                                                                   | ** ** | **December 31,** | ** ** | **June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------------|------------|
|                                                                                                                                                                                   | ** ** | **2007**              | ** ** | **2007**          | ** ** |
|                                                                                                                                                                                   | ** ** | **(unaudited)**       | ** ** | **restated**      | ** ** |
| ASSETS                                                                                                                                                                                 | ** ** | ** **            | ** ** | ** **        | ** ** |
| Cash and cash  equivalents                                                                                                                                                             |       | $                     | 341        |              | $          | 9,724 |   |
| Accounts  receivable, net                                                                                                                                                              |       | 4,249                 |       | 8,224             |       |
| Inventory                                                                                                                                                                              |       | 695                   |       | 695               |       |
| Short term note  receivable, net                                                                                                                                                       |       | 103                   |       | 95                |       |
| Prepaid expenses  and other current assets                                                                                                                                             |       | 731                   |       | 906               |       |
| Total current  assets                                                                                                                                                                  |       | 6,119                 |       | 19,644            |       |
| Property and  equipment, net of accumulated depreciation and amortization of $68,402 and  $53,546 respectively                                                                         |       | 42,506                |       | 43,884            |       |
| Restricted cash                                                                                                                                                                        |       | 10,189                |       | 6,282             |       |
| Deferred  financing costs, net                                                                                                                                                         |       | 120                   |       | 1,596             |       |
| Long term note  receivable, net                                                                                                                                                        |       | 768                   |       | 178               |       |
| Other assets,  net                                                                                                                                                                     |       | 548                   |       | 891               |       |
| Total assets                                                                                                                                                                           |       | $                     | 60,250     |              | $          | 72,475 |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                              | ** ** | ** **            | ** ** | ** **        | ** ** |
| Convertible 8%  subordinated notes payable                                                                                                                                             |       | $                     | —     |              | $          | 10,306 |   |
| Accounts payable                                                                                                                                                                       |       | 4,855                 |       | 1,494             |       |
| Accounts  payable-Astrium                                                                                                                                                              |       | 1,580                 |       | 2,955             |       |
| Accrued interest                                                                                                                                                                       |       | 81                    |       | 789               |       |
| Accrued expenses                                                                                                                                                                       |       | 1,380                 |       | 2,056             |       |
| Accrued  subcontracting services                                                                                                                                                       |       | —                |       | 3,669             |       |
| Deferred gains  on sale of buildings                                                                                                                                                   |       | 221                   |       | 221               |       |
| Customer  Deposits                                                                                                                                                                     |       | —                |       | 3,106             |       |
| Deferred  revenue, current portion                                                                                                                                                     |       | 524                   |       | 1,153             |       |
| Total current  liabilities                                                                                                                                                             |       | 8,641                 |       | 25,749            |       |
| Accrued contract  cost and other                                                                                                                                                       |       | 10                    |       | 39                |       |
| Advances on  construction contract                                                                                                                                                     |       | 7,351                 |       | 5,722             |       |
| Deferred gains  on sale of buildings                                                                                                                                                   |       | 1,041                 |       | 1,152             |       |
| Senior  convertible 5.5% notes payable                                                                                                                                                 |       | 6,861                 |       | 52,944            |       |
| Long term  deferred compensation                                                                                                                                                       |       | 145                   |       | —            |       |
| Total  liabilities                                                                                                                                                                     |       | 24,049                |       | 85,606            |       |
| Commitments and  contingencies                                                                                                                                                         |       | —                |       | —            |       |
| Stockholders’  equity                                                                                                                                                             |       |                  |       |              |       |
| Preferred stock,  no par value, authorized 2,500,000 shares and 2,500,000 shares, respectively  (1,333,334 shares, liquidation preference of $12,000 issued as of  June 30, 2007) |       | —                |       | 11,892            |       |
| Common stock,  75,000,000 and 7,000,000 shares authorized, respectively; 13,557,263 and  1,308,417 shares issued, respectively                                                         |       | 182,390               |       | 84,122            |       |
| Treasury stock,  11,610 and 11,610 shares, respectively at cost                                                                                                                        |       | (117                  | )          | (117              | )          |
| Additional  paid-in capital                                                                                                                                                            |       | 544                   |       | 544               |       |
| Accumulated  (deficit)                                                                                                                                                                 |       | (146,616              | )          | (109,572          | )          |
| Total  stockholders’ equity (deficit)                                                                                                                                             |       | 36,201                |       | (13,131           | )          |
| Total  liabilities and stockholders’ equity                                                                                                                                       |       | $                     | 60,250     |              | $          | 72,475 |   |

 

See accompanying notes to unaudited condensedconsolidated financial statements.

 

3

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**SPACEHAB, INCORPORATED AND SUBSIDIARIES**

 

**UnauditedCondensed Consolidated Statements of Operations**

(In thousands,except share data)

 
| ** **                                                | ** ** | **Three Months  Ended December 31,** | ** ** | **Six Months  Ended December 31,** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenue                                                   |       | $                                                   | 4,310      |                                              | $          | 12,851 |   | $ | 12,906 |   | $ | 27,749 |   |
| Costs of revenue                                          |       | 4,455                                               |       | 11,072                                            |       | 10,892 |   | 22,205 |   |
| Gross profit                                              |       | (145                                                | )          | 1,779                                             |       | 2,014 |   | 5,544 |   |
| Operating  expenses:                                      |       |                                                |       |                                              |       |   |   |   |   |
| Selling, general  and administrative                      |       | 2,199                                               |       | 2,679                                             |       | 4,013 |   | 5,366 |   |
| Research and  development                                 |       | 444                                                 |       | 173                                               |       | 762 |   | 365 |   |
| Total operating  expenses                                 |       | 2,643                                               |       | 2,852                                             |       | 4,775 |   | 5,731 |   |
| Income (loss)  from operations                            |       | (2,788                                              | )          | (1,073                                            | )          | (2,761 | ) | (187 | ) |
| Interest expense                                          |       | (46                                                 | )          | (1,077                                            | )          | (1,113 | ) | (2,157 | ) |
| Debt conversion  expense                                  |       | (30,191                                             | )          | —                                            |       | (30,191 | ) | — |   |
| Interest and  other income, net                           |       | 182                                                 |       | 241                                               |       | 366 |   | 403 |   |
| Income (loss)  before income taxes                        |       | (32,843                                             | )          | (1,909                                            | )          | (33,699 | ) | (1,941 | ) |
| Income tax (expense)  benefit                             |       | —                                              |       | 69                                                |       | — |   | 69 |   |
| Net income  (loss)                                        |       | $                                                   | (32,843    | )                                                 | $          | (1,840 | ) | $ | (33,699 | ) | $ | (1,872 | ) |
| Income (loss)  per share:                                 |       |                                                |       |                                              |       |   |   |   |   |
| Net income  (loss) per share – basic and diluted     |       | $                                                   | (4.36      | )                                                 | $          | (1.42 | ) | $ | (7.72 | ) | $ | (1.45 | ) |
| Shares used in  computing net loss per share – basic |       | 8,293,710                                           |       | 1,292,011                                         |       | 4,798,215 |   | 1,289,046 |   |

 

See accompanying notes to unaudited condensed consolidated financialstatements.

 

4

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**SPACEHAB, INCORPORATED AND SUBSIDIARIES**

**UnauditedCondensed Consolidated Statements of Cash Flows**

**(In thousands)**

 
|                                                                                                        | ** ** | **Six Months Ended  December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
|                                                                                                        | ** ** | **2007**                                          | ** ** | **2006** | ** ** |
|                                                                                                        | ** ** | **restated**                                      | ** ** | ** ** | ** ** |
| **Cash flows from operating activities**                                                |       |                                              |       |   |   |
| Net (loss)                                                                                                  |       | $                                                 | (33,699    | ) | $ | (1,872 | ) |
| Adjustments to  reconcile net loss to net cash provided by (used in) operating activities:                  |       |                                              |       |   |   |
| Non-cash debt  conversion expense                                                                           |       | 30,191                                            |       | — |   |
| Stock-based  compensation                                                                                   |       | 145                                               |       | 150 |   |
| Depreciation and  amortization, including debt issuance cost of $0.1 million and $0.3 million               |       | 1,732                                             |       | 3,189 |   |
| Recognition of  deferred gain                                                                               |       | (111                                              | )          | (111 | ) |
| Changes in  assets and liabilities:                                                                         |       |                                              |       |   |   |
| Increase in  restricted cash                                                                                |       | (3,907                                            | )          | (5,960 | ) |
| (Increase)  decrease in accounts receivable                                                                 |       | 3,377                                             |       | (3,039 | ) |
| (Increase) in  prepaid expenses and other current assets                                                    |       | (523                                              | )          | (368 | ) |
| (Increase)  decrease in other assets                                                                        |       | 343                                               |       | (37 | ) |
| Increase  (decrease) in deferred revenue                                                                    |       | (629                                              | )          | 8 |   |
| Increase  (decrease) in accounts payable, accounts payable-Astrium, accrued interest,  and accrued expenses |       | 1,982                                             |       | (2,174 | ) |
| Decrease in  customer deposits                                                                              |       | (3,106                                            | )          | — |   |
| Increase  (decrease) in accrued subcontracting services and other                                           |       | (3,612                                            | )          | 5,084 |   |
| Increase in  advance on construction contract                                                               |       | 1,467                                             |       | 5,960 |   |
| Increase  (decrease) in long-term accrued contract costs and other liabilities                              |       | (86                                               | )          | 31 |   |
| Net cash  provided by (used in) operating activities                                                        |       | (6,436                                            | )          | 861 |   |
| **Cash  flows from investing activities**                                                                   |       |                                              |       |   |   |
| Purchases of  property, equipment and leasehold improvements, net of reimbursements                         |       | (80                                               | )          | (121 | ) |
| Net cash used in  investing activities                                                                      |       | (80                                               | )          | (121 | ) |
| **Cash  flows from financing activities**                                                                   |       |                                              |       |   |   |
| Payment of  mortgage loan                                                                                   |       | —                                            |       | (1,636 | ) |
| Purchase of  Junior Notes not participating in exchange                                                     |       | (2,867                                            | )          | — |   |
| Proceeds from  issuance of common stock, net of expenses                                                    |       | —                                            |       | 64 |   |
| Net cash used in  financing activities                                                                      |       | (2,867                                            | )          | (1,572 | ) |
| Net change in  cash and cash equivalents                                                                    |       | (9,383                                            | )          | (832 | ) |
| Cash and cash  equivalents at beginning of period                                                           |       | 9,724                                             |       | 6,317 |   |
| Cash and cash  equivalents at end of period                                                                 |       | $                                                 | 341        |   | $ | 5,485 |   |
|                                                                                                        |       |                                              |       |   |   |
| Non-cash financing  activities:                                                                             |       |                                              |       |   |   |
| Issuance of  common stock for bonds                                                                         |       | $                                                 | 83,031     |   | $ | — |   |
|                                                                                                        |       |                                              |       |   |   |
| Issuance of  common stock for preferred stock                                                               |       | $                                                 | 11,892     |   | $ | — |   |
| Deemed dividend  related to induced conversion of preferred shares                                          |       | $                                                 | 3,344      |   | $ | — |   |
| Cash paid for  interest                                                                                     |       | $                                                 | 316        |   | $ | 1,868 |   |
| Cash paid for  income taxes                                                                                 |       | $                                                 | —     |   | $ | — |   |

 

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 a developer and operator of space flighthardware assets, a provider of pre-launch space payload and spacecraftprocessing services, and an entrepreneurial force in space commerce and developingspace utilization applications such as microgravity processing. Specificallythe Company maintains the following core competencies:

 

·                  Expertise in qualifying hardware forspaceflight and the habitability and occupational challenges of space;

·                  Facilities and support servicesnecessary for the preparation of satellites and payloads for launch;

·                  Engineering, analysis, and payloadoperations services;

·                  Program integration and control; and

·                  Product design, development, andfabrication.

 

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

 

# **OURBUSINESS UNITS**

# ** **

For the first half of fiscal year 2008, our Companywas comprised of three primary business units providing the following productsand services to the government and commercial markets. Those business unitsincluded:

 

*SPACEHAB Flight Services*. Throughthis business unit, we offer a range of engineering, research, logistics,integration, operations, and ground support services supporting our spaceshuttle module and pallet assets. Specifically, we provide a full range ofground-based pre- and post-flight experiment, cargo, and payload processingservices as well as on-orbit operations support for U.S. space shuttleoperations. During fiscal year 2007, our Flight Services business unitaccounted for 65% of our consolidated revenues.

 

*Astrotech Space Operations*.Through our Astrotech business unit, we provide services and facilities insupport of the final assembly, checkout, and countdown functions associatedwith preparing our customers’ multi-million dollar spacecraft for launch onexpendable launch vehicles. Astrotech currently has long-term contracts inplace with NASA, United Launch Alliance, National Reconnaissance Office and SeaLaunch, LLC. During fiscal year 2007, Astrotech accounted for 23% of ourconsolidated revenues.

 

*SPACEHAB Government Services*.SPACEHAB Government Services provides large scale program technical support andspecialized engineering analysis, products, and services to NASA and othercustomers. Our Government Services business unit derives most of its revenueunder the ARES contract to provide configuration and data management serviceswithin NASA’s Program Integration and Control (“PI&C”) contract for theInternational Space Station.

 

### **Short Term Liquidity Issues**

### ** **

As of December 31, 2007 we had cash on hand of$0.3 million and our working capital deficit was $2.5 million. Restricted cash,which consists of advance payments on a government contract to modify certainspacecraft processing facilities, totaled $10.2 million at December 31,2007. We carry a liability of $7.4 million for obligations under thisconstruction contract. For the six months ended December 31, 2007, our cashflows from operating activities utilized cash of $6.4 million.

 

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

 

6

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As a consequence of the Exchange Transaction, werecognized non cash debt conversion expense of ($30.2) million in the threemonths ended December 31, 2007, and increased our common stock by $98.3million.

 

We have submitted a response to NASA’s announcementsoliciting proposals for the Commercial Orbital Transportation Services (COTS)Program and have committed the necessary resources for development andpresentation of our proposed capability. In February 2008 we obtainedcommitments for $5.5 million of new equity securities contingent upon thesuccessful award of a COTS Program funded Space Act Agreement (see SubsequentEvents, Note 16).

 

In February 2008 (seeSubsequent Events, Note 16), we consummated a financing facility with acommercial bank. This facility provides for a $4.0 million term loan, payablein monthly installments of principal and interest based upon a 15 yearamortization and a $2.0 million revolving credit facility. The three-year termloan is secured by the assets of our Astrotech subsidiary and the one-yearrevolving credit facility is also secured by Astrotech’s accounts receivable.

 

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

 

### **2.  Basis ofPresentation**

### ** **

In the opinion of management, the accompanyingunaudited condensed consolidated financial statements reflect all adjustments,consisting of only normal recurring accruals necessary for a fair presentationof the consolidated financial position of SPACEHAB, Incorporated and itssubsidiaries as of December 31, 2007, and the results of its operationsand cash flows for the periods ended December 31, 2007 and 2006. However,the unaudited condensed consolidated financial statements do not include allrelated footnote disclosures.

 

The consolidated results of operations for the sixmonth period ended December 31, 2007 are not necessarily indicative of theresults that may be expected for the full year. Our results of operationstypically fluctuate significantly from quarter to quarter. The interimunaudited condensed consolidated financial statements should be read inconjunction with our audited consolidated financial statements appearing in ourAnnual Report on Form 10-K for the fiscal year ended June 30, 2007.

 

### **3.  Income(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, 2007 and December 31, 2006(in thousands, except share and per share data):

 
| ** **                                                         | ** ** | **Three months ended  December 31, 2007** | ** ** | **Three months ended  December 31, 2006** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                         | ** ** | **Loss**                                                      | ** ** | **Shares**                                                    | ** ** | **Per Share** | ** ** | **Loss** | ** ** | **Shares** | ** ** | **Per Share** | ** ** |
| ** **                                                         | ** ** | **(Numerator)**                                               | ** ** | **(Denominator)**                                             | ** ** | **Amount** | ** ** | **(Numerator)** | ** ** | **(Denominator)** | ** ** | **Amount** | ** ** |
| Basic and  Diluted EPS:                                            |       |                                                          |       |                                                          |       |   |   |   |   |   |   |   |   |
| Net Loss                                                           |       | $                                                             | (32,843    | )                                                             | 8,293,710  |   | $ | (3.96 | ) | $ | (1,840 | ) | 1,292,011 |   | $ | (1.42 | ) |
|                                                               |       |                                                          |       |                                                          |       |   |   |   |   |   |   |   |   |
| Deemed Dividend  Related to Induced Conversion of Preferred Shares |       | (3,344                                                        | )          |                                                          |       |   |   |   |   |   |   |   |   |
| Net Loss  Applicable to Common Shares                              |       | $                                                             | (36,187    | )                                                             | 8,293,710  |   | $ | (4.36 | ) | $ | (1,840 | ) | 1,292,011 |   | $ | (1.42 | ) |

 

7

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|                                                                | ** ** | **Six months ended  December 31, 2007** | ** ** | **Six months ended  December 31, 2006** | ** ** |
|---------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
|                                                                | ** ** | **Loss**                                                    | ** ** | **Shares**                                                  | ** ** | **Per Share** | ** ** | **Loss** | ** ** | **Shares** | ** ** | **Per Share** | ** ** |
|                                                                | ** ** | **(Numerator)**                                             | ** ** | **(Denominator)**                                           | ** ** | **Amount** | ** ** | **(Numerator)** | ** ** | **(Denominator)** | ** ** | **Amount** | ** ** |
| Basic and  Diluted EPS:                                             |       |                                                        |       |                                                        |       |   |   |   |   |   |   |   |   |
| Net Loss                                                            |       | $                                                           | (33,699    | )                                                           | 4,798,215  |   | $ | (7.02 | ) | $ | (1,872 | ) | 1,289,046 |   | $ | (1.45 | ) |
|                                                                |       |                                                        |       |                                                        |       |   |   |   |   |   |   |   |   |
| Deemed Dividends  Related to Induced Conversion of Preferred Shares |       | (3,344                                                      | )          |                                                        |       |   |   |   |   |   |   |   |   |
| Net Loss  Applicable to Common Stock                                |       | $                                                           | (37,043    | )                                                           | 4,798,215  |   | $ | (7.72 | ) | $ | (1,872 | ) | 1,289,046 |   | $ | (1.45 | ) |

 

Senior convertible notes payable outstanding as of December 31,2007 due 2010 convertible into 459,133 shares of common stock at $15.00 pershare, which include a mandatory conversion feature once the Company’s stockprice reaches $19.50 per share, have not been included in the computation ofdiluted EPS for the three months and six months ended December 31, 2007and 2006 as the conversion price(s) of the convertible notes payable pershare were greater than the average market price of the shares during theperiod and no value has been assigned to the mandatory conversion feature.

 

Options to purchase 97,900 shares of common stockoutstanding at December 31, 2007 were not included in diluted EPS for thethree months and six months ended December 31, 2007 as they wereanti-dilutive due to our net loss. The options expire between July 1, 2008and December 12, 2016.

 

Options to purchase 171,996 shares of common stockoutstanding at December 31, 2006 were not included in diluted EPS for thethree months and six months ended December 31, 2006 as they wereanti-dilutive due to our net loss. The options expire between April 25,2007 and December 1, 2015.

 

### **4.  RevenueRecognition**

### ** **

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

 

**8**

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** **

**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

 

  Sea Launch    Facility    Management   Contract

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

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

 

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

 

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

### ** **

(a)          Cash paidfor interest costs was $0.3 million and $1.9 million for the six months ended December 31,2007 and 2006, respectively. We did not capitalize any interest costs duringthe six months ended December 31, 2007 or 2006.

(b)         The bondtransactions of $10,306,000 of 8.0% convertible subordinated Junior Notes and$46,083,000 of 5.5% Senior Notes in exchange for 12,254,544 shares of commonstock had the following cash impact.  Theprincipal portion of the 8.0% Junior Notes not participating in the exchangeamounting to $2.867 million was paid in cash. In addition there was no cash effect for the conversion of the 1,333,334shares of Series B preferred stock for the 1,088,828 shares of commonstock.  All of the conversion stocktransactions were effective prior to the 1 for 10 reverse stock split.

(c)          We paid noincome taxes for the six months ended December 31, 2007 and 2006.

 

9

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### **6.  CreditFacilities**

### ** **

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

 

In February 2008 (seeSubsequent Events, Note 16), we consummated a new financing facility with a commercialbank. This facility provides for a $4.0 million term loan, payable in monthlyinstallments of principal and interest based upon a 15 year amortization and a$2.0 million revolving credit facility. The interest rate on the creditfacility is prime plus 1.75% (9.0% as of December 31, 2007). The unusedrevolving credit facility balance is subject to a charge of 0.5%. Fundsavailable under the revolving credit facility are limited to 80% of eligibleaccounts receivable, and we are subject to various financial and othercovenants based upon our Astrotech subsidiary, including a minimum tangible networth covenant, a liability to tangible net worth covenant, and a debt servicecoverage covenant. The three-year term loan is secured by the assets of our Astrotechsubsidiary and the one-year revolving credit facility is also secured byAstrotech’s accounts receivable.

 

### **7.  SegmentInformation**

### ** **

Based on our organization, weoperate in three business segments: SFS, Astrotech, and SGS. SFS was founded tocommercially develop space carriers that operate in the cargo bay of the spaceshuttle. SFS provides space flight assets and integration and operationssupport services for both NASA and commercial customers. Astrotech providespayload processing facilities and services to serve the spacecraftmanufacturing and launch services industry. SGS is primarily engaged inproviding engineering services and products to the Government, including NASA.

 

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

 

Three Months Ended December 31, 2007 (in thousands):

 
| ** **          | ** ** | **Revenue** | ** ** | **Income (Loss)  before income taxes** | ** ** | **Net  Fixed  Assets** | ** ** | **Depreciation  And  Amortization** | ** ** |
|---------------------|------------|-------------|------------|-------------------------------------------------------|------------|------------------------|------------|-------------------------------------|------------|
| SFS                 |       | $           | 498        |                                                  | $          | (1,282                 | )          | $                                   | 282        |   | $ | 13 |   |
| Astrotech           |       | 2,438       |       | 296                                                   |       | 41,737                 |       | 531                                 |       |
| SGS                 |       | 1,374       |       | 170                                                   |       | —                 |       | —                              |       |
| Corporate and Other |       | —      |       | (32,027                                               | )          | 487                    |       | 44                                  |       |
|                |       | $           | 4,310      |                                                  | $          | (32,843                | )          | $                                   | 42,506     |   | $ | 588 |   |

 

Three Months Ended December 31,2006 (in thousands):

 
| ** **          | ** ** | **Revenue** | ** ** | **Income (Loss)  Before Income Taxes** | ** ** | **Net  Fixed  Assets** | ** ** | **Depreciation  And  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 |   |

 

10

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Six Months Ended December 31, 2007 (inthousands):

 
| ** **          | ** ** | **Revenue** | ** ** | **Income (Loss)  before income taxes** | ** ** | **Net  Fixed  Assets** | ** ** | **Depreciation  And  Amortization** | ** ** |
|---------------------|------------|-------------|------------|-------------------------------------------------------|------------|------------------------|------------|-------------------------------------|------------|
| SFS                 |       | $           | 4,081      |                                                  | $          | (1,072                 | )          | $                                   | 282        |   | $ | 435 |   |
| Astrotech           |       | 6,150       |       | 1,653                                                 |       | 41,737                 |       | 1,063                               |       |
| SGS                 |       | 2,675       |       | 314                                                   |       | —                 |       | —                              |       |
| Corporate and Other |       | —      |       | (34,594                                               | )          | 487                    |       | 234                                 |       |
|                |       | $           | 12,906     |                                                  | $          | (33,699                | )          | $                                   | 42,506     |   | $ | 1,732 |   |

 

Six Months Ended December 31,2006 (in thousands):

 
| ** **          | ** ** | **Revenue** | ** ** | **Income (Loss)  before income taxes** | ** ** | **Net  Fixed  Assets** | ** ** | **Depreciation  And  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 |   |

### ** **

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

### ** **

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

 

### **The 1994 Plan**

### ** **

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

 

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

### ** **

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

 

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

### ** **

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

 

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

### ** **

We adopted an employee stock purchase plan that permitseligible employees to purchase shares of common stock of the Company at pricesno less than 85% of the current market price. Eligible employees may elect toparticipate in the plan by authorizing payroll deductions from 1% to 10% ofgross compensation for each payroll period. On the last day of each quarter,each participant’s contribution account is used to purchase the maximum numberof whole and fractional shares of common stock determined by dividing thecontribution account’s balance by the lesser of 85% of the price of a share ofcommon stock on the first day of the quarter or the last day of a quarter. Thenumber of shares of common stock that may be purchased under the plan is150,000. Through December 31, 2007, employees have purchased 148,264.5shares under this plan. During the fourth quarter of fiscal year 2007, we 

 

11

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suspended the purchasing of Common Stock by theemployees from this plan. The shares purchased under this plan are consideredcompensatory for accounting and reporting purposes.

 

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

### ** **

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

 

·                  We estimated volatility using ourhistorical share price performance over the last ten years. Managementconsidered the guidance in SFAS No. 123R and believes the historicalestimated volatility is materially indicative of expectations about futurevolatility.

·                  We use the simplified method outlinedin the Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin No. 107to estimate expected lives for options granted.

·                  The risk-free interest rate is basedon the U.S. Treasury yield curve in effect at the time of grant for theexpected term of the option.

·                  The expected dividend yield is basedon our current dividend yield and the best estimate of projected dividend yieldfor future periods within the expected life of the option.

 

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

 
| ** **                             | ** ** | **Shares Under  Fixed Options** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Weighted-  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|----------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------|------------|------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding at  June 30, 2007     |       | 107,691                                   |       | $                                       | 2.61       |                                                 | 4.94       |                            | $          | — |   |
| Granted                                |       | 1,000                                     |       | $                                       | 4.40       |                                                 | 7.0        |                            | $          | — |   |
| Exercised                              |       | —                                    |       | $                                       | —     |                                                 | —     |                            | $          | — |   |
| Forfeited/Expired                      |       | (10,791                                   | )          | $                                       | 34.39      |                                                 | —     |                            | $          | — |   |
| Outstanding at  December 31, 2007 |       | 97,900                                    |       | $                                       | 24.92      |                                                 | 4.50       |                            | $          | — |   |
| Exercisable                            |       | 82,200                                    |       | $                                       | 27.14      |                                                 | 3.84       |                            | $          | — |   |

 

As of December 31, 2007 there was $264,029 ofunamortized expense related to our stock option plans.

 

During the first six months of fiscal year 2008 therewere 1,000 shares of stock options granted.

 

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

 

·                  Special performance shares – weissued 61,100 performance shares that vest on January 15, 2009, subject tocertain events or upon designation by the Compensation Committee. Terminationof employment, except for resignation or cause was not an event of forfeiture.The employees receiving special performance shares were subsequently terminatedby the Company and the risk of subsequent forfeiture was not material.Consequently, we expensed the entire fair value of the grant ($127,305) valuingthe performance shares at the close of business on the date of grant.

·                  2007 performance shares – we issued203,350 performance shares that vest on February 15, 2011 subject tocertain events or upon designation by the Compensation Committee. Terminationof employment for any cause is an event of forfeiture. We valued the 2007performance shares granted at the close of business on the date of grant andrecognize expense and accrue a deferred compensation liability, pro rata overthe vesting period. In 

 

12

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the three months ended December 31, 2007, we recognizedcompensation expense of $9,976 for these performance shares.

 

The Compensation Committee of the Board of Directorsadopted and implemented a Long Term Cash Incentive Plan during the three monthsended December 31, 2007. The Long Term Cash Incentive Plan makes cashincentive awards to employees upon the successful completion of certain eventsand passage of time as established by the Committee. In the three months ended December 31,2007, the Committee awarded Long Term Cash Incentive Units valued at $308,350to employees. These units vest on February 15, 2011 and are subject tomaterial risk of forfeiture. We recognized expense and accrued deferredcompensation liability of $7,379 under the Long Term Cash Incentive Plan duringthe three months ended December 31, 2007.

 

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

### ** **

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

 

### **10.  RelatedParty Transactions**

### ** **

We engaged in certain transactions with directors andexecutive officers during the six months ended December 31, 2007.Following is a description of these transactions:

 

### **Astrium GmbH**

### ** **

Dr. Graul, a member of SPACEHAB’s Board ofDirectors until his resignation in August 2007, is the Executive VicePresident for Astrium GmbH (“Astrium”). Astrium provides unpressurized payloadand integration efforts to SPACEHAB on a fixed-price basis in addition toproviding engineering services as required. For the six months ended December 31,2007 and 2006, Astrium’s payload and integration services included in cost ofrevenue were approximately $1.0 million and $7.8 million, respectively. In August 2007SPACEHAB terminated its ICC/VCC lease agreements with Astrium North America(see Note 14). We agreed to reimburse Astrium North America $1.4 million upontermination of these leases.

 

### **Executive Credit Cards**

### ** **

Certain named executive officers of the Company havecompany paid credit cards for ordinary business expenses. Although the Companypays the amounts on the credit cards, the executive officer is obligated tosubstantiate the charges and reimburse the Company for any non-business relatedcharges. As of December 31, 2007 the Company has a receivable due from anexecutive officer for $22,807.

 

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

### ** **

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

 

Staff Accounting Bulletin (SAB) 108, “Considering theEffects of Prior-Year Misstatements when Quantifying Misstatements in CurrentYear Financial Statements” – The Securities and Exchange Commission releasedSAB 108 to provide interpretive guidance on how the effects of the carry-overor reversal of prior year misstatements should be considered in quantifying acurrent year misstatement. There have been two approaches commonly used toquantify such errors. Under one approach, the error is quantified as the amountby which the current year income statement is misstated. The other approachquantifies the error as the cumulative amount by which the current year balancesheet is misstated. The SEC staff believes that companies should quantifyerrors using both a balance sheet and an income statement approach and evaluatewhether either approach results in quantifying a misstatement that, 

 

13

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when all relevant quantitative and qualitative factorsare considered, is material. We do not expect the application of thisinterpretation to have a material impact on our financial position or resultsof operations.

 

In September 2006 the FASB issued FASB Statement No. 157,*Fair Value Measurements.*Statement No. 157establishes a common definition for fair value to be applied to U.S. generallyaccepted accounting principles requiring use of fair value, establishes aframework for measuring fair value, and expands disclosure about such fair valuemeasurements. Statement No. 157 is effective for fiscal years beginningafter November 15, 2007. The adoption of this statement is not expected tohave a material impact on the Company’s consolidated financial position andresults of operations.

 

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

### ** **

In December 2006, our Astrotech subsidiary wasawarded a contract with a governmental agency to modify one of our payloadprocessing facilities to specific requirements of a programmed mission. Underthe terms of this $20.0 million fixed-price contract, which has subsequentlybeen increased in contract value to $35.1 million, we will own the improvementsafter completion of the contract obligations. We have entered into a firm fixedprice construction subcontract with J. P. Donovan Construction, Inc. toprovide a significant portion of the design and construction work that will berequired under our contract. In accordance with our contracts, payments will bereceived from our customer on a milestone schedule that generally providesreceipt of cash before payments are required to the subcontractor under theirmilestone schedule. Receipts in advance of disbursements will be retained in arestricted cash account within our subsidiary company and used exclusively forpurposes of the contract obligations. As of December 31, 2007, net cashreceipts of $10.2 million have been designated as restricted cash and $7.4million has been designated as a liability.

 

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

 

### **13.  CustomerDeposits**

### ** **

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

 

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

### ** **

On August 28, 2007, the Company and Astrium, GmbHmutually agreed to terminate the lease agreement dated as of February 28,2001 in regards to the Company’s lease of the Integrated Cargo Carriers (“ICC”)assets from Astrium, GmbH. Also, we mutually agreed to terminate the lease agreementdated as of July 3, 2001 in regards to the Company’s lease of the VerticalCargo Carrier (VCC) assets from Astrium, GmbH. The ICC and VCC assets arespecifically designed cargo carrying equipment used from time to time in theU.S. space shuttle. In order to terminate these two leases, we have mutuallyagreed that the Company reimburse Astrium, GmbH $1.4 million for the period March 1,2007 through August 31, 2007 for the ICC and VCC assets and incur nofinancial obligations for either the ICC or VCC after August 31, 2007.

 

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

### ** **

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

 

14

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remained outstanding pursuant to an indenturegoverning the Senior Notes that was amended through the elimination ofsubstantially all of the indenture’s restrictive covenants.

 

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

 

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

 

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

 

### **16.  SubsequentEvents**

### ** **

### **NASDAQ Deficiency Letters**

### ** **

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

 

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

 

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

 

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

 

On December 21, 2007, NASDAQ notified us thatpursuant to the Exchange Transaction, the Company was no longer out ofcompliance with NASDAQ Marketplace Rule 4310(c)(3) and had regainedcompliance with NASDAQ Marketplace Rule 4310(c)(4). On January 23,2008, the Company appointed four new directors to fill vacancies on its Boardof Directors, and has added a third Independent Director and Financial Expertto its Audit Committee. The Company has not been notified, however, that it hasregained compliance with Marketplace Rule 4350(c)(1) and 4350(d)(4).

 

### **Bank Financing Facility**

### ** **

In February 2008 weconsummated a financing facility with a commercial bank. This facility providesfor a $4.0 million term loan, payable in monthly installments of principal andinterest based upon a 15 year amortization and a $2.0 million revolving creditfacility. The interest rate on the credit facility is prime plus 1.75% (9.0% asof December 31, 2007). The unused revolving credit facility balance issubject to a charge of 0.5%. Funds available under the revolving creditfacility are limited to 80% of eligible accounts receivable, and we are subjectto various financial and other covenants based upon our Astrotech subsidiary,including a minimum tangible net worth covenant, a liability to tangible networth covenant, and a debt service coverage covenant. The three-year term loanis secured by the assets of our Astrotech subsidiary and the one-year revolvingcredit facility is also secured by Astrotech’s accounts receivable.

 

15

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### ** **

### **Unregistered Sales of Equity Securities**

### ** **

On February 11, 2008, theCompany entered into a Stock Purchase Agreement with certain investors for thepurchase of 55,000 shares of the Company’s Series D convertible preferredstock for a total price of $5.5 million. Consummation of the transaction iscontingent upon NASA awarding us a funded Space Act Agreement under the COTSProgram and shareholder approval of the transaction. The Company will issue150,150 shares of common stock upon entering into the transaction.

 

The Series D convertiblepreferred stock will be converted into common stock within six months afterissuance based on a ratio determined by dividing $100.00 by the average of (x) theaverage of the closing price of the Company’s common stock for the businessdays January 18-25, 2008 and (y) the average of the closing price ofthe Company’s common stock for the five business days prior to the Company’sreceipt of written notification from NASA indicating the Company’s receipt of aCOTS award of at least $120.0 million.

 

16

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

# ** **

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

 

**OVERVIEW**

** **

### **Forward Looking Statements**

### ** **

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

 

### **Financial Summary**

### ** **

SPACEHAB’s first six months operating results reflectthe completion of the Company’s STS-118 space shuttle mission in August 2007.As a result, the Company’s revenues were significantly below the first sixmonths of the prior fiscal year. Recognition of non cash debt conversionexpense of ($30.2) million on the induced conversion of convertible securitiescontributed to a loss for the six months of ($33.7) million, compared to a netloss of ($1.9) million for the first six months of the prior fiscal year.

 

The following table illustrates financial highlightsfor the six months ended December 31, 2007 and December 31, 2006:

 
|                                       | ** ** | **2007**                                    | ** ** | **2006** | ** ** | **Percent  Change** | ** ** |
|--------------------------------------------|------------|---------------------------------------------|------------|----------|------------|---------------------|------------|
| ** **                                 | ** ** | **(in  millions except per share amounts)** | ** ** |
| For the Six Months Ended December 31: | ** ** |                                        | ** ** |
| Revenue                                    |       | 12.9                                        |       | 27.7     |       | (53                 | )%         |
| Net (Loss)                                 |       | (33.7                                       | )          | (1.9     | )          | (1674               | )%         |
| Diluted EPS                                |       | (7.72                                       | )          | (1.45    | )          | (432                | )%         |
| As of  December 31:                   |       |                                        |       |     |       |                |       |
| Cash and Cash  Equivalents                 |       | 0.3                                         |       | 5.4      |       | (94                 | )%         |
| Restricted Cash                            |       | 10.2                                        |       | 6.0      |       | 70                  | %          |
| Total Debt                                 |       | 6.9                                         |       | 63.3     |       | (89                 | )%         |
| Stockholders  Equity                       |       | 36.2                                        |       | 1.2      |       | 2917                | %          |

### ** **

### **Business Segments**

### ** **

For the first half of fiscal year 2008, our Companywas comprised of three primary business segments. Following is a briefdiscussion of each of these segments, including a list of key factors thataffected their respective contribution to earnings and cash flows. We alsopresent a brief discussion of our corporate-level expenses along with a summaryof our current liquidity position and items that could impact our liquidityposition in fiscal year 2008 and beyond.

 

*SPACEHAB Flight Services*. Throughthis business unit, we offer a range of engineering, research, logistics,integration, operations, and ground support services supporting our spaceshuttle module and pallet assets. 

 

17

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Specifically, we provide a full range of ground-basedpre- and post-flight experiment, cargo, and payload processing services as wellas on-orbit operations support for U.S. space shuttle operations.

 

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

 

The primary factors impacting our SFS business unitearnings and cash flows are the number of space shuttle missions manifestedwith SPACEHAB assets and the configuration of the cargo handling and researchlogistics required for each mission. Our revenues and earnings, if any, fromeach mission are dependent upon the space assets required in the cargo orresearch logistics configuration and the mission support services required toemploy those assets. Other factors that have impacted earnings and cash flowsfor this business unit include:

 

·                  Congress’ funding for NASA and theallocation of that funding to International Space Station operations and spaceshuttle cargo missions

·                  The dependability of the U.S. spaceshuttle launch schedule and mission manifests

·                  The impending 2010 shuttle retirementdate

·                  The role of international spaceresearch projects flying on future space shuttle and Russian and European SpaceAgency missions

·                  The growth of space explorationprograms within NASA and NASA’s commitment to the President’s Vision for SpaceExploration regarding enhancement of the commercial enterprise role in the ISSand space exploration programs

 

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

 

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

 

·                  Our ability to control our capitalexpenditures which are primarily limited to modifications to accommodatepayload processing for new launch vehicles, maintenance and safety,environmental and reliability projects, and other costs, through disciplined managementand safe, efficient operations

·                  The continuing limited availabilityof competing facilities at the major domestic launch sites that can offercompatible services, leading to an increase in government use of our services

·                  The consistent launch schedule andprocessing requirements of our government and commercial customers

 

*SPACEHAB Government Services*. OurSGS business unit generates revenue by providing support to the U.S. Governmentin the areas of large-scale configuration and data management programs such asthe International Space Station; specialized hardware design, development, andfabrication; low- to high-fidelity mockup design and construction; and safetyand quality support services. Our SGS business unit currently providesconfiguration management, data management, and IT services as a subcontractorof ARES Corporation under ARES’ PI&C contract with NASA.

 

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

 

·                  Continuation, through the governmentfiscal year 2008, of our PI&C contract with the International Space Stationprogram and exercise of the contract options through the government fiscal year2010

·                  Our ability to maintain smallbusiness qualification for our SGS business unit under NASA contracting rules

 

18

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·                  Our ability to control costs withinour budget commitments

 

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

 

·                  Our ability to control sales, generaland administrative costs in a period of decreasing revenues and pursuit of newbusiness opportunities

·                  Interest expense on our convertiblenotes, costs relative to the refinancing of our long-term debt during fiscalyear 2008, and interest savings on the conversion and repayment of our debt

·                  Income taxes, of which we currentlyonly pay alternative minimum tax and minimal state income taxes; income taxeswill also be impacted by our ability to realize our significant deferred taxassets, including loss carry forwards that are limited due to IRS restrictionsafter a significant change in ownership

 

### **Corporate Structure: Fiscal Year 2008 Third QuarterGoing Forward**

### ** **

In anticipation of the planned 2010 space shuttle retirement,we began developing new products and services. As a result, in January 2008,we began focusing our business on using our core capabilities for thecommercial exploitation of space. These new business initiatives include thefollowing:

 

·                  Processing products and services inmicrogravity

·                  Developing new spacecraft andproviding alternate space transportation means

·                  Commercializing products manufacturedin microgravity

·                  Commercializing products developedfor use in the space industry

·                  Acquiring other U.S. spacecontractors

·                  Providing end-to-end services forcommercial and government satellite operations

 

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

 

The following paragraphs characterize SPACEHAB’s newcorporate structure:

 

*SPACEHAB Orbital Transportation, Inc.*

We have assembled a team of industry partners with acommon goal of developing a commercial transportation system providing lowercost, lower risk space transportation services than conventional,government-developed transportation systems. SPACEHAB’s Advanced Research andConventional Technology Utilization Spacecraft (ARCTUS) is designed to providecargo transportation services to the International Space Station, initiallyunder the unfunded Space Act Agreement signed with NASA in June 2007, andan additional means of transportation for our microgravity processing businessdiscussed below. More recently, the Company has proposed the ARCTUS solutionfor a funded Space Act Agreement, anticipated to be awarded in mid-February, tofully develop the commercial cargo service for NASA.

 

*SPACEHAB Microgravity Sciences, Inc.*

Our experience with the processing and integration ofcomplex science payloads for flight propelled our entrance into the field ofmicrogravity processing of high value bioscience products for the benefit ofthe general public. Since the inception of the Space Shuttle Program andextending through the International Space Station Program, NASA has spentbillions of dollars on microgravity infrastructure and research. We have beenlogistically responsible for several hundred of these experiments on the spaceshuttle, the Russian Progress vehicle and the International Space Station.

 

On August 14, 2007, NASA announced that it wasseeking private industry proposals for research and manufacturing concepts andopportunities onboard the International Space Station, a designated U.S.National Lab. SPACEHAB responded to the solicitation and was subsequentlyselected by NASA to cooperate on a Space Act Agreement for use of the ISSNational Lab forresearch, development, and industrial processing purposes.

 

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*Astrotech Space Operations*

Astrotech will continue to provide facilities andpayload processing operations at its three Florida and California locationsprocessing both government and commercial satellites before launch. The currentexpansion of our facility at its Vandenberg Air Force Base location isscheduled to be operational in 2009. Looking further ahead, Astrotech intendsto expand its market by offering end-to-end assurance services to bothcommercial and government customers. These new end-to-end space missionassurance services would extend Astrotech’s current relationships withcustomers’ spacecraft from a condensed few weeks of ground processing at anAstrotech facility to multiple years of space mission assurance servicesthroughout the satellite’s lifecycle.

 

*SPACETECH, Inc.* SPACETECH isa technology transfer, product development, and sales-focused business approachto transform space-based technologies and products into commercialapplications, useful products, intellectual property, and possible spin-offbusinesses. The following are two current SPACETECH initiatives:

 

·                  Under an unfunded Space Act Agreementwith NASA, we began development of a mini-mass spectrometer which we hope toturn into a small, portable, low power unit capable of detecting chemicalcompounds such as explosives, weapons of mass destruction, and toxic gases. Wenegotiated an agreement for the licensing, sale and distribution of the minimass spectrometer.

·                  The Federal Aviation Administrationand Department of Transportation have enacted new regulations for airtransportation of oxygen containers to enhance safety in the event of a fire.Applying decades of experience in the development of specialized containers, wehave been working with an industry partner to develop and certify a containerto meet these new requirements. If successful, this project will provide us anopportunity to enter a new market.

 

*SPACEHAB EngineeringServices*

SPACEHAB Engineering Services (SES) is a businesshybrid of the former SPACEHAB Government Services and SPACEHAB Flight Servicesand is continuing to operate in support of current government and commercialcustomers providing specialized design, development and fabrication of flighthardware, ground systems, and mockups, as well as large scale program datamanagement, configuration management, and IT services.

 

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**RESULTS OF OPERATIONS**

 

*For the three months ended December 31, 2007as compared to the three months ended December 31, 2006.*

 

Revenue. Revenue decreasedapproximately 67% to $4.3 million for the three months ended December 31,2007 as compared to $12.9 million for the three months ended December 31,2006 (in millions).

 
| ** **                    | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **  | ** ** |
|-------------------------------|------------|----------------------------------|------------|------------|------------|-------------|------------|
| ** **                    | ** ** | **December 31,**            | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **                    | ** ** | **2007**                         | ** ** | **2006**   | ** ** | **Change**  | ** ** | **Change** | ** ** |
| SPACEHAB Flight  Services     |       | $                                | 0.5        |       | $          | 9.9         |       | $ | (9.4 | ) | (95 | )% |
| Astrotech Space  Operations   |       | 2.4                              |       | 1.1        |       | 1.3         |       | 118 | % |
| SPACEHAB  Government Services |       | 1.4                              |       | 1.9        |       | (0.5        | )          | (26 | )% |
| Other                         |       | —                           |       | —     |       | —      |       | — |   |
|                          |       | $                                | 4.3        |       | $          | 12.9        |       | $ | (8.6 | ) | (67 | )% |

 

Revenue from our SFS business unit decreased by $9.4million for the period ending December 31, 2007 as compared to the sameperiod ending December 31, 2006. The following summarizes the significantitems that affected the quarter ended December 31, 2007 as compared to thequarter ended December 31, 2006:

 

·                  Decrease in revenue from STS-116 andSTS-118 under the CMC with Lockheed Martin of $9.6 million due to launch andcompletion of these missions during prior periods.  There are no more scheduled missions underour CMC contract with Lockheed Martin.

·                  Other contract revenue increase of$0.2 million due to the delivery of the EVA and PFIP flight hardware.

 

Revenue from our Astrotech business unit increased by$1.3 million for the three months ended December 31, 2007 as compared tothe three month period ending December 31, 2006. The following summarizessignificant items that affected the three months ended December 31, 2007as compared to the same period ended December 31, 2006:

 

·                  Decrease in revenue of $1.1 milliondue to four different satellites in our facilities for processing for all of ora portion of the three month period ending December 31, 2006. Whereas, forthe same period this fiscal year, there was only one satellite processed in ourfacilities.

·                  Increase over the three month periodending December 31, 2006 revenue of $2.4 million where the reduction ofrevenue on our Lockheed Martin guaranteed missions contract for two futuremissions that were to be processed for Boeing on Atlas launch vehiclespartially offset by one Atlas mission that was processed at the Titusvillefacility contracted directly with Boeing.

 

Revenue from our SGS business unit decreased by $0.5million for the period ending December 31, 2007 as compared to the sameperiod ending December 31, 2006. The following summarizes the significantitems that affected the quarter ended December 31, 2007 as compared to thequarter ended December 31, 2006:

 

·                  Decrease in revenue from the sale ofour Destiny module to the Seattle Space Museum during the three month periodended December 31, 2006 in the amount of $0.3 million.

·                  Decrease in contract revenue with USAfor support of the Constellation Program of $0.2 million.

 

Cost of Revenue. Cost of revenue forthe three months ended December 31, 2007 decreased by 59% to approximately$4.5 million, as compared to $11.1 million for the same period of the prioryear (in millions).

 
| ** **                    | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **  | ** ** |
|-------------------------------|------------|----------------------------------|------------|------------|------------|-------------|------------|
| ** **                    | ** ** | **December 31,**            | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **                    | ** ** | **2007**                         | ** ** | **2006**   | ** ** | **Change**  | ** ** | **Change** | ** ** |
| SPACEHAB Flight  Services     |       | $                                | 1.1        |       | $          | 7.5         |       | $ | (6.4 | ) | (85 | )% |
| Astrotech Space  Operations   |       | 2.2                              |       | 2.2        |       | —      |       | — |   |
| SPACEHAB  Government Services |       | 1.2                              |       | 1.3        |       | (0.1        | )          | (8 | )% |
| Other                         |       | 0.0                              |       | 0.1        |       | (0.1        | )          | (100 | )% |
|                          |       | $                                | 4.5        |       | $          | 11.1        |       | $ | (6.6 | ) | (59 | )% |

 

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The following summarizessignificant items that affected the three months ended December 31, 2007as compared to the same period ended December 31, 2006 for SFS:

 

·                  Decrease in cost of revenue, otherthan direct depreciation cost of revenue, for STS-116 and STS-118 under the CMCwith Lockheed Martin of $5.0 million due to launch and completion of thesemissions during prior periods.  There areno more scheduled missions under our CMC contract with Lockheed Martin.

·                  Decrease in depreciation expense of$0.8 million due to the write-down of our flight assets during the periodending June 30, 2007.

·                  Decrease in cost of revenue of $0.4million due to the termination of the ICC/VCC assets during the fiscal yearended June 30, 2007.

·                  Decrease in cost of revenue ofapproximately $0.2 million due to a reduction in workforce in January of2007.

 

The cost of revenue in our Astrotech business unitremained in line with this same quarter the previous year at $2.2 million.

 

The decrease in cost of revenue of $0.1 million in ourSGS business unit is primarily resulting from a reduction in staff under ourPI&C contract necessary to balance obligations within the prime contract.

 

Operating Expenses. Operatingexpenses decreased to $2.7 million for the three months ended December 31,2007 as compared to approximately $2.9 million for the three months ended December 31,2006. The following summarizes the significant differences between the twoperiods:

 

·                  Legal expenses decrease by $0.4million due to the termination of legal proceedings related to the loss of theRDM.

·                  Increase in consulting expenses of$0.1 million primarily related to increased business development efforts.

·                  Labor and related expenses decreaseby $0.1 million as a result of the reduction in work-force in January 2007.

·                  Decrease in expenses associated withthe operations of the Space Store sold in October of 2006 in the amount of$0.1 million.

·                  R&D increase of $0.3 millionduring the period ending December 31, 2007 as compared to the same periodlast year.  This is attributable to theMMS and ARCTUS programs.

 

Interest Expense. Interest expensewas approximately $0.1 million for the three months ended December 31, 2007as compared to approximately $1.1 million for the three months ended December 31,2006. The decrease in interest expense is primarily due to the conversion of$7.4 million of 8% convertible subordinated notes due October 2007 and$46.1 million of our 5.5% senior convertible notes due October 2010 intocommon and convertible preferred stock on October 5, 2007, and repaymentof the remaining $2.9 million of 8% convertible subordinated notes on October 15,2007.

 

Interest and Other Income. Interestincome is earned on our mortgage receivable due to the sale of our payloadprocessing facility in our SFS segment and on investment of our restrictedcash. Additionally the gain on the sale of The Space Store, LLC of $189,000 wasrecorded as other income for the period ended December 31, 2006. For thefirst three months of fiscal year 2008 we earned $0.1 million on investment ofour restricted cash. We recognized a loss of ($28.8) million from theconversion of Junior and Senior Notes to common stock.

 

Income Taxes. Based on our projectedeffective tax rate for fiscal year 2008 and 2007, we recorded no tax expense.

 

Net Loss. Net Loss for the threemonths ended December 31, 2007 was approximately ($32.8) million or ($4.36)per share as compared to net loss of approximately ($1.8) million or ($1.42)per share for the three months ended December 31, 2006.

 

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*For the six months ended December 31, 2007 ascompared to the six months ended December 31, 2006.*

 

Revenue. Revenue decreasedapproximately 53% to $12.9 million for the six months ended December 31,2007 as compared to $27.7 million for the six months ended December 31,2006 (in millions).

 
| ** **                    | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** | ** **  | ** ** |
|-------------------------------|------------|--------------------------------|------------|------------|------------|-------------|------------|
| ** **                    | ** ** | **December 31,**          | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **                    | ** ** | **2007**                       | ** ** | **2006**   | ** ** | **Change**  | ** ** | **Change** | ** ** |
| SPACEHAB Flight  Services     |       | $                              | 4.1        |       | $          | 20.0        |       | $ | (15.9 | ) | (80 | )% |
| Astrotech Space  Operations   |       | 6.1                            |       | 4.2        |       | 1.9         |       | 45 | % |
| SPACEHAB  Government Services |       | 2.7                            |       | 3.3        |       | (0.6        | )          | (18 | )% |
| Other                         |       | 0.0                            |       | 0.2        |       | (0.2        | )          | 100 | % |
|                          |       | $                              | 12.9       |       | $          | 27.7        |       | $ | (14.8 | ) | (53 | )% |

 

Revenue from our SFS business unit decreased by $15.9million for the period ending December 31, 2007 as compared to the sameperiod ending December 31, 2006. The following summarizes the significantitems that affected the period ended December 31, 2007 as compared to theperiod ended December 31, 2006:

 

·                  Decrease in revenue for STS-116,STS-121 and STS-118 under the CMC with Lockheed Martin of $16.4 million due tolaunch and completion of these missions during prior periods.  There are no more scheduled missions underour CMC contract with Lockheed Martin.

·                  Increase in revenue of approximately$0.5 million mainly due to revenue for the manufacture of flight hardware forLockheed Martin on STS-118 and flight bags for Mitsubishi.

 

Revenue fromour Astrotech business unit increased by $1.9 million for the six months ended December 31,2007 as compared to the six month period ending December 31, 2006. Thefollowing summarizes significant items that affected the six months ended December 31,2007 as compared to the same period ended December 31, 2006:

 

·                  Decrease in revenue of $1.1 milliondue to four different satellites in our facilities for processing for all of orportion of the six month period ending December 31, 2006. Whereas, for thesame period this fiscal year, there was only one satellite processed in ourfacilities.

·                  Increase over the six month periodending December 31, 2006 revenue of $2.4 million where the reduction ofrevenue on our Lockheed Martin guaranteed missions contract for two futuremissions that were to be processed for Boeing on Atlas launch vehiclespartially offset by one Atlas mission that was processed at the Titusvillefacility contracted directly with Boeing. One of these missions, STP-1, was processed during fiscal year 2007.  Another mission , WGS-F1, was processed at theend of fiscal year 2007 and the beginning of fiscal year 2008.

·                  Decrease in revenue from six monthperiod ending December 31, 2006 to six month period ending December 31,2007 of $0.7 million from a contract to design a satellite processing facilitycompleted in the prior fiscal year.

·                  Increase in revenue of $2.3 millionat our VAFB facility due to three missions processed during the six monthperiod ending December 31, 2007, as compared to no missions beingprocessed during the same period last fiscal year.

·                  Astrotech supported two satellitelaunches at its Sea Launch facility during the period ending December 31,2006 which resulted in revenue of $1.0 million. In the period ending December 31,2007, Astrotech did not support a satellite launch at its Sea Launch facility.This is attributed to the January 30, 2007 launch failure experienced bySea Launch that resulted in the loss of a satellite and damage to their groundsupport equipment on the floating launch platform. Sea Launch returned toflight in January 2008.

 

Revenue from our SGS business unit decreased by $0.6million for the period ending December 31, 2007 as compared to the sameperiod ending December 31, 2006. The following summarizes the significantitems that affected the period ended December 31, 2007 as compared to theperiod ended December 31, 2006:

 

·                  Decrease in revenue from the sale ofour Destiny module to the Seattle Space Museum during the six month periodended December 31, 2006 in the amount of $0.3 million.

·                  Decrease in contract revenue with USAfor support of the Constellation Program of $0.2 million.

 

Cost of Revenue. Cost of revenue forthe six months ended December 31, 2007 decreased by 51% to approximately$10.9 million, as compared to $22.2 million for the same period of the prioryear (in millions).

 

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| ** **                    | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** | ** **  | ** ** |
|-------------------------------|------------|--------------------------------|------------|------------|------------|-------------|------------|
| ** **                    | ** ** | **December 31,**          | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **                    | ** ** | **2007**                       | ** ** | **2006**   | ** ** | **Change**  | ** ** | **Change** | ** ** |
| SPACEHAB Flight  Services     |       | $                              | 4.1        |       | $          | 14.8        |       | $ | (10.7 | ) | (72 | )% |
| Astrotech Space  Operations   |       | 4.6                            |       | 4.8        |       | (0.2        | )          | (4 | )% |
| SPACEHAB  Government Services |       | 2.2                            |       | 2.5        |       | (0.3        | )          | (12 | )% |
| Other                         |       | 0.0                            |       | 0.1        |       | (0.1        | )          | (100 | )% |
|                          |       | $                              | 10.9       |       | $          | 22.2        |       | $ | (11.3 | ) | (51 | )% |

 

The following summarizes significant items thataffected the six months ended December 31, 2007 as compared to the sameperiod ended December 31, 2006 for SFS:

 

·                  Decrease in cost of revenue, otherthan direct depreciation cost of revenue, for STS-116, STS-121 and STS-118under the CMC with Lockheed Martin of $8.7 million due to launch and completionof these missions during prior periods. There are no more scheduled missions under our CMC contract withLockheed Martin.

·                  Decrease in depreciation expense of$1.1 million due to the write-down of our flight assets during the period endedJune 30, 2007.

·                  Decrease in cost of revenue of $0.5million due to the termination of the ICC/VCC assets during the fiscal yearended June 30, 2007.

·                  Decrease in cost of revenue ofapproximately $0.4 million due to a reduction in workforce in January of2007.

 

The decreasein cost of revenue of $0.2 million in our Astrotech business unit is primarilydue to the startup of our contract to design a new satellite processingfacility during the six month period ending December 31, 2006 whichresulted in a decrease of cost of revenue of $0.6 million and an increase of$0.6 million in other mission specific expenses due to facility improvementsduring the six month period ending December 31, 2007.  During the six month period ending December 31,2007 cost of revenue decreased by $0.2 million due to timing of labor and laborrelated expenses and due to less missions in fiscal year 2008, lower utilities,and other related expenses.

 

The decrease in cost of revenue of $0.3 million in ourSGS business unit is primarily due to reduced contract activities for thePI&C subcontract.

 

Operating Expenses. Operatingexpenses decreased to $4.8 million for the six months ended December 31,2007 as compared to approximately $5.7 million for the six months ended December 31,2006. The following summarizes the significant differences between the twoperiods:

 

·                  Legal expenses decrease by $0.7million due to the termination of legal proceedings related to the loss of theRDM.

·                  Increase in consulting expenses of$0.1 million primarily related to increased business development efforts.

·                  Labor and related expenses decreaseby $0.5 million as a result of the reduction in work-force in January 2007.

·                  Decrease in expenses associated withthe operations of the Space Store sold in October of 2006 in the amount of$0.1 million.

·                  R&D increase of $0.3 millionduring the period ending December 31, 2007 as compared to the same periodlast year.  This is attributable to theMMS and ARCTUS programs.

 

Interest Expense. Interest expensewas approximately $1.1 million for the six months ended December 31, 2007as compared to approximately $2.2 million for the six months ended December 31,2006. The decrease in interest expense is primarily due to the conversion of$7.4 million of 8% convertible subordinated notes due October 2007 and$46.1 million of our 5.5% senior convertible notes due October 2010 intocommon and convertible preferred stock on October 5, 2007, and repaymentof the remaining $2.9 million of 8% convertible subordinated notes on October 15,2007.

 

Interest and Other Income. Interestincome is earned on our mortgage receivable due to the sale of our payloadprocessing facility in our SFS segment and on our restricted cash. Interest andother income was not significant for the six months ended December 31,2006, however, we earned interest income of $0.2 million over the six monthperiod ending December 31, 2007 from interest of our restricted cash.Additionally the gain on the sale of The Space Store, LLC of $189,000 wasrecorded as other income for the period ended December 31, 2006. Werecognized non cash debt conversion expense of ($30.2) million from theconversion of Junior and Senior Notes to common stock.

 

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Income Taxes. Based on our projectedeffective tax rate for fiscal year 2007, we recorded a tax benefit of $69,000for the six month period ending December 31, 2006.

 

Net Loss. Net Loss for the sixmonths ended December 31, 2007 was approximately ($33.7) million or ($7.72)per share as compared to net loss of approximately ($1.9) million or ($1.45)per share for the six months ended December 31, 2006. The net income forthe six months ended December 31, 2007 included a non cash debt conversionexpense of ($30.2) million from our induced conversion of convertiblesecurities.

 

### **Liquidity and CapitalResources**

 

Our primary source of liquidity is cash flow fromoperations. The principal uses of cash flow that affect our liquidity positioninclude both operational expenditures and debt service payments. Management isfocused on increasing cash flow and on managing cash effectively throughlimiting cash investments in long-term assets and reducing overhead expenses.

 

*Cash Flows From Operating Activities.*Cashprovided by (used in) operations for the six months ended December 31, 2007 and 2006 was ($6.4) million and$0.9 million, respectively. The significant items affecting the differences incash flows from operating activities for the six months ended December 31,2007 as compared to the six months ended December 31, 2006 are discussedbelow:

 

·                  Net loss for the six months ended December 31, 2007 was ($33.7) million ascompared to net loss for the six months ended December 31,2006 of ($1.9) million. Included in the net loss for the six months ended December 31,2007 is ($30.2) million of debt conversion expense recognized as a result ofthe bond exchange transaction in October

·                  Depreciation and amortization for thesix months ended December 31, 2007was $1.7 million as compared to $3.2 million for the six months period ended December 31, 2006

·                  Increase from employee stockcompensation of $0.1 million

·                  For the six months ended December 31, 2007, changes in assets usedcash from operations of ($0.7) million resulted primarily from an offset of the$3.4 million decrease in accounts receivable against the ($3.9) million inincreases from restricted cash.  For thesix months ended December 31, 2006,changes in assets provided cash of $9.4 million

·                  Changes in liabilities for the sixmonths ended December 31, 2007 usedcash from operations of $3.9 million. This change was due primarily to the useof advances received on the construction contract as well as the reduction incustomers’ cash on deposit.  For the sixmonths ended December 31, 2006, thechange in liabilities provided cash from operations of $8.9 million. Thischange was due primarily to the increases in accounts payable, accruedexpenses, and other liabilities of $2.9 million and an increase of $6.0 millionin advances on our construction contract. The increase in advances on theconstruction contract was primarily due to receiving the initial milestonepayment on our contract with a governmental agency to design and build a newprocessing facility.

 

*Cash Flows From Investing Activities*.For the six months ended December 31, 2007 and 2006, cash flows used ininvesting activities were $0.1 million and $0.1 million, respectively. Theirwere no significant items affecting the differences in cash flows frominvesting activities for the six months ended December 31, 2007 ascompared to the six months ended December 31, 2006.

 

*Cash Flows From Financing Activities.*Forthe six months ended December 31, 2007 and 2006, cash flows used infinancing activities were $2.9 million and $1.6 million, respectively. Thesignificant items affecting the differences in cash flows from financingactivities for the six months ended December 31, 2007 as compared to thesix months ended December 31, 2006 are discussed below:

 

·                  As part of the bond conversion, wepaid off the $2.9 million principal balance of the 8.0% junior subordinatednotes payable to bondholders not participating in the exchange for stock duringthe period ending December 31, 2007

·                  For the six months ended December 31,2006 we had mortgage payments on our Astrotech payload processing facility of$1.6 million. We have completely paid this mortgage as of December 31,2006

 

On March 25, 2003 the Board of Directorsauthorized us to repurchase up to $1.0 million of our outstanding common stockat market prices. Any purchases under our stock repurchase program may be madefrom time to time in the open market through block trades or otherwise inaccordance with applicable regulations of the SEC. As of December 31, 2006we had repurchased 11,610 shares at a cost of $117,320 under the program. Wewill continue to 

 

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evaluate the stock repurchase program and the fundsauthorized for the program, which represents an average cost of $10.10 pershare. This stock repurchase program remains available for purchases of ourstock.

 

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

 

As of December 31, 2007 we had cash on hand of$0.3 million and our working capital deficit was $2.5 million. Restricted cash,which consists of advance payments on a government contract to modify certainspacecraft processing facilities, totaled $10.2 million at December 31,2007. We carry a liability of $7.4 million for obligations under thisconstruction contract. For the six months ended December 31, 2007 our cashflows from operating activities utilized cash of $6.4 million.

 

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

 

As a consequence of the Exchange Transaction, werecognized non cash debt conversion expense of ($30.2) million in the threemonths ended December 31, 2007, and increased our common stock, no parvalue by $98.3 million.

 

We have submitted a response to NASA’s announcementsoliciting proposals for the COTS Program and have committed the necessaryresources for development and presentation of our proposed capability. On February 8, 2008, the Company enteredinto a Stock Purchase Agreement with certain investors for the purchase of55,000 shares of the Company’s Series D convertible preferred stock for atotal price of $5.5 million. Consummation of the transaction is contingent uponNASA awarding us a funded Space Act Agreement under the COTS Program andshareholder approval of the transaction. The Company will issue 150,150 sharesof common stock upon entering into the transaction.

 

The Series D convertiblepreferred stock will be converted into common stock within six months afterissuance based on a ratio determined by dividing $100.00 by the average of (x) theaverage of the closing price of the Company’s common stock for the businessdays January 18-25, 2008 and (y) the average of the closing price ofthe Company’s common stock for the five business days prior to the Company’sreceipt of written notification from NASA indicating the Company’s receipt of aCOTS award of at least $120.0 million.

 

In February 2008 weconsummated a financing facility with a commercial bank. This facility providesfor a $4.0 million term loan, payable in monthly installments of principal andinterest based upon a 15 year amortization, and a $2.0 million revolving creditfacility. The three-year term loan is secured by the assets of our Astrotechsubsidiary and the one-year revolving credit facility is secured by Astrotech’saccounts receivable.

 

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

 

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Our contractualobligations as of December 31, 2007are as follows (in thousands):

 
| ** **                          | ** ** | **At**                          | ** ** | **Remaining in**       | ** ** | **Fiscal**      | ** ** | **Fiscal**      | ** ** | **Fiscal**      | ** ** | **Fiscal**       | ** ** | **Fiscal**       | ** ** | ** **     | ** ** |
|-------------------------------------|------------|---------------------------------|------------|-----------------------------|------------|-----------------|------------|-----------------|------------|-----------------|------------|------------------|------------|------------------|------------|----------------|------------|
| **Contractual Obligations**    | ** ** | **December 31****,  2007** | ** ** | **Fiscal Year   2008** | ** ** | **Year   2009** | ** ** | **Year   2010** | ** ** | **Year   2011** | ** ** | **Year****2012** | ** ** | **Year****2013** | ** ** | **Thereafter** | ** ** |
| Long-term  Debt(3)                  |       | $                               | 6,861      |                        | $          | —          |       | $               | —     |            | $          | —           |       | $                | 6,861      |           | $          | — |   | $ | — |   | $ | — |   |
| ICC/VCC(2)                          |       | $                               | —     |                        | $          | —          |       | $               | —     |            | $          | —           |       | $                | —     |           | $          | — |   | $ | — |   | $ | — |   |
| Other Operating  Leases(1)          |       | 5,044                           |       | 779                         |       | 970             |       | 982             |       | 710             |       | 426              |       | 423              |       | 753            |       |
| Total  Contractual Cash Obligations |       | $                               | 11,905     |                        | $          | 779             |       | $               | 970        |            | $          | 982              |       | $                | 7,571      |           | $          | 426 |   | $ | 423 |   | $ | 753 |   |
| (excluding  interest payments)      |       |                            |       |                        |       |            |       |            |       |            |       |             |       |             |       |           |       |

 

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| 1 | - | For  the remainder of fiscal year 2008 we expect to receive net payments of $0.1  million for sub leases. For fiscal year 2009 the Company expects to receive  net payments of approximately $0.1 million. There are currently no subleases  beyond fiscal year 2009. |
|---|---|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2 | - | We  terminated our ICC/VCC lease agreement with Astrium North America on  August 28, 2007. There are no more cash obligations remaining.                                                                                                                         |
| 3 | - | Please  see the “Subsequent Events” section of this document.                                                                                                                                                                                               |

 

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

 

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

 

### **Construction Contract Contingency**

 

In August 2007, we entered into a $14.2 millionmodification to our existing Vandenberg construction contract. The modificationrequires us to complete the construction on the redesigned facility by September 30,2009. The modification contains penalties of up to $3.0 million if we do notmeet the contracted completion date. We have not established a reserve for thiscontingent liability.

 

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

 

We have no material changes to the disclosure made onthis matter in our Annual Report on Form 10-K for the year ended June 30,2007.

 

# **ITEM4.  CONTROLS AND PROCEDURES**

 

Under the supervision andwith the participation of our management, including our principal executiveofficer and principal financial officer, we have evaluated the effectiveness ofthe design and operation of our disclosure controls and procedures as of the endof the period covered by this quarterly report, and, based on our evaluation,our principal executive officer and principal financial officer have concludedthat these controls and procedures are effective. There have been no changes inour internal control over financial reporting that occurred during our lastfiscal quarter that have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.

 

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

 

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# **PART II:  OTHER INFORMATION**

 

# **ITEM1.  LEGAL PROCEEDINGS**

 

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

 

# **ITEM1A.  RISK FACTORS**

 

There have been nomaterial changes in the risk factors described in our Annual Report on Form 10-Kfor the year ended June 30, 2007.

 

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

 

During the six months ended December 31, 2007 wedid not issue any unregistered securities.

 

# **ITEM3.  DEFAULTS UPON SENIOR SECURITIES**

 

During the six months ended December 31, 2007 wedid not have any defaults upon senior securities.

 

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

 

A special meeting of shareholders was held on November 20,2007. At the meeting the shareholders approved the following:

 

(a)          Theamendment to our Amended and Restated Articles of Incorporation to increase thenumber of authorized shares of Common Stock to 750,000,000 shares:

 
| ** **                                            | ** ** | **For**    | ** ** | **Against** | ** ** | **Broker Non  Votes** | ** ** | **Abstaining** | ** ** |
|-------------------------------------------------------|------------|------------|------------|-------------|------------|----------------------------|------------|----------------|------------|
| Holders of  Common Stock                              |       | 32,528,740 |       | 1,141,217   |       | 0                          |       | 13,718         |       |
| Holders of  Series C Convertible Preferred Stock |       | 47,035     |       | 0           |       | 0                          |       | 0              |       |

 

(b)         Theauthorization of the reverse stock split of the Common Stock in the ratio ofone share of new Common Stock for each ten shares of old Common Stock and toamend the Amended and Restated Articles of Incorporation to decrease the numberof authorized shares of Common Stock from 750,000,000 shares to 75,000,000shares:

 
| ** **                                            | ** ** | **For**    | ** ** | **Against** | ** ** | **Broker Non  Votes** | ** ** | **Abstaining** | ** ** |
|-------------------------------------------------------|------------|------------|------------|-------------|------------|----------------------------|------------|----------------|------------|
| Holders of  Common Stock                              |       | 33,404,898 |       | 264,539     |       | 0                          |       | 14,238         |       |
| Holders of  Series C Convertible Preferred Stock |       | 47,035     |       | 0           |       | 0                          |       | 0              |       |

 

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# **ITEM 6.  EXHIBITS**

 

The following exhibits are filed herewith:

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                                                         |
|------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **       | ** ** | ** **                                                                                                                                                                                              |
| **3**            | ** ** | **Articles  of Incorporation and Bylaws**                                                                                                                                                               |
|             |       |                                                                                                                                                                                                    |
| 3.1              |       | Amended and  Restated Articles of Incorporation of the Registrant filed with the Secretary  of State of the state of Washington on November 26, 2007.                                              |
|             |       |                                                                                                                                                                                                    |
| 3.2              |       | Amended and  Restated Articles of Incorporation of the Registrant filed with the Secretary  of State of the state of Washington on November 27, 2007.                                              |
|             |       |                                                                                                                                                                                                    |
| 3.3              |       | Designation of  Rights, Terms and Preferences of Series C Convertible Preferred Stock of  the Registrant filed with the Secretary of State of the state of Washington  on September 20, 2007. |
|             |       |                                                                                                                                                                                                    |
| **4**            | ** ** | **Instruments  Defining the Rights of Security Holders, including Indentures**                                                                                                                          |
|             |       |                                                                                                                                                                                                    |
| 4.1              |       | Designation of  Rights, Terms and Preferences of Series C Convertible Preferred Stock of  the Registrant filed with the Secretary of State of the state of Washington  on September 20, 2007. |
|             |       |                                                                                                                                                                                                    |
| 4.2              |       | Preemptive  Rights Letter Agreement dated as of August 31, 2007 between the  Registrant and Plainfield Special Situations Master Fund Limited                                                      |
|             |       |                                                                                                                                                                                                    |
| 4.3              |       | Preemptive  Rights Letter Agreement dated as of August 31, 2007 between the  Registrant and Lanphier Capital Management Inc.                                                                       |
|             |       |                                                                                                                                                                                                    |
| 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 14,  2008 | /s/Thomas  B. Pickens, III                     |
|                          | Thomas B. Pickens, III                         |
|                          | Chief  Executive Officer                            |
|                          |                                                |
|                          |                                                |
|                          | /s/Brian  K. Harrington                             |
|                          | Brian K. Harrington                                 |
|                          | Senior Vice  President and  Chief Financial Officer |

 

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