**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM10-Q**

** **

**(MarkOne)**

 

**x****QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

**For thequarterly period ended September 30, 2007**

 

**OR**

 

**o****TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934.**

 

**For thetransition 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)has been subject to such filing requirements for the past 90 days.

 

Yes xNo o

 

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

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

 

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

 

Yes o No x

 

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

 

 

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**SPACEHAB,INCORPORATED AND SUBSIDIARIES**

**SEPTEMBER30, 2007 QUARTERLY REPORT ON FORM 10-Q**

 

**TABLEOF CONTENTS**

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

 

1

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# **DEFINITIONS**

 

As used in 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                     |
|-----------------|--------|-----------------------------------------------|
| Astrium         |   | Astrium GmbH                                  |
| Astrotech       |   | Astrotech Space Operations                    |
| Boeing          |   | The Boeing Company                            |
| CMC             |   | Cargo Mission Contract                        |
| Common stock    |   | SPACEHAB common stock                         |
| EPS             |   | Earnings Per Share                            |
| ICC             |   | Integrated Cargo Carrier                      |
| IDIQ            |   | Indefinite-Delivery, Indefinite-Quantity      |
| ISS             |   | International Space Station                   |
| Lockheed Martin |   | Lockheed Martin Corporation                   |
| NASA            |   | National Aeronautics and Space Administration |
| PI&C        |   | Program Integration and Control               |
| RDM             |   | Research Double Module                        |
| RSC Energia     |   | Rocket Space Corporation-Energia              |
| SEC             |   | Securities and Exchange Commission            |
| SFAS            |   | Statement of Financial Accounting Standards   |
| SFS             |   | SPACEHAB Flight Services                      |
| SGS             |   | SPACEHAB Government Services                  |
| SMI             |   | Space Media, Inc.                             |
| SMI Plan        |   | Space Media, Inc. Stock Option Plan           |
| SPF             |   | Spacecraft Processing Facility                |
| VCC             |   | Vertical Cargo Carrier                        |

 

2

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# **PARTI:  FINANCIAL INFORMATION**

# ** **

# **ITEM1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

# ** **

**SPACEHAB,INCORPORATED AND SUBSIDIARIES**

**UnauditedCondensed Consolidated Balance Sheets**

(In thousands,except share data)

 
| ** **                                                                                                                                  | ** ** | **September 30,** | ** ** | **June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|--------------|------------|
| ** **                                                                                                                                  | ** ** | **2007**          | ** ** | **2007**     | ** ** |
| ** **                                                                                                                                  | ** ** | **(unaudited)**   | ** ** | ** **   | ** ** |
| ASSETS                                                                                                                                      | ** ** | ** **        | ** ** | ** **   | ** ** |
| Cash and cash  equivalents                                                                                                                  |       | $                 | 2,561      |         | $          | 9,724 |   |
| Restricted cash                                                                                                                             |       | 14,631            |       | 6,282        |       |
| Accounts  receivable, net                                                                                                                   |       | 6,557             |       | 8,224        |       |
| Inventory                                                                                                                                   |       | 695               |       | 695          |       |
| Short term note  receivable, net                                                                                                            |       | 106               |       | 95           |       |
| Prepaid expenses  and other current assets                                                                                                  |       | 1,398             |       | 906          |       |
| Total current  assets                                                                                                                       |       | 25,948            |       | 25,926       |       |
| Property and equipment,  net of accumulated depreciation and amortization of $67,832 and $66,845,  respectively                             |       | 43,102            |       | 43,884       |       |
| Deferred  financing costs, net                                                                                                              |       | 1,465             |       | 1,596        |       |
| Long term note  receivable, net                                                                                                             |       | 193               |       | 178          |       |
| Other assets,  net                                                                                                                          |       | 1,149             |       | 891          |       |
| Total assets                                                                                                                                |       | $                 | 71,857     |         | $          | 72,475 |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                   |       |              |       |         |       |
| Convertible  subordinated notes payable - 8.0%                                                                                              |       | $                 | 10,306     |         | $          | 10,306 |   |
| Accounts payable                                                                                                                            |       | 2,147             |       | 1,494        |       |
| Accounts  payable-EADS                                                                                                                      |       | 324               |       | 2,955        |       |
| Accrued interest                                                                                                                            |       | 1,723             |       | 789          |       |
| Accrued expenses                                                                                                                            |       | 1,495             |       | 2,056        |       |
| Accrued  subcontracting services                                                                                                            |       | 1,313             |       | 3,669        |       |
| Deferred gains  on sale of buildings                                                                                                        |       | 221               |       | 221          |       |
| Advances on  construction contract                                                                                                          |       | 13,257            |       | 5,722        |       |
| Customer  deposits                                                                                                                          |       | —            |       | 3,106        |       |
| Deferred revenue                                                                                                                            |       | 998               |       | 1,153        |       |
| Total current  liabilities                                                                                                                  |       | 31,784            |       | 31,471       |       |
| Accrued contract  cost and other                                                                                                            |       | 76                |       | 39           |       |
| Deferred gains  on sale of buildings                                                                                                        |       | 1,096             |       | 1,152        |       |
| Senior  convertible 5.5% notes payable                                                                                                      |       | 52,944            |       | 52,944       |       |
| Total  liabilities                                                                                                                          |       | 85,900            |       | 85,606       |       |
| Commitments and  contingencies                                                                                                              |       |              |       |         |       |
| Stockholders’  equity                                                                                                                  |       |              |       |         |       |
| Preferred Stock,  no par value, convertible, authorized 2,500,000 shares, issued and 1,333,334  shares, (liquidation preference of $12,000) |       | 11,892            |       | 11,892       |       |
| Common stock, no  par value, 70,000,000 shares authorized, 13,143,296 and 13,143,296 shares  issued, respectively                           |       | 84,122            |       | 84,122       |       |
| Treasury stock,  116,100 shares, at cost                                                                                                    |       | (117              | )          | (117         | )          |
| Additional  paid-in capital                                                                                                                 |       | 488               |       | 544          |       |
| Accumulated  deficit                                                                                                                        |       | (110,428          | )          | (109,572     | )          |
| Total  stockholders’ deficit                                                                                                           |       | (14,043           | )          | (13,131      | )          |
| Total  liabilities and stockholders’ deficit                                                                                           |       | $                 | 71,857     |         | $          | 72,475 |   |

 

See accompanying notes to unaudited condensedconsolidated financial statements.

 

3

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**SPACEHAB, INCORPORATED ANDSUBSIDIARIES**

**UnauditedCondensed Consolidated Statements of Operations**

(In thousands,except share data)

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

 

See accompanying notes tounaudited condensed consolidated financial statements.

 

4

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**SPACEHAB,INCORPORATED AND SUBSIDIARIES**

**UnauditedCondensed Consolidated Statements of Cash Flows**

**(In thousands)**

 
| ** **                                                                                   | ** ** | **Three Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                   | ** ** | **2007**                              | ** ** | **2006** | ** ** |
| **Cash  flows from operating activities**                                                    | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Net loss                                                                                     |       | $                                     | (856       | ) | $ | (32 | ) |
| Adjustments to  reconcile net income(loss) to net cash provided by operating activities:     |       |                                  |       |   |   |
| Stock-based  compensation                                                                    |       | (56                                   | )          | 78 |   |
| Depreciation and  amortization, including debt issuance cost of $0.1 million for each period |       | 1,117                                 |       | 1,591 |   |
| Recognition of  deferred gain                                                                |       | (56                                   | )          | (55 | ) |
| Changes in  assets and liabilities:                                                          |       |                                  |       |   |   |
| Decrease  (increase) in accounts receivable                                                  |       | 1,641                                 |       | (1,534 | ) |
| Increase in  prepaid expenses and other current assets                                       |       | (492                                  | )          | (193 | ) |
| Increase in  other assets                                                                    |       | (258                                  | )          | (27 | ) |
| (Decrease)  increase in deferred revenue                                                     |       | (155                                  | )          | 458 |   |
| Decrease in accounts  payable, accounts payable-EADS, accrued interest, and accrued expenses |       | (1,605                                | )          | (993 | ) |
| Increase in  advances from construction contract                                             |       | 7,535                                 |       | — |   |
| (Decrease)  increase in customer deposits                                                    |       | (3,106                                | )          | 3,093 |   |
| (Decrease)  increase in accrued subcontracting services and other                            |       | (2,356                                | )          | 1,593 |   |
| Increase in  long-term accrued contract costs and other liabilities                          |       | 37                                    |       | 63 |   |
| Net cash  provided by operating activities                                                   |       | 1,390                                 |       | 4,042 |   |
| **Cash  flows from investing activities**                                                    | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Purchases of  property, equipment and leasehold improvements, net of reimbursements          |       | (204                                  | )          | (70 | ) |
| Increase in  restricted cash                                                                 |       | (8,349                                | )          | — |   |
| Net cash used in  investing activities                                                       |       | (8,553                                | )          | (70 | ) |
| **Cash  flows from financing activities**                                                    | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Payment of  mortgage loan                                                                    |       | —                                |       | (533 | ) |
| Proceeds from  issuance of common stock, net of expenses                                     |       | —                                |       | 37 |   |
| Net cash used in  financing activities                                                       |       | —                                |       | (496 | ) |
| Net change in  cash and cash equivalents                                                     |       | (7,163                                | )          | 3,476 |   |
| Cash and cash  equivalents at beginning of period                                            |       | 9,724                                 |       | 6,317 |   |
| Cash and cash  equivalents at end of period                                                  |       | $                                     | 2,561      |   | $ | 9,793 |   |

 

See accompanying notes tounaudited condensed consolidated financial statements.

 

5

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**SPACEHAB, INCORPORATED ANDSUBSIDIARIES**

**Notes to Unaudited CondensedConsolidated Financial Statements**

 

### **1. Description of theCompany and Operating Environment**

 

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

 

•      Expertisein qualifying hardware for spaceflight and the habitability and occupationalchallenges of space;

•      Facilitiesand support services necessary for the preparation of satellites and payloadsfor launch;

•      Engineering,analysis, and payload operations services;

•      Programintegration and control; and

•      Productdesign, development, and fabrication.

 

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

 

# **OURBUSINESS UNITS**

# ** **

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

 

*SPACEHAB Flight Services*. Theprimary goal of our Flight Services business unit is to enable government and commercialenterprises to overcome the accessibility, habitability and occupationalchallenges of space. To meet our clients’ specific mission requirements, weoffer a range of engineering, research, logistics, integration, operations, andground support services. Through this business unit, we have and will continueto offer a full range of ground-based pre- and post-flight experiment, cargo,and payload processing services as well as on-orbit operations support. Additionally,our experience with the integration of complex science payloads enables ourentrance into the field of microgravity processing of high value bioscienceproducts for the benefit of the general public. We are also supportingcontracts for ongoing flight hardware manufacturing projects in support of NASAand international customers. During fiscal year 2007, our Flight Servicesbusiness unit accounted for 65% of our consolidated revenues.

 

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

 

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

 

### **Short Term LiquidityIssues**

 

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

 

6

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

 

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

 

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

 

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

 

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 its subsidiariesas of September 30, 2007, and the results of its operations and cash flows forthe periods ended September 30, 2007 and 2006. However, the unaudited condensedconsolidated financial statements do not include all related footnotedisclosures.

 

The consolidated results of operations for the threemonth period ended September 30, 2007 are not necessarily indicative of theresults that may be expected for the full year. Our results of operations typicallyfluctuate significantly from quarter to quarter. The interim unauditedcondensed consolidated financial statements should be read in conjunction with ouraudited consolidated financial statements appearing in our Annual Report onForm 10-K for the fiscal year ended June 30, 2007.

 

### **3. Earnings per Share**

 

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

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

 

Convertible subordinated notes payable outstanding asof September 30, 2007, convertible into 756,404 shares of common stock at$13.625 per share and due October 2007, were not included in the computation ofdiluted EPS for the three months ended September 30, 2007 and 2006 as the conversionprice of the convertible notes payable per share was greater than the averagemarket price of the common shares during the periods.

 

7

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Senior convertible notes payable outstanding as of September30, 2007 due 2010 convertible into 35,296,000 shares of common stock at $1.50per share, which include a mandatory conversion feature once the Company’sstock price reaches $1.95 per share, have not been included in the computationof diluted EPS for the three months ended September 30, 2007 and 2006 as theconversion price(s) of the convertible notes payable per share were greaterthan the average market price of the shares during the period.

 

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

 

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

 

### **4. Revenue Recognition**

 

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

 

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

 

**ASummary of Revenue Recognition Methods Follows:**

 
| **Business Segment**     | ** ** | **Services/Products  Provided**                                                  | ** ** | **Contract Type**                                                                           | ** ** | **Method of Revenue  Recognition**                                                                                                                                       |
|-------------------------------|------------|----------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| SPACEHAB Flight  Services     |       | Commercial Space  Habitat Modules, Integration & Operations Support Services |       | Firm Fixed Price                                                                                 |       | Percentage-of-completion  based on costs incurred                                                                                                                                  |
|                          |       |                                                                             |       |                                                                                             |       |                                                                                                                                                                               |
| Astrotech Space  Operations   |       | Payload Processing  Facilities                                                   |       | Firm Fixed Price –  Mission Specific  Firm Fixed Price – Guaranteed Number of Missions |       | Ratably, over the  occupancy period of a satellite within the facility from arrival through  launch  Ratably, for multi-year contract payments recognized over the contract period |
|                          |       |                                                                             |       |                                                                                             |       |                                                                                                                                                                               |
| SPACEHAB Government  Services |       | Configuration  Management, Engineering Services                                  |       | Cost Plus Award/Fixed  Fee                                                                       |       | Earned as reimbursable  costs incurred plus award/fixed fee                                                                                                                        |

 

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

 

8

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### **5. Statements of CashFlows - Supplemental Information**

 

(a)   Cashpaid for interest costs was zero and $15,000 for the three months ended September30, 2007 and 2006, respectively. We did not capitalize any interest costsduring the three months ended September 30, 2007 or 2006.

 

(b)   Wepaid no income taxes for the three months ended September 30, 2007 and September30, 2006.

 

### **6. Credit Facilities**

 

On February 11, 2005 we enteredinto a revolving one-year credit facility with a bank providing for loans up to$5.0 million secured by the Company’s accounts receivable. In February 2006 therevolving credit facility was renewed and the term extended until February 11,2007 with substantially the same terms as the original agreement. The interestrate for the revolving credit facility was prime plus one percent (9.25% as ofJune 30, 2006). The unused revolving credit facility balance was subject tointerest charges of 0.25% to 0.5%. Funds available under the revolving creditfacility were limited to 80% of eligible accounts receivable, and we weresubject to various financial and other covenants including a minimum tangiblenet worth covenant, a cash flow coverage covenant, and a secured debt coveragecovenant. This credit facility expired on February 11, 2007 and we elected notto renew. We do not currently have a credit facility.

 

### **7. Segment Information**

 

Based on our organization forthe first quarter of fiscal year 2008, we operated in three business segments:SFS, Astrotech, and SGS. SFS was founded to commercially develop space habitatmodules that operate in the cargo bay of the space shuttles. SFS provides accessto the modules and integration and operations support services for both NASAand commercial customers. Astrotech provides payload processing facilities andservices to serve the spacecraft manufacturing and launch services industry.SGS is primarily engaged in providing engineering services and products to 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. 

 

ThreeMonths Ended September 30,

2007(in thousands):

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

 

Three Months Ended September30, 

2006 (in thousands):

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

 

### **8. Common Stock Optionsand Stock Purchase Plans**

 

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

 

9

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### **Non-qualified Options**

### ** **

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

 

### **The 1994 Plan**

### ** **

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

 

### **The Directors’ StockOption Plan**

### ** **

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

 

### **1997 Employee StockPurchase Plan**

### ** **

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

 

### **Space Media, Inc. StockOption Plan**

### ** **

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

 

### **Accounting for StockIssued to Employees**

### ** **

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

 

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

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

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

 

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•      Theexpected dividend yield is based on our current dividend yield and the bestestimate of projected dividend yield for future periods within the expectedlife of the option.

 

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

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

 

The weighted-average grant-date fair value of optionsgranted during the first three months of fiscal year 2007 was $0.32 per share.The intrinsic value for stock options is defined as the difference between thecurrent market value and the grant price. The total intrinsic value of optionsexercised during the first three months of fiscal year 2007 was zero. As of September30, 2007 there was $304,599 of unamortized expense related to our stock optionplans.

 

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

 

### **9. Related PartyTransactions**

 

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

 

### **Astrium GmbH**

 

Dr. Graul, a member of SPACEHAB’s Board of Directorsuntil his resignation in August 2007, is the Executive Vice President for AstriumGmbH (“Astrium”). Astrium provides unpressurized payload and integrationefforts to SPACEHAB on a fixed-price basis in addition to providing engineeringservices as required. For the three months ended September 30, 2007 and 2006, Astrium’spayload and integration services included in cost of revenue were approximately$1.0 million and $3.9 million, respectively. In August 2007 SPACEHAB terminatedits ICC/VCC lease agreements with Astrium North America (see Note 13). Weagreed to reimburse Astrium North America $1.4 million upon termination ofthese leases.

 

### **Executive Credit Cards**

 

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

 

### **10. RecentAccounting Pronouncement**

 

In July 2006, the Financial Accounting Standards Boardissued 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, *Accounting for IncomeTaxes*. It prescribes a recognition threshold and measurementattribute for financial statement disclosure of tax positions taken or expectedto be taken on a tax return. We will adopt provisions of this interpretationbeginning with the Company’s first-quarter of fiscal year 2008. We do notexpect the application of the standard to 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 to

 

11

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

 

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

 

### **11. Restricted Cash, Advanceson Construction Contract, and Contingency**

### ** **

In December 2006, our Astrotech subsidiary was awardeda contract with a governmental agency to modify one of our payload processingfacilities to specific requirements of a programmed mission. Under the terms ofthis $20.0 million fixed-price contract, which has subsequently been increasedto $34.0 million, we will own the improvements after completion of the contractobligations. We have entered into a firm fixed price construction subcontractwith J. P. Donovan Construction, Inc. to provide a significant portion of thedesign and construction work that will be required under our contract. Inaccordance with our contracts, payments will be received from our customer on amilestone schedule that generally provides receipt of cash before payments arerequired to the contractor under their milestone schedule. Receipts in advanceof disbursements will be retained in a restricted cash account within oursubsidiary company and used exclusively for purposes of the contractobligations. As of September 30, 2007, net cash receipts of $14.6 million havebeen designated as restricted cash and $13.3 million has been designated as aliability.

 

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

 

### **12. Customer Deposits**

### ** **

During the quarter ended September 30, 2007 we paid$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 endingSeptember 30, 2007.

 

### **13. Agreement toTermination 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, 2001in 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 of theVertical Cargo Carrier (VCC) assets from Astrium, GmbH. The ICC and VCC assetsare specifically designed cargo carrying equipment used from time to time inthe U.S. space shuttle. In order to terminate these two leases, we havemutually agreed that the Company reimburse Astrium, GmbH $1.4 million for theperiod March 1, 2007 through August 31, 2007 for the ICC and VCC assets andincur no financial obligations for either the ICC or VCC after August 31, 2007.

 

### **14. Subsequent Events**

### ** **

### **Exchange Offer**

### ** **

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

 

As a result of the closing of the Exchange Offer, forthe approximately $7.4 million in principal amount of Junior Notes tendered,the holders received approximately 550,000 shares of common stock and 8,927shares of Series C

 

12

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Convertible Preferred Stock. Following the closing ofthe Exchange Offer, approximately $2.9 million of Junior Notes remainedoutstanding pursuant to the original terms of the indenture governing theJunior Notes. On October 15, 2007 we redeemed the outstanding Junior Notes,including accrued interest, for cash. In addition, for the approximately $46.1million in principal amount of outstanding Senior Notes tendered, the holdersreceived approximately 30.7 million shares of common stock and 46,083 shares ofSeries C Convertible Preferred Stock. Following the closing of the ExchangeOffer, approximately $6.9 million of Senior Notes remained outstanding pursuantto an indenture governing the Senior Notes that was amended through theelimination of substantially 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, amongthe Company and certain holders of Junior Notes and Senior Notes, the Companyissued to Astrium GmbH 1,333,334 shares of common stock and 6,540 shares ofSeries C Convertible Preferred Stock in exchange for Astrium’s existing1,333,334 shares of Series B Convertible Preferred Stock.

 

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

 

### **NASDAQ Deficiency Letters**

### ** **

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

 

Marketplace Rule 4310(c)(4) requires that we maintaina $1.00 bid price. Following earlier notices of non-compliance with therequirement, we were granted a grace period, which expired on October 1, 2007. Wewere also not in compliance with Marketplace Rule 4310(c)(3) which requires usto have $500,000 of net income from continuing operations for the most recentlycompleted fiscal year or two of the three most recently completed fiscal years;or $35,000,000 market value of listed securities; or $2,500,000 in stockholders’equity.

 

On October 22, 2007, we announced that as a result ofthe resignation of Myron J. Goins as a director of SPACEHAB, Inc. effectiveOctober 16, 2007, we received a letter from The NASDAQ Stock Market notifyingus that we no longer comply with the NASDAQ independent director and auditcommittee requirements.

 

Consistent with Marketplace Rule 4350(c)(1), whichrequires 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 meeting isheld before April 14, 2008, then we must evidence compliance no later thanApril 14, 2008.

 

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# **ITEM2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

 

*You should read the following discussion andanalysis together with our consolidated financial statements and notes theretoand the discussion “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” and Item 1A. ― “Risk Factors” included in our2007 Annual 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 LookingStatements**

 

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

 

### **Financial Summary**

 

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

 

The following table illustrates financial highlightsfor the quarters ended September 30, 2007 and September 30, 2006:

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

 

----

*excludingrestricted cash

 

### **Business Segments**

 

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

 

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

 

14

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

 

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

 

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

•                  Thedependability of the U.S. space shuttle launch schedule and mission manifests

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

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

 

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

 

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

 

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

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

 

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

 

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

 

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

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

•                  Ourability to control costs within our budget commitments

 

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

 

•                  Ourability to control sales, general and administrative costs in a period ofdecreasing revenues and pursuit of new business opportunities

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

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

 

### **New Business Initiatives**

 

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

 

•                  Processingproducts and services in microgravity;

•                  Commercializingproducts manufactured in microgravity;

•                  Commercializingproducts developed for use in the space industry;

•                  Acquiringother U.S. space contractors; and

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

•                  TheFederal Aviation Administration and Department of Transportation have enactednew regulations for air transportation of oxygen containers to enhance safetyin the event of a fire. Applying decades of experience in the development ofspecialized containers, we have been working with an industry partner todevelop and certify a container to meet these new requirements. If successful,this project will provide us an opportunity to enter a new market.

 

### **Our Business Strategy**

 

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

 

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

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

•                  Bringmature space technology and space-based processing to the commercial markets;

•                  Provideaccess to space on alternative launch systems for proprietary space processingand for commercial customers;

•                  Designsolutions that encourage private commercial investment in space; and

•                  Continueto develop space-related hardware.

 

# **RESULTSOF OPERATIONS**

 

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

 

Revenue. Revenue decreasedapproximately 42% to $8.6 million for the three months ended September 30, 2007as compared to $14.9 million for the three months ended September 30, 2006.

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

 

Revenue from our SFS business unit decreased by $6.4million for the three months ended September 30, 2007 as compared to the threemonths ended September 30, 2006. The following summarizes the significant itemsthat affected the quarter ended September 30, 2007 as compared to the quarterended September 30, 2006:

 

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

•                  Decreasein revenue from STS-116 of $5.2 million due to the launch of STS-116 inDecember 2006.

•                  Decreasein revenue from STS-121 of $0.6 million due to the launch of STS-121 in July2006.

•                  Othercontract revenue increase of $0.3 million mainly due to various flight hardwaremanufacturing purchase orders.

 

17

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Revenue fromour Astrotech business unit increased by $0.5 million for the three monthsended September 30, 2007 as compared to the three months ended September 30,2006. The following summarizes significant items that affected the quarterended September 30, 2007 as compared to the quarter ended September 30, 2006:

 

•                  Increasein revenue of $0.4 million at our Florida facility due to two satellitesin-house for the period ending September 30, 2007 whereas, for the same periodlast fiscal year, only one satellite was in the facility for most of the period.

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

•                  Astrotechsupported one satellite launch at its Sea Launch facility during the periodending September 30, 2006 which resulted in revenue of $0.5 million. In theperiod ending September 30, 2007, Astrotech did not support a satellite launchat its Sea Launch facility. This is attributed to the January 30, 2007 launchfailure experienced by Sea Launch that resulted in the loss of a satellite anddamage to their ground support equipment on the floating launch platform. Afull inspection, evaluation, and repair of the damage incurred and preliminaryreports indicate that Sea Launch will launch their return to flight satellitein November 2007.

•                  Otherrevenue decrease of $0.2 million.

 

Revenue from our SGS business unit decreased by $0.2million for the three months ended September 30, 2007 as compared to the threemonths ended September 30, 2006. The following summarizes the significant itemsthat affected the quarter ended September 30, 2007 as compared to the quarterended September 30, 2006:

 

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

•                  Increasein revenue from our contract with USA for support of the Constellation Programof $0.1 million.

 

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

 

Cost of Revenue. Cost of revenue forthe three months ended September 30, 2007 decreased by 42% to approximately$6.4 million, as compared to $11.1 million for the three months ended September30, 2006.

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

 

Cost of revenue for our SFS business unit decreased$4.2 million for the three months ended September 30, 2007 compared to the threemonths ended September 30, 2006. The following summarizes significant itemsthat affected the three months ended September 30, 2007 as compared to the sameperiod ended September 30, 2006 for SFS:

 

•                  Decreasein cost of revenue from STS-118, other than depreciation expense, of $0.3million due to the launch of STS-118 in August 2007. STS-118 was the lastmission we have under contract to utilize our modules on the space shuttle.

•                  Decreasein cost of revenue from STS-116 and STS-121 of $2.8 million due to the launchof STS-116 in December 2006.

•                  Asa result of the reduction of our SFS workforce during the third quarter offiscal year 2007, there is a $0.6 million decrease in salaries and relatedcosts during the three months ended September 30, 2007, as compared to the threemonths ended September 30, 2006.

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

 

18

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

 

Cost of revenue from our SGS business unit decreasedby $0.2 million for the quarter ended September 30, 2007 as compared to thesame quarter ended September 30, 2006. The following summarizes the significantitems that affected the quarter ended September 30, 2007 as compared to thequarter ended September 30, 2006:

 

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

 

Operating Expenses. Operatingexpenses decreased to $2.1 million for the three months ended September 30, 2007as compared to approximately $2.9 million for the three months ended September30, 2006. The following summarizes the significant differences between thethree months ended September 30, 2007 and the three months ended September 30,2006:

 

•                  Legalexpenses decreased by $0.3 million. This decrease is mainly due to our droppingof the claims against NASA for the loss of the RDM during the third quarter offiscal year 2007

•                  Stockoption expense decreased by $0.1 million due to multiple stock options beingterminated or expiring

•                  Decreasein audit fees $0.1 million due to our changing auditors during the thirdquarter of fiscal year 2007

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

•                  SFSoperating expenses decreased by approximately $0.3 million. This decrease isdue to staff reductions during the third quarter of fiscal year 2007 whichincluded termination of SFS’ Vice President of Operations

•                  Decreasein operating expenses of $0.1 million for SMI due to selling The Space Store,LLC during the second quarter of fiscal year 2007

 

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

 

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

 

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

 

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

 

### **Liquidity and CapitalResources**

### ** **

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

 

*Cash Flows From Operating Activities.*Cashprovided by operations for the three months ended September 30, 2007 and 2006 was $1.4 million and $4.0million, respectively. The significant items affecting the differences in cashflows from operating activities for the three months ended September 30, 2007as compared to the three months ended September 30, 2006 are discussed below:

 

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

•                  Depreciationand amortization for the three months ended September30, 2007 was $1.1 million as compared to $1.6 million for the threemonths period ended September 30, 2006mainly due to the decrease in depreciation expense for our flight assets of$0.5 million due to the impairment of SFS assets completed during the fourthquarter of fiscal year 2007.

 

19

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

•                  Changesin liabilities for the three months ended September30, 2007 used cash from operations of $0.4 million. This change was dueprimarily to the decreases in accounts payable, accrued expenses, and otherliabilities of $3.9 million, a decrease of $0.1 million in deferred revenue, anincrease in advances from construction contract of $7.5 million, and a decreasein customer deposits of $3.1 million. The decrease in deferred revenue wasprimarily due to the WGS-1 mission being processed at Astrotech during the threemonths ended September 30, 2007 that was originally contracted and paid by ourcustomer during FY2005. This mission resulted in a decrease in deferred revenueof $0.8 million. This decrease was partially offset by increases for futureNASA IDIQ missions. The increase in advances on the construction contract of$7.5 million was due to receiving the initial milestone payments on ourcontract with a governmental agency to design and build a new payload processingfacility. For the three months ended September 30,2006 the change in liabilities provided cash from operations of $4.3 million.This was due primarily to the increases in accounts payable, accrued expenses,and other liabilities of $0.7 million, an increase of $0.5 million in deferredrevenue, and an increase in customer deposits of $3.1 million. The increase indeferred revenue was primarily due to meeting certain performance milestones onour IDIQ contract with NASA before the arrival of the spacecraft at ourfacility.

 

*Cash FlowsFrom Investing Activities*. For the three months endedSeptember 30, 2007 and 2006, cash flows used in investing activities were $8.5million and $0.1 million, respectively. The significant items affecting thedifferences in cash flows from investing activities for the three months endedSeptember 30, 2007 as compared to the three months ended September 30, 2006 arediscussed below:

 

•                  Therewere purchases of property and equipment of $0.2 million for the three monthsended September 30, 2007 as compared to$0.1 million for the three months ended September30, 2006. This difference was primarily due to capital expenditures forour Astrotech facility in Florida for ongoing capital.

•                  Forthe three months ended September 30, 2007 cash flows from investing activitiesincluded an increase in restricted cash of $8.3 million.

 

*Cash Flows From Financing Activities.*Forthe three months ended September 30, 2007 and 2006, cash flows used in financingactivities were $0.0 million and $0.5 million, respectively. The significantitems affecting the differences in cash flows from financing activities for thethree months ended September 30, 2007 as compared to the three months ended September30, 2006 are discussed below:

 

•                  Forthe three months ended September 30, 2006 we paid $0.5 million on our mortgageloan for our Astrotech building

 

On March 25, 2003 the Board of Directors authorized usto repurchase up to $1.0 million of our outstanding common stock at marketprices. Any purchases under our stock repurchase program may be made from timeto time, in the open market, through block trades or otherwise in accordancewith applicable regulations of the SEC. As of September 30, 2007 we hadrepurchased 116,100 shares at a cost of $117,320 under the program, which representsan average cost of $1.01 per share. We will continue to evaluate the stockrepurchase program and the funds authorized for the program. This stockrepurchase program remains available for purchases of our stock.

 

On August 28, 2007, the Company and Astrium, GmbHmutually agreed to terminate the lease agreement dated as of February 28, 2001in regards to the Company’s lease of the Integrated Cargo Carriers (ICC) assetsfrom 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 will reimburse Astrium, GmbH $1.4 million for theperiod of March 1, 2007 through August 31, 2007 for the ICC and VCC assets andincur no financial obligations for either the ICC or VCC after August 31, 2007.During the quarter end September 30, 2007, we made the payment to Astrium,GmbH.

 

Management continues to focus its efforts on improvingour overall liquidity through identifying new business opportunities within theareas of our core competencies, reducing operating expenses, and limiting cashcommitments for future capital investments and new asset development.Additionally, management continues to

 

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evaluate operating expenses in an effort to reduce oreliminate costs not required to effectively operate the Company. During thefirst quarter of fiscal year 2008, we had a reduction in staff of approximately13 positions. This reduction resulted from the completion of space shuttle missionSTS-118 in August 2007, leaving us with no shuttle missions under contract. Weexpect this reduction in force to result in savings of $0.7 million annually.Cash expenditures associated with the restructuring estimated at $85,000 willbe paid during the second quarter of fiscal year 2008.

 

As of September 30, 2007 we had cash and restrictedcash on hand of $17.2 million and our working capital deficit was $5.8 million.Restricted cash, which consists of advance payments on a government contract tomodify certain spacecraft processing facilities, totaled $14.6 million atSeptember 30, 2007. We carry a current liability of $13.3 million forobligations under this construction contract. For the three months endedSeptember 30, 2007 we generated $1.4 million from operating activities. Our$5.0 million revolving credit facility expired as of February 11, 2007 and weelected not to renew the facility. We do not currently have a credit facility.

 

Upon consummation of our Exchange Transaction onOctober 5, 2007 (see below), we have a balance of $2.9 million principle amountof our 8% convertible notes due, along with accrued interest on such notes andaccrued interest on the remaining balance of $6.9 million of our 5.5% seniorconvertible notes on October 15, 2007. On October 15, 2007 we redeemed theJunior Notes, including accrued interest, for cash. With the conclusion ofSTS-118 in August 2007, we expected to have a material decrease in our revenuefrom our Flight Services business unit, which has accounted for over 65% of ourconsolidated revenue during fiscal year 2007. As a result, in order to continueto fund our current operations, we will need additional capital. No assurancecan be given that we will be able to obtain a new source of capital on termsthat are acceptable to us. If we are unable to obtain new capital, we may beforced to subject ourselves to bankruptcy, reorganization, liquidation, dissolutionor similar proceeding. Management has implemented significant strategies toaddress its liquidity requirements; however, no assurance can be given that theCompany will be successful in achieving the remaining goals.

 

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

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

 

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(1).       For the remainder of fiscal year 2008 weexpect to receive net payments of $0.2 million for sub leases. For fiscal year2009 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 agreementwith Astrium North America on August 28, 2007. There are no more cashobligations remaining.

 

(3).       Please see the “Subsequent Events” sectionof this document.

 

### **Construction ContractContingency**

 

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

 

### **Capitalization**

 

On October 5, 2007 we consummated our offer toexchange our outstanding 8% convertible subordinated notes due 2007, 5.5% seniorconvertible notes due 2010, and Series B Convertible Preferred Stock for commonstock and Series C Convertible Preferred Stock. The following table sets forthour unaudited consolidated indebtedness and capitalization as of September 30,2007 and our pro forma consolidated indebtedness and capitalization as ofSeptember 30, 2007 assuming the Exchange Transaction had closed as of suchdate. You should read this

 

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information in conjunction with “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” andour consolidated financial statements and notes thereto.

 
| ** **                                                                                                                                                                   | ** **   | **September 30, 2007** | *** *** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------|------------------------|--------------|
| **(amounts in thousands except  share and per share data)**                                                                                                                  | ** **   | **Reported**           | ** **   | **Pro Forma** | *** *** |
| ***Cash  & Investments:***                                                                                                                                               | * *     | * *               | * *     | * * | * * |
| Cash and cash  equivalents (excluding restricted cash)                                                                                                                       |         | $                      | 2,561        |   | $ | 2,561 |   |
|                                                                                                                                                                         |         |                   |         |   |   |
| ***Capitalization:***                                                                                                                                                        | *** *** | *** ***           | *** *** | *** *** | *** *** |
| Debt:                                                                                                                                                                        |         |                   |         |   |   |
| 8.0% Subordinated  Convertible Notes due October 15, 2007(4)                                                                                                                 |         | 10,306                 |         | 2,867 |   |
| 5.5% Senior  Convertible notes due October 15, 2010                                                                                                                          |         | 52,944                 |         | 6,861 |   |
| Total debt                                                                                                                                                                   |         | $                      | 63,250       |   | $ | 9,728 |   |
| Shareholders  equity:                                                                                                                                                        |         |                   |         |   |   |
| Preferred stock,  no par value, 2,500,000 shares authorized                                                                                                                  |         |                   |         |   |   |
| Series B  Convertible Preferred Stock, 1,333,334 shares issued and outstanding at March  31, 2007 (liquidation preference of $12,000)                                        |         | 11,892                 |         | — |   |
| Series C  Convertible Preferred Stock, 61,550 shares issued and outstanding on pro  forma basis, convertible into 89,924,258 common shares, no liquidation  preference(1)(2) |         | —                 |         | 31,473 |   |
| Common stock, no  par value, 70,000,000 shares authorized, 13,027,196 shares outstanding at  September 30, 2007 and 45,648,377 shares pro forma                              |         | 84,122                 |         | 95,537 |   |
| Treasury stock,  116,100 shares at cost                                                                                                                                      |         | (117                   | )            | (117 | ) |
| Additional  paid-in capital                                                                                                                                                  |         | 488                    |         | 488 |   |
| Accumulated  deficit(3)(5)                                                                                                                                                   |         | (110,428               | )            | (89,824 | ) |
| Total  stockholders equity                                                                                                                                                   |         | (14,043                | )            | 37,557 |   |
| ***Total  Capitalization***                                                                                                                                                  |         | $                      | 49,207       |   | $ | 47,285 |   |

 

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(1).          Common stock is valued at $0.35 per shareas of the pro forma date of the exchange.

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

(3).          Deficit on pro forma basis includesfinancing costs of $1,922.

(4).          The remaining $2,867 of 8% SubordinatedConvertible Notes were redeemed for cash at their maturity on October 15, 2007.

(5).          A gain of $20,604 is recognized on theexchange transaction.

 

### **Off-Balance SheetArrangements**

 

We do not have any significant off-balance sheet arrangements,other than operating leases, that have, or are reasonably likely to have, acurrent or future material effect on our financial condition, revenues orexpenses, results of operations, liquidity, capital expenditures or capitalresources.

 

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# **ITEM3. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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 theend of the period covered by this quarterly report, and, based on ourevaluation, our principal executive officer and principal financial officerhave concluded that these controls and procedures are effective. There havebeen no changes in our internal control over financial reporting that occurredduring our last fiscal quarter that have materially affected, or are reasonablylikely to materially affect, our internal control over financial reporting.

 

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

 

# **PARTII:  OTHER INFORMATION**

 

# **ITEM1. LEGAL PROCEEDINGS**

 

Currently, the Company is not a party to any pending or threatenedproceedings, which in management’s opinion, would have a material adverseeffect on our business, financial condition, or results of operation.

 

# **ITEM1A. RISK FACTORS**

 

There have been nomaterial changes in the Risk Factors disclosed in Item 1A in our Annual Reporton Form 10-K for the year ended June 30, 2007.

 

# **ITEM2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

During the three months ended September 30, 2007 wedid not issue any unregistered securities.

 

# **ITEM3. DEFAULTS UPON SENIOR SECURITIES**

 

During the three months ended September 30, 2007 wedid not have any defaults upon senior securities.

 

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

 

During the three months ended September 30, 2007 wedid not have any submissions of matters to a vote of security holders.

 

# **ITEM6. EXHIBITS**

 

The following exhibits are filed herewith:

 

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

 

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**SIGNATURE**

 

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

 

 
|                          | SPACEHAB, INCORPORATED                              |
|-------------------------------|-----------------------------------------------------|
|                          |                                                |
|                          |                                                |
| Date:  November 13, 2007 | /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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