**UNITED STATES**

**SECURITIES ANDEXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 10-Q**

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

 

**For the transition period from               to               **

**Commission File Number: 0-27206**

**SPACEHAB,Incorporated**

(Exact name of registrant asspecified in this charter)

| **Washington**                     |   | **91-1273737**       |
|------------------------------------|--------|----------------------|
| (State or other  jurisdiction      |   | (I.R.S. Employer     |
| of incorporation  or organization) |   | 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 markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15 (d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

Yes xNo o

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

Large acceleratedfiler o                                            Acceleratedfiler o                                      Non-acceleratedfiler x

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

Yes o No x

As of May 7, 2007 there were 12,989,213 shares of theregistrant’s common stock outstanding.

 

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**SPACEHAB, INCORPORATEDAND SUBSIDIARIES**

**MARCH31, 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                                                                                    |   |
|                                                           |                                                                                             |        |        |  |  |

 

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# **DEFINITIONS**

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

 

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# **PART I: FINANCIAL INFORMATION**

# **ITEM 1.  UNAUDITED CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**SPACEHAB, INCORPORATEDAND SUBSIDIARIES**

**Unaudited Condensed ConsolidatedBalance Sheets**

(In thousands,except share data)
| ** **                                                                                                                                  | ** ** | **March 31,** | ** ** | **June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-------------------|------------|
| ** **                                                                                                                                  | ** ** | **2007**           | ** ** | **2006**          | ** ** |
| ** **                                                                                                                                  | ** ** | **(unaudited)**    | ** ** | ** **        | ** ** |
| ASSETS                                                                                                                                      |       |               |       |              |       |
| Cash and cash  equivalents                                                                                                                  |       | $                  | 12,328     |              | $          | 6,317 |   |
| Restricted cash                                                                                                                             |       | 7,181              |       | —            |       |
| Accounts receivable,  net                                                                                                                   |       | 11,528             |       | 11,379            |       |
| Inventory                                                                                                                                   |       | 2,369              |       | 2,369             |       |
| Prepaid expenses and  other current assets                                                                                                  |       | 892                |       | 610               |       |
| Total current  assets                                                                                                                       |       | 34,298             |       | 20,675            |       |
| Property and equipment,  net of accumulated depreciation and amortization of $54,994 and $50,620,  respectively                             |       | 57,677             |       | 61,637            |       |
| Deferred financing costs,  net                                                                                                              |       | 1,728              |       | 2,124             |       |
| Other assets, net                                                                                                                           |       | 1,237              |       | 1,014             |       |
| Total assets                                                                                                                                |       | $                  | 94,940     |              | $          | 85,450 |   |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                                  |       |               |       |              |       |
| Convertible 8%  subordinated notes payable                                                                                                  |       | $                  | 10,306     |              | $          | — |   |
| Mortgage loan payable                                                                                                                       |       | —             |       | 1,636             |       |
| Accounts payable                                                                                                                            |       | 696                |       | 1,598             |       |
| Accounts  payable-Astrium                                                                                                                   |       | 5,263              |       | 3,386             |       |
| Accrued interest                                                                                                                            |       | 1,723              |       | 804               |       |
| Accrued expenses                                                                                                                            |       | 1,551              |       | 2,394             |       |
| Accrued subcontracting  services                                                                                                            |       | 9,270              |       | 6,562             |       |
| Advances on  construction contract                                                                                                          |       | 7,143              |       | —            |       |
| Customer deposits                                                                                                                           |       | 3,106              |       | —            |       |
| Deferred gains on sale  of buildings                                                                                                        |       | 221                |       | 221               |       |
| Deferred revenue,  current portion                                                                                                          |       | 1,397              |       | 1,321             |       |
| Total current  liabilities                                                                                                                  |       | 40,676             |       | 17,922            |       |
| Accrued contract cost  and other                                                                                                            |       | 78                 |       | 96                |       |
| Deferred gains on sale  of buildings                                                                                                        |       | 1,207              |       | 1,373             |       |
| Convertible 8%  subordinated notes payable                                                                                                  |       | —             |       | 10,306            |       |
| Senior convertible 5.5%  notes payable                                                                                                      |       | 52,944             |       | 52,944            |       |
| Total  liabilities                                                                                                                          |       | 94,905             |       | 82,641            |       |
| Commitments and  contingencies                                                                                                              |       |               |       |              |       |
| Stockholders’ equity                                                                                                                   |       |               |       |              |       |
| Preferred stock,  no par value, convertible, authorized 2,500,000 shares, issued and 1,333,334  shares, (liquidation preference of $12,000) |       | 11,892             |       | 11,892            |       |
| Common stock, no  par value, 70,000,000 shares authorized, 13,105,313 and 12,976,264 shares  issued, respectively                           |       | 84,105             |       | 84,030            |       |
| Treasury stock,  116,100 shares, at cost                                                                                                    |       | (117               | )          | (117              | )          |
| Additional  paid-in capital                                                                                                                 |       | 502                |       | 284               |       |
| Accumulated  deficit                                                                                                                        |       | (96,347            | )          | (93,280           | )          |
| Total stockholders’  equity                                                                                                            |       | 35                 |       | 2,809             |       |
| Total liabilities and stockholders’ equity                                                                                             |       | $                  | 94,940     |              | $          | 85,450 |   |

 

See accompanying notes tounaudited condensed consolidated financial statements.

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**SPACEHAB, INCORPORATEDAND SUBSIDIARIES**

**Unaudited CondensedConsolidated Statements of Operations**

(In thousands,except share data)
| ** **                                                 | ** ** | **Three Months**         | ** ** | **Nine Months**          | ** ** |
|------------------------------------------------------------|------------|-------------------------------|------------|-------------------------------|------------|
| ** **                                                 | ** ** | **Ended March 31,** | ** ** | **Ended March 31,** | ** ** |
| ** **                                                 | ** ** | **2007**                      | ** ** | **2006**                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenue                                                    |       | $                             | 12,183     |                          | $          | 12,400 |   | $ | 39,932 |   | $ | 36,178 |   |
| Costs of revenue                                           |       | 9,757                         |       | 9,979                         |       | 31,962 |   | 29,980 |   |
| Impairment of flight  asset                                |       | —                        |       | —                        |       | — |   | 6,283 |   |
| Gross profit (loss)                                        |       | 2,426                         |       | 2,421                         |       | 7,970 |   | (85 | ) |
| Operating expenses:                                        |       |                          |       |                          |       |   |   |   |   |
| Selling, general  and administrative                       |       | 2,597                         |       | 2,923                         |       | 7,963 |   | 7,858 |   |
| Research and  development                                  |       | 177                           |       | 91                            |       | 542 |   | 302 |   |
| Total operating  expenses                                  |       | 2,774                         |       | 3,014                         |       | 8,505 |   | 8,160 |   |
| Income (loss)  from operations                             |       | (348                          | )          | (593                          | )          | (535 | ) | (8,245 | ) |
| Interest expense                                           |       | (1,068                        | )          | (1,168                        | )          | (3,225 | ) | (4,428 | ) |
| Interest and other income,  net                            |       | 221                           |       | 88                            |       | 624 |   | 260 |   |
| Loss before income  taxes                                  |       | (1,195                        | )          | (1,673                        | )          | (3,136 | ) | (12,413 | ) |
| Income tax (expense)  benefit                              |       | —                        |       | —                        |       | 69 |   | (32 | ) |
| Net loss                                                   |       | $                             | (1,195     | )                             | $          | (1,673 | ) | $ | (3,067 | ) | $ | (12,445 | ) |
| Loss per share:                                            |       |                          |       |                          |       |   |   |   |   |
| Net loss per  share — basic                           |       | $                             | (0.09      | )                             | $          | (0.13 | ) | $ | (0.24 | ) | $ | (0.98 | ) |
| Shares used in  computing net loss per share — basic  |       | 12,968,300                    |       | 12,765,720                    |       | 12,916,027 |   | 12,718,168 |   |
|                                                       |       |                          |       |                          |       |   |   |   |   |
| Net loss per share —  diluted                         |       | $                             | (0.09      | )                             | $          | (0.13 | ) | $ | (0.24 | ) | $ | (0.98 | ) |
| Shares used in computing net loss per share — diluted |       | 12,968,300                    |       | 12,765,720                    |       | 12,916,027 |   | 12,718,168 |   |

 

See accompanying notes to unaudited condensedconsolidated financial statements.

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**SPACEHAB, INCORPORATEDAND SUBSIDIARIES**

**UnauditedCondensed Consolidated Statements of Cash Flows**

**(In thousands)**
| ** **                                                                                       | ** ** | **Nine Months Ended  March 31,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                                       | ** ** | **2007**                                        | ** ** | **2006** | ** ** |
| **Cash flows from operating  activities**                                                        | ** ** | ** **                                      | ** ** | ** ** | ** ** |
| Net loss                                                                                         |       | $                                               | (3,067     | ) | $ | (12,445 | ) |
| Adjustments to  reconcile net loss to net cash provided by operating activities:                 |       |                                            |       |   |   |
| Stock-based  compensation                                                                        |       | 218                                             |       | 198 |   |
| Impairment of flight  assets                                                                     |       | —                                          |       | 6,283 |   |
| Depreciation and  amortization, including debt issuance cost of $0.4 million and $0.4 million    |       | 4,771                                           |       | 4,462 |   |
| Write-off of debt  placement fees                                                                |       | —                                          |       | 591 |   |
| Recognition of deferred  gain                                                                    |       | (166                                            | )          | (166 | ) |
| Changes in assets and  liabilities:                                                              |       |                                            |       |   |   |
| (Increase)  decrease in accounts receivable                                                      |       | (410                                            | )          | 5,382 |   |
| Increase in  prepaid expenses and other current assets                                           |       | (210                                            | )          | (301 | ) |
| (Increase)  decrease in other assets                                                             |       | (35                                             | )          | 121 |   |
| Increase  (decrease) in deferred revenue                                                         |       | 76                                              |       | (394 | ) |
| Increase in  accounts payable, accounts payable-Astrium, accrued interest, and accrued  expenses |       | 1,051                                           |       | 740 |   |
| Increase  (decrease) in accrued subcontracting services and other                                |       | 2,708                                           |       | (2,041 | ) |
| Increase in  advance on construction contract                                                    |       | 7,143                                           |       | — |   |
| Increase in  customer deposits                                                                   |       | 3,106                                           |       | — |   |
| Decrease in  long-term accrued contract costs and other liabilities                              |       | (18                                             | )          | (103 | ) |
| Net cash  provided by operating activities                                                       |       | 15,167                                          |       | 2,327 |   |
| **Cash flows from investing  activities**                                                        | ** ** | ** **                                      | ** ** | ** ** | ** ** |
| Purchases of property,  equipment and leasehold improvements, net of reimbursements              |       | (414                                            | )          | (1,327 | ) |
| (Increase) decrease in  restricted cash                                                          |       | (7,181                                          | )          | 970 |   |
| Net cash used in  investing activities                                                           |       | (7,595                                          | )          | (357 | ) |
| **Cash flows from financing  activities**                                                        | ** ** | ** **                                      | ** ** | ** ** | ** ** |
| Payment of mortgage  loan                                                                        |       | (1,636                                          | )          | (1,531 | ) |
| Increase in deferred  financing costs                                                            |       | —                                          |       | (1,936 | ) |
| Proceeds from issuance  of common stock, net of expenses                                         |       | 75                                              |       | 111 |   |
| Net cash used in  financing activities                                                           |       | (1,561                                          | )          | (3,356 | ) |
| Net change in  cash and cash equivalents                                                         |       | 6,011                                           |       | (1,386 | ) |
| Cash and cash equivalents  at beginning of period                                                |       | 6,317                                           |       | 7,327 |   |
| Cash and cash equivalents at end of period                                                       |       | $                                               | 12,328     |   | $ | 5,941 |   |

 

See accompanying notes to unaudited condensedconsolidated financial statements.

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**SPACEHAB, INCORPORATED AND SUBSIDIARIES**

**Notes to Unaudited CondensedConsolidated Financial Statements**

### **1.  The Company**

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

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

Our FlightServices (“SFS”) business unit is continuing operations for the U.S. spaceshuttle program, supporting the August 2007 scheduled launch of space shuttlemission STS-118 through the use of our pressurized laboratory and logisticssupply module and cargo carrier. In support of our space flight hardware forthis mission, we are providing cargo processing services, including payloadpacking and crew training for International Space Station resupply operations.

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

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

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

As of March 31,2007, the Company had unrestricted cash on hand of $12.3 million and cashrestricted to performance under a long term construction contract of $7.2million. The Company’s 8% subordinated notes in the amount of $10.3 millionmature in October 2007. For the nine months ended March 31, 2007 the Companygenerated $15.2 million of cash from operating activities. We expect togenerate positive cash flows from operations through completion of spaceshuttle mission STS-118. Thereafter, the Company’s ability to generate cashflow from operations will be dependent upon its success in attracting new orincremental business and continued performance under our current backlog ofcontracted missions.

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

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

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Company had untilApril 2, 2007 to demonstrate compliance by maintaining a minimum closing bidprice of $1.00 per share of common stock for a minimum of 10 consecutivetrading days or its common stock will be delisted from The NASDAQ Stock Market.On April 3, 2007 the Company received an additional 180-day extension todemonstrate compliance with the rule.

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

In the opinion ofmanagement, the accompanying unaudited condensed consolidated financialstatements reflect all adjustments, consisting of only normal recurringaccruals necessary for a fair presentation of the consolidated financialposition of SPACEHAB, Incorporated and its subsidiaries as of March 31, 2007,and the results of its operations and cash flows for the periods ended March31, 2007 and 2006. However, the unaudited condensed consolidated financialstatements do not include all related footnote disclosures.

The consolidatedresults of operations for the nine month period ended March 31, 2007 are notnecessarily indicative of the results that may be expected for the full year.Our results of operations typically fluctuate significantly from quarter toquarter. The interim unaudited condensed consolidated financial statementsshould be read in conjunction with our audited consolidated financialstatements appearing in our Annual Report on Form 10-K for the fiscal yearended June 30, 2006.

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

The following is areconciliation of the numerator and denominator of the basic and diluted lossper share computations for the three and nine month periods ended March 31,2007 and March 31, 2006 (in thousands, except share and per share data):
| ** **                                      | ** ** | **Three months ended** | ** ** | **Three months ended** | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                      | ** ** | **March 31, 2007**     | ** ** | **March 31, 2006**     | ** ** |
| ** **                                      | ** ** | **Loss**                         | ** ** | **Shares**                       | ** ** | **Per Share** | ** ** | **Loss** | ** ** | **Shares** | ** ** | **Per Share** | ** ** |
| ** **                                      | ** ** | **(Numerator)**                  | ** ** | **(Denominator)**                | ** ** | **Amount** | ** ** | **(Numerator)** | ** ** | **(Denominator)** | ** ** | **Amount** | ** ** |
| Basic EPS:                                      |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Income (loss)  available to common stockholders |       | $                                | (1,195     | )                                | 12,968,300 |   | $ | (0.09 | ) | $ | (1,673 | ) | 12,765,720 |   | $ | (0.13 | ) |
| Diluted EPS:                                    |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Income (loss) available  to common stockholders |       | $                                | (1,195     | )                                | 12,968,300 |   | $ | (0.09 | ) | $ | (1,673 | ) | 12,765,720 |   | $ | (0.13 | ) |

 
| ** **                                      | ** ** | **Nine months ended** | ** ** | **Nine months ended** | ** ** |
|-------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                      | ** ** | **March 31, 2007**    | ** ** | **March 31, 2006**    | ** ** |
| ** **                                      | ** ** | **Loss**                        | ** ** | **Shares**                      | ** ** | **Per Share** | ** ** | **Loss** | ** ** | **Shares** | ** ** | **Per Share** | ** ** |
| ** **                                      | ** ** | **(Numerator)**                 | ** ** | **(Denominator)**               | ** ** | **Amount** | ** ** | **(Numerator)** | ** ** | **(Denominator)** | ** ** | **Amount** | ** ** |
| Basic EPS:                                      |       |                            |       |                            |       |   |   |   |   |   |   |   |   |
| Income (loss) available to common stockholders  |       | $                               | (3,067     | )                               | 12,916,027 |   | $ | (0.24 | ) | $ | (12,445 | ) | 12,718,168 |   | $ | (0.98 | ) |
| Diluted EPS:                                    |       |                            |       |                            |       |   |   |   |   |   |   |   |   |
| Income (loss) available  to common stockholders |       | $                               | (3,067     | )                               | 12,916,027 |   | $ | (0.24 | ) | $ | (12,445 | ) | 12,718,168 |   | $ | (0.98 | ) |

 

Convertiblesubordinated notes payable outstanding as of March 31, 2007, convertible into756,404 shares of common stock at $13.625 per share and due October 2007, werenot included in the computation of diluted EPS for the three months and ninemonths ended March 31, 2007 and 2006 as the conversion price(s) of theconvertible notes payable per share was greater than the average market priceof the common shares during the periods.

Senior convertiblenotes payable outstanding as of March 31, 2007 due 2010 convertible into35,296,000 shares of common stock at $1.50 per share, which include a mandatoryconversion feature once the Company’s stock price reaches $1.95 per share, havenot been included in the computation of diluted EPS for the three months andnine months ended March 31, 2007 and 2006 as the conversion price(s) of theconvertible notes payable per share were 

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greater than theaverage market price of the shares during the period and no value has beenassigned to the mandatory conversion feature.

Options topurchase 1,291,952 shares of common stock outstanding at March 31, 2007 werenot included in diluted EPS for the three months and nine months ended March31, 2007 as they were anti-dilutive due to our net loss. The options expirebetween July 1, 2008 and December 12, 2016.

Options topurchase 1,601,786 shares of common stock outstanding at March 31, 2006 werenot included in diluted EPS for the three months and nine months ended March31, 2006 as they were anti-dilutive due to our net loss. The options expirebetween April 25, 2007 and December 1, 2015.

### **4.  Revenue Recognition**

Our business units’revenue is derived primarily from long-term contracts with the U.S. Government,U.S. Government contractors, and commercial customers. Revenue under thesecontracts is recognized using the methods described below. Estimating futurecosts and, therefore, revenues and profits is a process requiring managementjudgment. Management bases its estimate on historical experience and on variousassumptions that are believed to be reasonable under the circumstancesincluding the negotiation(s) of equitable adjustment(s) and change orders onthe Cargo Mission Contract (“CMC”) that are added to the contract as pricingamendment(s) due to delay(s) in the space shuttle launch schedule and customerdirected changes to the baseline contracted mission. Costs to complete include,when appropriate, material, labor, subcontracting costs, lease costs,commissions, insurance, and depreciation. Our business segment personnelperform periodic contract status and performance reviews. In the event of achange in total estimated contract cost or profit, the cumulative effect ofsuch change is recorded in the period that the change in estimate occurs.

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

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

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

Lockheed MartinCorporation (“Lockheed Martin”) has signed a one-year option extension of oursatellite ground processing contract at our Astrotech Florida facility. Underthe terms of this contract option, Lockheed Martin commits to a guarantee offour missions for calendar year 2007. We account for this revenue as guaranteedperiod revenues over calendar year 2007.

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According toAstrotech’s original base contract with Lockheed Martin for satelliteprocessing support, which guarantees Astrotech revenue for four Lockheed Martinmissions per calendar year, Astrotech had the opportunity to then contract withother Atlas customers for use of its facilities and services. In accordancewith this clause, Astrotech signed contracts with The Boeing Company to processits Space Test Program-1 (“STP-1”) mission and two Wideband Global SATCOM (“WGS”)missions. STP-1 was processed and successfully launched within this period andthe first WGS mission is currently scheduled for processing and liftoff in latesummer. To fulfill our contractual obligation with Lockheed Martin, Astrotechcredited the Lockheed Martin customer $2.6 million of the guaranteed missionrevenue for calendar year 2006.

Revenues for theLockheed Martin subcontract in our SFS business unit are being accounted forunder the percentage-of-completion method based on costs incurred over theperiod of the agreement. Lastly, during the nine month period ended March 31,2007, SGS sold the Destiny module to the Seattle Museum of Flight on afixed-price contract for $350,000.

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

(a)          Cash paid for interestcosts was $1.9 million and $3.0 million for the nine months ended March 31,2007 and 2006, respectively. We did not capitalize any interest costs duringthe nine months ended March 31, 2007 or 2006. During the nine months endedMarch 31, 2006 there was $0.6 million of non-cash charges due to theacceleration of debt placement fees related to the convertible subordinatednotes. The bond exchange of $52,944,000 of 8% convertible subordinated notesfor 5.5% of senior convertible notes was an exchange of notes which resulted inno cash inflow or outflow for the Company.

(b)         We paid no income taxesfor the nine months ended March 31, 2007 and 2006.

### **6.  Credit Facilities**

Our revolving credit facility with a bank, whichexpired on February 11, 2007, provided for loans up to $5.0 million secured byour accounts receivable. Funds available under the revolving credit facilitywere limited to 80% of eligible accounts receivable and we were subject tovarious financial and other covenants including a minimum tangible net worth covenant,a cash flow coverage covenant, and a secured debt coverage covenant. Thefacility provided that we must secure advances with cash balances if therequired tangible net worth or cash flow ratio is not met. We have no immediateplans to replace this credit facility.

Our Astrotechsubsidiary had a mortgage loan with a financial institution for our SpacecraftProcessing Facility (“SPF”) expansion project in Titusville, Florida. The loanagreement matured in January 2007 and had an interest rate of 5.5%. We made thefinal payment on the loan in December 2006.

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

### **7.  Segment Information**

Based on our organization, we operate in three business segments: SFS,Astrotech, and SGS. SFS was founded to commercially develop space carriers thatoperate in the cargo bay of the space shuttles. SFS provides space flightassets and integration and operations support services for both NASA andcommercial customers. Astrotech provides payload processing facilities andservices to serve the spacecraft manufacturing and launch services industry.SGS is primarily engaged in providing engineering and program support servicesand products to the Government, including NASA.

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

9

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ThreeMonths Ended March 31,

### 2007 (in thousands):

|                     | ** ** | ** **  | ** ** | ** **                        | ** ** | **Net**    | ** ** | **Depreciation** | ** ** |
|---------------------|------------|-------------|------------|-----------------------------------|------------|------------|------------|------------------|------------|
| ** **          | ** ** | ** **  | ** ** | **Income (Loss)**            | ** ** | **Fixed**  | ** ** | **And**          | ** ** |
| ** **          | ** ** | **Revenue** | ** ** | **before income taxes** | ** ** | **Assets** | ** ** | **Amortization** | ** ** |
| SFS                 |       | $           | 7,955      |                              | $          | 972        |       | $                | 14,177     |   | $ | 898 |   |
| Astrotech           |       | 2,816       |       | 633                               |       | 42,921     |       | 531              |       |
| SGS                 |       | 1,412       |       | 152                               |       | —     |       | —           |       |
| Corporate and Other |       | —      |       | (2,952                            | )          | 579        |       | 169              |       |
|                |       | $           | 12,183     |                              | $          | (1,195     | )          | $                | 57,677     |   | $ | 1,598 |   |

 

Three Months Ended March 31,

2006(in thousands):
|                     | ** ** | ** **  | ** ** | **Income (Loss)**       | ** ** | **Net**    | ** ** | **Depreciation** | ** ** |
|---------------------|------------|-------------|------------|------------------------------|------------|------------|------------|------------------|------------|
| ** **          | ** ** | ** **  | ** ** | **Before Income ** | ** ** | **Fixed**  | ** ** | **And**          | ** ** |
| ** **          | ** ** | **Revenue** | ** ** | **Taxes**                    | ** ** | **Assets** | ** ** | **Amortization** | ** ** |
| SFS                 |       | $           | 8,095      |                         | $          | 1,078      |       | $                | 17,046     |   | $ | 841 |   |
| Astrotech           |       | 2,466       |       | 403                          |       | 44,658     |       | 540              |       |
| SGS                 |       | 1,635       |       | 215                          |       | —     |       | —           |       |
| Corporate and Other |       | 204         |       | (3,369                       | )          | 650        |       | 156              |       |
|                |       | $           | 12,400     |                         | $          | (1,673     | )          | $                | 62,354     |   | $ | 1,537 |   |

 

Nine Months Ended March 31,

2007(in thousands):
|                     | ** ** | ** **  | ** ** | ** **                        | ** ** | **Net**    | ** ** | **Depreciation** | ** ** |
|---------------------|------------|-------------|------------|-----------------------------------|------------|------------|------------|------------------|------------|
| ** **          | ** ** | ** **  | ** ** | **Income (Loss)**            | ** ** | **Fixed**  | ** ** | **And**          | ** ** |
| ** **          | ** ** | **Revenue** | ** ** | **before income taxes** | ** ** | **Assets** | ** ** | **Amortization** | ** ** |
| SFS                 |       | $           | 27,862     |                              | $          | 5,078      |       | $                | 14,177     |   | $ | 2,720 |   |
| Astrotech           |       | 7,104       |       | 7                                 |       | 42,921     |       | 1,553            |       |
| SGS                 |       | 4,727       |       | 810                               |       | —     |       | —           |       |
| Corporate and Other |       | 239         |       | (9,031                            | )          | 579        |       | 498              |       |
|                |       | $           | 39,932     |                              | $          | (3,136     | )          | $                | 57,677     |   | $ | 4,771 |   |

 

Nine Months Ended March 31,

2006(in thousands):
|                     | ** ** | ** **  | ** ** | ** **                        | ** ** | **Net**    | ** ** | **Depreciation** | ** ** |
|---------------------|------------|-------------|------------|-----------------------------------|------------|------------|------------|------------------|------------|
| ** **          | ** ** | ** **  | ** ** | **Income (Loss)**            | ** ** | **Fixed**  | ** ** | **And**          | ** ** |
| ** **          | ** ** | **Revenue** | ** ** | **before income taxes** | ** ** | **Assets** | ** ** | **Amortization** | ** ** |
| SFS                 |       | $           | 23,621     |                              | $          | (3,787     | )          | $                | 17,046     |   | $ | 2,339 |   |
| Astrotech           |       | 7,654       |       | 1,386                             |       | 44,658     |       | 1,606            |       |
| SGS                 |       | 4,182       |       | 355                               |       | —     |       | —           |       |
| Corporate and Other |       | 721         |       | (10,367                           | )          | 650        |       | 517              |       |
|                |       | $           | 36,178     |                              | $          | (12,413    | )          | $                | 62,354     |   | $ | 4,462 |   |

 

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

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

### **Non-qualifiedOptions**

Non-qualifiedoptions are granted at the sole discretion of the Board of Directors. Prior tothe adoption of the 1994 Stock Incentive Plan (“1994 Plan”), stock optionsgranted to certain officers and employees were part of their employmentcontract or offer. The number and price of the options granted were defined inthe employment 

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agreements andsuch options vest incrementally over a period of four years and generallyexpire within ten years of the date of grant.

### **The1994 Plan**

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

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

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

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

We adopted anemployee stock purchase plan that permits eligible employees to purchase sharesof common stock of the Company at prices no less than 85% of the current marketprice. Eligible employees may elect to participate in the plan by authorizingpayroll deductions from 1% to 10% of gross compensation for each payrollperiod. On the last day of each quarter, each participant’s contributionaccount is used to purchase the maximum number of whole and fractional sharesof common stock determined by dividing the contribution account’s balance bythe lesser of 85% of the price of a share of common stock on the first day ofthe quarter or the last day of a quarter. The number of shares of common stockthat may be purchased under the plan is 1,500,000. Through March 31, 2007,employees have purchased 1,444,662 shares under this plan. Employees purchasedan aggregate of 129,049 shares at an average price of $0.59 during thenine-month period ended March 31, 2007. The shares purchased under this planare considered compensatory for accounting and reporting purposes.

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

During the yearended June 30, 2000, Space Media, Inc., (“SMI”) a majority-owned subsidiary,adopted an option plan (“SMI Plan”) for employees, officers, directors andconsultants of SMI. Under the terms of the SMI Plan, 1,500,000 shares have beenreserved for future grants for which the number and price of the optionsgranted is determined by the Board of Directors and such options vest, in mostcases, incrementally over a period of four years and expire no more than ten yearsafter the date of grant.

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

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

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

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

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

·                  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.

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A summary of ourstock option activity as of March 31, 2007 and changes during the first ninemonths of fiscal year 2007 are presented in the following table:

|                                | ** ** | **Shares Under   Fixed Options** | ** ** | **Weighted-  Average   Exercise   Price** | ** ** | **Weighted-  Average   Remaining   Contractual   Term** | ** ** | **Aggregate   Intrinsic   Value** | ** ** |
|--------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------------|------------|------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| Outstanding at  June 30, 2006  |       | 1,577,201                                       |       | $                                                   | 2.96       |                                                                   | 5.52       |                                        | $          | — |   |
| Granted                        |       | 340,000                                         |       | $                                                   | 1.11       |                                                                   | 6.05       |                                        | $          | — |   |
| Exercised                      |       | —                                          |       | $                                                   | —     |                                                                   | —     |                                        | $          | — |   |
| Forfeited/Expired              |       | (625,249                                        | )          | $                                                   | 2.63       |                                                                   | —     |                                        | $          | — |   |
| Outstanding at  March 31, 2007 |       | 1,291,952                                       |       | $                                                   | 2.64       |                                                                   | 5.19       |                                        | $          | — |   |
| Exercisable                    |       | 967,952                                         |       | $                                                   | 3.08       |                                                                   | 5.19       |                                        | $          | — |   |

Theweighted-average grant-date fair value of options granted during the first ninemonths of fiscal year 2007 was $0.94 per share. The intrinsic value for stockoptions is defined as the difference between the current market value and thegrant price. The total intrinsic value of options exercised during the firstnine months of fiscal year 2007 was $0.0. As of March 31, 2007 there was$433,034 of unamortized expense related to our stock option plans.

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

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

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

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

We engaged incertain transactions with directors, executive officers, shareholders, andcertain former officers during the three and nine months ended March 31, 2007.Following is a description of these transactions:

### **AstriumGmbH**

Dr. Stefan-FritzGraul, a member of SPACEHAB’s Board of Directors, is the Executive VicePresident for Astrium GmbH. Astrium provides unpressurized payload andintegration efforts to SPACEHAB on a fixed-price basis in addition to providingengineering services as required. For the three months ended March 31, 2007 and2006, Astrium’s payload and integration services included in cost of revenuewere approximately $3.4 million and $2.6 million, respectively. For the ninemonths ended March 31, 2007 and 2006, Astrium’s payload and integrationservices included in cost of revenue were approximately $11.2 million and $8.0million, respectively.

### **DanielA. Bland**

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

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

In February 2007,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities*, including an amendment 

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of FASB StatementNo. 115 (SFAS No. 159). SFAS No. 159 permits entities to choose, at specifiedelection dates, to measure eligible items at fair value (the “fair value option”).A business entity shall report unrealized gains and losses on items for whichthe fair value option has been elected in earnings at each subsequent reportingperiod. This accounting standard is effective as of the beginning of an entity’sfirst fiscal year that begins after November 15, 2007. The adoption of thisstatement is not expected to have a material impact on the Company’sconsolidated financial position and results of operations.

In September 2006,the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”)108, “Considering the Effects of Prior-Year Misstatements when QuantifyingMisstatements in Current Year Financial Statements” — The Securities andExchange Commission released SAB 108 to provide interpretive guidance on howthe effects of the carry over or reversal of prior year misstatements should beconsidered in quantifying a current year misstatement. There have been two approachescommonly used to quantify such errors. Under one approach, the error isquantified as the amount by which the current year income statement ismisstated. The other approach quantifies the error as the cumulative amount bywhich the current year balance sheet is misstated. The SEC staff believes thatcompanies should quantify errors using both a balance sheet and an incomestatement approach and evaluate whether either approach results in quantifyinga misstatement that, when all relevant quantitative and qualitative factors areconsidered, is material. We do not expect the application of thisinterpretation to have a material impact on our consolidated financial positionor results of operations. SAB 108 is effective for fiscal years beginning afterNovember 15, 2007.

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

In July 2006 theFASB issued Interpretation No. 48, *Accounting for Uncertaintyin Income Taxes* (FIN No. 48). This interpretation clarifies theaccounting for uncertainty in income taxes recognized in an entity’s financialstatements in accordance with SFAS No. 109, *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 ourconsolidated financial position or results of operations.

### **12. Legal Proceedings**

On February 21,2007, the Company dismissed with prejudice all litigation against NASA relatingto losses incurred by the Company as a result of the February 2003 SpaceShuttle *Columbia* accident.

In January 2004the Company initiated a formal proceeding against NASA in which the Company wasseeking damages in the amount of $87.7 million for the loss of its ResearchDouble Module (“RDM”) as a result of the *Columbia*accident. In October 2004, NASA responded to this claim with the determinationthat its liability was $8.2 million, including interest, and paid SPACEHAB thisamount. SPACEHAB subsequently filed an appeal with the Armed Services Board ofContract Appeals and over the past two years, the two parties have proceededwith preparations for a court hearing planned for July 2008. The Company alsofiled a tort claim in November 2004, seeking damages of $79.7 million for theloss of the RDM, to which the court granted a motion in June 2006 to stay thecase until resolution of the Company’s contract claim appeal.

As a result of theclaim dismissal, the Company paid Lloyd’s of London, the insurer of the RDM,$0.5 million in accordance with the May 12, 2005 agreement with Lloyd’ssubsequent to quarter end.

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

### **13.  Restricted Cash**

In December 2006our Astrotech subsidiary was awarded a contract with a governmental agency tomodify one of our payload processing facilities to specific requirements of aprogrammed mission. Under the terms of this $20.0 million fixed price contract,we will own the improvements after completion of the contract obligations. Wehave 

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entered into afirm fixed price construction subcontract with J. P. Donovan Construction, Inc.to provide a significant portion of the design and construction work that willbe required under our contract. In accordance with our contracts, payments willbe received from our customer on a milestone schedule that generally providesreceipt of cash before payments are required to the contractor under theirmilestone schedule. Receipts in advance of disbursements will be retained in arestricted cash account within our subsidiary company and used exclusively forpurposes of the contract obligations. As of March 31, 2007, cash receipts of$7.2 million have been designated as restricted cash.

### **14.  Staff Reduction**

On January 18,2007 we announced a reduction in staff resulting in the elimination ofapproximately 36 positions or 16% of our workforce. Cash expendituresassociated with the restructuring, most of which was paid in the third quarter,are estimated at $450,000. This reduction in force is anticipated to result incost reductions of approximately $3.9 million on an annual basis.

### **15.  Adverse Event**

On January 30,2007 Sea Launch experienced a launch explosion resulting in the loss of asatellite and damage to the floating launch platform. A full inspection andevaluation of the damage incurred and an assessment of future launch schedulesis underway, however, preliminary reports indicate that Sea Launch will returnto operations in September 2007. We are paid under our contract with Sea Launchupon launch of each mission; therefore, anticipated future revenues will bedelayed until the resumption of normal operations.

### **16.  Customer Deposits**

During the quarterended March 31, 2007 we billed to our customer $3.1 million for in-flightinsurance on our pressurized module for use on STS-118. STS-118 is scheduled tolaunch mid-August 2007. This amount is included in accounts receivable and incustomer deposits as of March 31, 2007. The insurance payment is due to theinsurance carrier one month prior to the launch date.

### **17. Subsequent Event**

On April 3, 2007the Company received notification from NASDAQ that the Company has been grantedan additional 180-day period, or until October 1, 2007, to regain compliancewith NASDAQ’s $1.00 per share minimum bid price requirement.

NASDAQ MarketplaceRules require that the Company’s common stock bid price close at or above $1.00per share for a minimum of ten consecutive trading days at any time prior toOctober 1, 2007. The Company currently meets all initial inclusion criteria forthe NASDAQ Capital Market except the minimum bid price. Should SPACEHAB fail toremedy the bid price deficiency by the established deadline, NASDAQ will notifythe Company that its securities will be delisted from the NASDAQ Capital Marketand the Company will have the right to appeal such determination.

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

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

**OVERVIEW**

### **ForwardLooking Statements**

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

### **FinancialSummary**

SPACEHAB’s firstnine months operating results were below management’s expectations, however,the Company’s revenues significantly exceeded the first nine months of theprior fiscal year and the net loss of $3.1 million improved substantially fromthe loss of $12.4 million in the first nine months of the prior fiscal year.The prior year’s comparable periods included a charge of $6.3 million for thewrite down of book value of one of our two space shuttle logistics modules. Theremaining module recently completed STS-116 and is scheduled to fly on STS-118in August 2007.

The followingtable illustrates financial highlights for the nine months ended March 31, 2007and March 31, 2006:

| For the Nine Months Ended | ** ** | **2007**                                                            | ** ** | **2006** | ** ** | **Percent  Change** | ** ** |
|-----------------------------------------------|------------|---------------------------------------------------------------------|------------|----------|------------|---------------------|------------|
| ** **                                    | ** ** | **(in millions except per share amounts)** | ** ** |
| March 31:                                |       |                                                                |       |     |       |                |       |
| Revenue                                       |       | $                                                                   | 39.9       |     | 36.2       |                | 10         | % |
| Net Loss                                      |       | $                                                                   | (3.1       | )        | (12.4      | )                   | 75         | % |
| Diluted EPS                                   |       | $                                                                   | (0.24      | )        | (0.98      | )                   | 76         | % |
| As of March 31:                               |       |                                                                |       |     |       |                |       |
| Cash and Cash  Equivalents                    |       | $                                                                   | 12.3       |     | 5.9        |                | 108        | % |
| Restricted Cash                               |       | $                                                                   | 7.2        |     | —     |                | —     |   |
| Total Notes  Payable                          |       | $                                                                   | 63.3       |     | 65.4       |                | (3         | )% |
| Stockholders Equity                           |       | $                                                                   | —     |     | 2.7        |                | —     |   |

### **Industry and MarketOverview**

We providefacilities and services to the space industry, which encompasses governmental,commercial, and defense sectors. Our research and logistics modules weredesigned and developed to provide enhanced payload capability and flexibilityto the U.S. Space Shuttle Program which is operated by NASA. Our Astrotechoperations provide facilities and services for pre-launch preparation ofspacecraft in support of the commercial communications satellite industry, NASA’sexploratory spacecraft programs and the Department of Defense satelliteprograms. We also provide engineering and program support services to NASA.

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We are pleasedthat the White House is maintaining its vision for U.S. space leadership.Although there continues to be a lag in the necessary follow-on funding for theNASA programs required to support the vision, we believe the need to 1)maintain U.S. leadership in space with the emergence of other internationalspace programs and goals and 2) fully exploit the capability of theInternational Space Station infrastructure for advancements in both life andmaterials science to improve life on Earth and make further exploration of theuniverse possible, will reinvigorate the space program and prompt appropriatefunding likely yielding benefits to both the government and commercial spaceindustry. In support of this viewpoint, we are evolving our 22-year heritage ofprocessing and transporting experiments to space to begin manufacturingpharmaceuticals and materials in microgravity for distribution into thecommercial marketplace. We will leverage our deep understanding of microgravityscience, space access, and payload processing, as well strong relationshipswith international space agencies and companies, to advance these initiativesin the near term. Additionally, with the space shuttle fleet scheduled forretirement by 2010, we will continue to offer our valuable pressurized moduleassets to NASA to support the necessary ambitious mission manifests, resultingfrom continued ISS assembly and resupply requirements, even after the Company’slast scheduled mission, STS-118, in August.

We also look for agrowing commercial role in both the ground and on-orbit servicing and fleetmanagement of commercial communications satellites. Our long term critical rolein preparing commercial communications satellites for launch positions us forexpanding our service offerings to satellite on-orbit operations andpotentially spacecraft servicing.

We operate in three mainareas generally related to spaceflight activities within the aerospaceindustry: space assets and mission support services for manned and unmannedspace exploration and research missions; commercial and exploratory spacecraftpre-launch services; and engineering and administrative services in support ofgovernment space operations. Because of the diversity among the operations ofour activities, we report the results of each business as a separate segment inour consolidated financial statements. Our consolidated financial results alsoreflect corporate-level expenses such as general and administrative, interest,and depreciation and amortization, which due to their nature, are not reportedas a separate segment.

### **BusinessSegments**

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

*SPACEHAB Flight Services*.This business unit generates revenue by providing space shuttle-based, turnkeyservices that include customer access to space via our pressurized modules;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.

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

Additionally, we providecargo shipment coordination services to NASA for all U.S. cargo shipped to theInternational Space Station via the Russian *Progress* spacevehicle. These services are provided under contract with Lockheed Martin, theprime Cargo Mission Contract contractor to NASA. We also provide researchaccess to the International Space Station to the Japanese Aerospace ExplorationAgency through Rocket Space Corporation-Energia (“RSC-Energia”), a majorRussian aerospace enterprise.

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

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

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

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

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

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

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

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

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

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

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

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

·                  Our ability tocontrol costs within our budget commitments

*Corporateand Other*. Significant items impacting future earnings andcash 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, cost relative to the refinancing of ourlong-term debt during fiscal year 2006, and interest savings on the now repaidmortgage loan on our Astrotech Florida assets

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

### **Revenue**

Our revenue for the ninemonths ended March 31, 2007 and 2006 was generated primarily from the LockheedMartin CMC subcontract and contracts with related commercial customers in theSFS segment; the PI&C contract in the SGS segment; and our contracts withLockheed Martin, Boeing, NASA and other commercial satellite providers in theAstrotech segment.

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

Astrotech derivesits revenue by providing support necessary for its customers to successfullyprocess their spaceflight hardware for launch, including advance planning; useof unique facilities; and spacecraft checkout, encapsulation, fueling,transport, and remote control through launch. During the nine months endedMarch 31, 2007 we were awarded a new indefinite-delivery, indefinite-quantity (“IDIQ”)contract with NASA in the amount of $9.5 million for payload processing supporton several future NASA spacecraft.

On January 30,2007 Sea Launch experienced a launch explosion resulting in the loss of asatellite and damage to the floating launch platform. A full inspection andevaluation of the damage incurred and an assessment of future launch schedulesis underway, however, preliminary reports indicate that Sea Launch will returnto operations in September 2007. We are paid under our contract with Sea Launchupon launch of each mission; therefore, anticipated future revenues will beimpacted.

During the quarterended December 31, 2006, Astrotech was awarded a $20.0 million contract for theU.S. Government, Office of Space Launch for the design and construction ofmodifications to our payload processing facility at the VAFB location. Duringthe nine months ended March 31, 2007, Astrotech received $7.2 million from theU.S. Government, Office of Space Launch. We have designated this cash asrestricted cash, recognizing its commitment to obligations under the contractand have recognized a liability for those anticipated obligations.

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

During the threeand nine months ended March 31, 2007 and 2006, deferred revenue decreased by aninsignificant amount.

### **Costsof Revenue**

We have severaltypes of costs of revenue in our business segments. Costs of revenue for SFSinclude integration and operations expenses associated with the performance oftwo types of efforts: (i) sustaining engineering in support of all missionsunder a contract and (ii) mission specific support. Costs associated with theperformance of the contracts, using the percentage-of-completion method ofrevenue recognition, are expensed as incurred. Costsassociatedwith the cost-plusaward and fixed-fee contracts are expensedas incurred by SGS. Other costs of revenue include depreciation expenseand costs associated with the Astrotech payload processing facilities. Such other costs of revenue includes depreciationon our logistics modules which is being depreciated through the end of thescheduled shuttle life and rent on our ICC and VCC assets which is notcurrently being paid. Selling, general and administrative, interest, andother expenses are recognized when incurred.

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**RESULTSOF OPERATIONS**

*For thethree months ended March 31, 2007 as compared to the three months ended March31, 2006.*

Revenue.Revenue decreased approximately 2% to $12.2 million for the three months endedMarch 31, 2007 as compared to $12.4 million for the three months ended March31, 2006 (in millions).
|                               | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **  | ** ** |
|-------------------------------|------------|----------------------------------|------------|------------|------------|-------------|------------|
| ** **                    | ** ** | **March 31,**               | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **                    | ** ** | **2007**                         | ** ** | **2006**   | ** ** | **Change**  | ** ** | **Change** | ** ** |
| SPACEHAB Flight  Services     |       | $                                | 8.0        |       | $          | 8.1         |       | $ | (0.1 | ) | (1 | )% |
| Astrotech Space  Operations   |       | 2.8                              |       | 2.5        |       | 0.3         |       | 12 | % |
| SPACEHAB Government  Services |       | 1.4                              |       | 1.6        |       | (0.2        | )          | (13 | )% |
| Other                         |       | —                           |       | 0.2        |       | (0.2        | )          | (100 | )% |
|                          |       | $                                | 12.2       |       | $          | 12.4        |       | $ | (0.2 | ) | (2 | )% |

 

Revenue from our SFSbusiness unit decreased by $0.1 million for the period ended March 31, 2007 ascompared to the same period ended March 31, 2006. The following summarizes thesignificant items that affected the quarter ended March 31, 2007 as compared tothe quarter ended March 31, 2006:

·                  Increasein revenue from STS-116 and STS-118 under the CMC with Lockheed Martin of $3.1million due to increased mission activities and change orders due to the launchof STS-116 in December 2006 and the scheduled launch of STS-118 in August 2007

·                  Decreasein revenue from External Stowage Platform 2 (“ESP2”) of $0.3 million due to thelaunch of STS-114 in July 2005

·                  Decreasein revenue from STS-121 of $2.0 million due to the launch of STS-121 in July2006

·                  Decreasein revenue from the JETIS contract of $0.8 due to the contract being completedduring fiscal year 2006

·                  Othercontract revenue decrease of $0.1 million

Revenue from ourAstrotech business unit increased by $0.3 million for the three months endedMarch 31, 2007 as compared to the three month period ended March 31, 2006. Thefollowing summarizes significant items that affected the three months endedMarch 31, 2007 as compared to the same period ended March 31, 2006:

·                  Increasein revenue of $0.6 million due to two different satellites in our Floridafacility for processing for all of or portions of the three month period endedMarch 31, 2007. Whereas, for the same period last fiscal year, there were twosatellites in our Florida facility that were being delayed therefore there wasless revenue recognized for that period

·                  Decreasein revenue from our Lockheed Martin guaranteed contract of $0.1 million due tothe guarantee being reduced this calendar year as compared to the same periodlast fiscal year

·                  Othercontract revenue decrease of $0.1 million

Revenue from ourSGS business unit decreased by $0.2 million for the period ended March 31, 2007as compared to the same period ended March 31, 2006. The following summarizesthe significant items that affected the quarter ended March 31, 2007 ascompared to the quarter ended March 31, 2006:

·                  Increasein revenue from a new contract with USA for support of the ConstellationProgram of $0.2 million

·                  Decreasein revenue from our subcontract with ARES on the PI&C contract of $0.2million. This decrease is due to a reduction in our statement of workassociated with the contract

·                  Decreasein other revenue of $0.3 million due to the contract closeout of our contractwith Shanghai Scienceland in fiscal year 2006

Cost of Revenue.Cost of revenue for the three months ended March 31, 2007 decreased by 2% toapproximately $9.8 million, as compared to $10.0 million for the same period ofthe prior year (in millions).

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|                               | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **  | ** ** |
|-------------------------------|------------|----------------------------------|------------|------------|------------|-------------|------------|
| ** **                    | ** ** | **March 31,**               | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **                    | ** ** | **2007**                         | ** ** | **2006**   | ** ** | **Change**  | ** ** | **Change** | ** ** |
| SPACEHAB Flight  Services     |       | $                                | 6.5        |       | $          | 6.6         |       | $ | (0.1 | ) | (2 | )% |
| Astrotech Space  Operations   |       | 2.1                              |       | 2.0        |       | 0.1         |       | 1 | % |
| SPACEHAB  Government Services |       | 1.2                              |       | 1.3        |       | (0.1        | )          | (8 | )% |
| Other                         |       | —                           |       | 0.1        |       | (0.1        | )          | (100 | )% |
|                          |       | $                                | 9.8        |       | $          | 10.0        |       | $ | (0.2 | ) | (2 | )% |

 

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

·                  Increasein cost of revenue for STS-116 and STS-118 under the CMC with Lockheed Martinof $1.8 million due to increased mission activities due to the launch ofSTS-116 in December 2006 and the scheduled launch of STS-118 in August 2007

·                  Decreasein cost of revenue of $1.6 million for STS-121 due to the launch of STS-121 inJuly 2006

·                  Decreasein cost of revenue of $0.3 million from External Stowage Platform 2 of $0.3million due to the launch of STS-114 in July 2005

·                  Decreasein cost of revenue for the JETIS contract of $0.4 million due to the contractbeing completed during fiscal year 2006

·                  Othercost of revenue increase of $0.4 million

The increase incost of revenue of $0.1 million in our Astrotech business unit is primarily dueto an increase in other mission specific expenses due to the mission activity duringthe period mainly for our NASA IDIQ missions.

Cost of revenue inour SGS business unit decreased by $0.1 million for the three month periodended March 31, 2007 as compared to the same period last fiscal year. Thefollowing summarizes the differences between the two periods:

·                  Anincrease in cost of revenue of $0.1 million from our contract with USA forsupport of the Constellation program

·                  Adecrease in cost of revenue of $0.1 million from our subcontract with ARES onthe PI&C contract due to a reduction in our statement of work associatedwith the contract

·                  Adecrease in cost of revenue of $0.1 million due to the contract closeout of ourcontract with Shanghai Scienceland in fiscal year 2006

OperatingExpenses. Operating expenses decreased to $2.8 million forthe three months ended March 31, 2007 as compared to approximately $3.0 millionfor the three months ended March 31, 2006. The following summarizes thesignificant differences between the two periods:

·                  Legalexpenses decreased by $0.1 million. This increase is mainly due to the claimsagainst NASA for the loss of the RDM. Due to us dropping the lawsuit, theexpenses will decrease significantly going forward

·                  Dueto the staff reduction during the quarter ended March 31, 2007, selling,general and administrative expenses decreased by $0.1 million

Interest Expense.Interest expense was approximately $1.1 million for the three months endedMarch 31, 2007 as compared to approximately $1.2 million for the three monthsended March 31, 2006. The decrease in interest expense is primarily due to thelast payment on our mortgage on the Astrotech facility being made in December2006.

Interest and OtherIncome. Interest income is earned on our restricted andnon-restricted cash balances and our mortgage receivable due to the sale of ourpayload processing facility in our SFS segment.

Income Taxes.Based on our projected effective tax rate for fiscal year 2007 and 2006, werecorded no tax expense for the three month period ended March 31, 2007 and notax expense for the three month period ended March 31, 2006.

Net Loss.Net loss for the three months ended March 31, 2007 was approximately $1.2million or $0.09 per share as compared to net loss of approximately $1.7million or $0.13 per share for the three months ended March 31, 2006. 

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*For thenine months ended March 31, 2007 as compared to the nine months ended March 31,2006.*

Revenue.Revenue increased approximately 10% to $39.9 million for the nine months endedMarch 31, 2007 as compared to $36.2 million for the nine months ended March 31,2006 (in millions).
|                               | ** ** | **Nine Months Ended** | ** ** | ** ** | ** ** | ** **  | ** ** |
|-------------------------------|------------|---------------------------------|------------|------------|------------|-------------|------------|
| ** **                    | ** ** | **March 31,**              | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **                    | ** ** | **2007**                        | ** ** | **2006**   | ** ** | **Change**  | ** ** | **Change** | ** ** |
| SPACEHAB Flight  Services     |       | $                               | 27.9       |       | $          | 23.6        |       | $ | 4.3 |   | 18 | % |
| Astrotech Space  Operations   |       | 7.1                             |       | 7.7        |       | (0.6        | )          | (8 | )% |
| SPACEHAB Government  Services |       | 4.7                             |       | 4.2        |       | 0.5         |       | 12 | % |
| Other                         |       | 0.2                             |       | 0.7        |       | (0.5        | )          | (71 | )% |
|                          |       | $                               | 39.9       |       | $          | 36.2        |       | $ | 3.7 |   | 10 | % |

Revenue from our SFSbusiness unit increased by $4.3 million for the period ended March 31, 2007 ascompared to the same period ended March 31, 2006. The following summarizes thesignificant items that affected the period ended March 31, 2007 as compared tothe period ended March 31, 2006:

·                  Increasein revenue from STS-116 and STS-118 under the CMC with Lockheed Martin of $11.2million due to increased mission activities and change orders due to the launchof STS-116 in December 2006 and the scheduled launch of STS-118 in August 2007

·                  Decreasein revenue from ESP2 of $1.0 million due to the launch of STS-114 in July 2005

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

·                  Decreasein revenue from STS-121 of $4.1 million due to the launch of STS-121 in July2006

·                  Decreasein revenue for the JETIS contract of $1.1 million due to the contract beingcomplete during fiscal year 2006

·                  Othercontract revenue decrease of $0.3 million

Revenue from our Astrotech business unitdecreased by $0.6 million for the nine months ended March 31, 2007 as comparedto the nine month period ended March 31, 2006. The following summarizessignificant items that affected the nine months ended March 31, 2007 ascompared to the same period ended March 31, 2006:

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

·                  Astrotechsupported three satellite launches at its Sea Launch facility during the periodended March 31, 2007 which resulted in an increase in revenue of $0.5 million.In the period ended March 31, 2006, Astrotech supported two satellite launches at its Sea Launch facility

·                  Increasein revenue of $1.7 million due to three different satellites in our Floridafacilities for all of or portions of the nine month period ended March 31,2007.  Whereas, for the same period lastfiscal year, there was only two satellites in our Florida facility

·                  Decreasein revenue of $0.9 million for the period ended March 31, 2007 due to usrecognizing one additional guaranteed mission under our Lockheed Martincontract for the period ended March 31, 2006

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

Revenue from ourSGS business unit increased by $0.5 million for the period ended March 31, 2007as compared to the same period ended March 31, 2006. The following summarizesthe significant items that affected the period ended March 31, 2007 as comparedto the period ended March 31, 2006:

·                  Decreasein revenue from our subcontract with ARES on the PI&C contract of $0.1million. This decrease is due to a reduction in our statement of workassociated with the contract

·                  Increasein revenue from a new contract with USA for support of the ConstellationProgram of $0.6 million

·                  Increasein revenue from the sale of our Destiny module to the Seattle Space Museum inthe amount of $0.3 million during the nine month period ended March 31, 2007

·                  Decreasein other revenue of $0.3 million due to the contract closeout of our contractwith Shanghai Scienceland in fiscal year 2006

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Cost of Revenue.Cost of revenue for the nine months ended March 31, 2007 decreased by 12% toapproximately $32.0 million, as compared to $36.3 million for the same periodof the prior year (in millions).
|                               | ** ** | **Nine Months Ended** | ** ** | ** ** | ** ** | ** **  | ** ** |
|-------------------------------|------------|---------------------------------|------------|------------|------------|-------------|------------|
| ** **                    | ** ** | **March 31,**              | ** ** | **Dollar** | ** ** | **Percent** | ** ** |
| ** **                    | ** ** | **2007**                        | ** ** | **2006**   | ** ** | **Change**  | ** ** | **Change** | ** ** |
| SPACEHAB Flight  Services     |       | $                               | 21.3       |       | $          | 26.4        |       | $ | (5.1 | ) | (19 | )% |
| Astrotech Space  Operations   |       | 6.8                             |       | 6.0        |       | 0.8         |       | 13 | % |
| SPACEHAB Government  Services |       | 3.7                             |       | 3.5        |       | 0.2         |       | 6 | % |
| Other                         |       | 0.2                             |       | 0.4        |       | (0.2        | )          | (50 | )% |
|                          |       | $                               | 32.0       |       | $          | 36.3        |       | $ | (4.3 | ) | (12 | )% |

The following summarizessignificant items that affected the nine months ended March 31, 2007 ascompared to the same period ended March 31, 2006 for SFS:

·                  Increasein cost of revenue for STS-116 and STS-118 under the CMC with Lockheed Martinof $5.9 million due to increased mission activities due to the launch ofSTS-116 in December 2006 and the scheduled launch of STS-118 in August 2007

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

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

·                  Decreasein cost of revenue of $3.5 million for STS-121 due to the launch of STS-121 inJuly 2006

·                  Decreasein cost of revenue of $0.8 million for ESP2 due to the launch of STS-114 inJuly 2005

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

·                  Othercost of revenue decrease of $0.6 million partially due to the completion of theJETIS contract during the nine month period ended March 31, 2006

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

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

OperatingExpenses. Operating expenses increased to $8.5 million forthe nine months ended March 31, 2007 as compared to approximately $8.2 millionfor the nine months ended March 31, 2006. The following summarizes thesignificant differences between the two periods:

·                  Corporateoperating expenses increased by $0.1 million. This increase is due to anincrease in audit fees, legal expenses, and travel costs in the amount of $0.4million. This increase is partially offset by a decrease in consulting expensesof $0.3 million

·                  Researchand development costs increased by approximately $0.2 million. This increase isdue to increased efforts on the Micro Electro Mechanical System program

·                  SFSoperating expenses increased by approximately $0.2 million. This increase isdue to expenses shifting from cost of revenue to operating expenses due to thecompletion of the CE&R contract during the period ended March 31, 2006

·                  SGSoperating expenses decreased by approximately $0.1 million. This decrease isdue to lower labor and associated benefit expenses

·                  SMIoperating expenses decreased by approximately $0.1 million due to the sale ofThe Space Store during the period ended December 31, 2006

Interest Expense.Interest expense was approximately $3.2 million for the nine months ended March31, 2007 as compared to approximately $4.4 million for the nine months endedMarch 31, 2006. The decrease in interest expense is primarily due to theconversion of $52.9 million of 8% convertible subordinated notes due October2007 into 5.5% senior convertible notes due October 2010 and the write-off of$0.6 million of debt placement costs due to 

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conversion of thenotes during the nine month period ended March 31, 2006. Also, the last paymenton our mortgage of our Astrotech facility was made in December 2006.

Interest and OtherIncome. Interest income is earned on our restricted andnon-restricted cash balances and our mortgage receivable due to the sale of ourpayload processing facility in our SFS segment. Additionally the gain on thesale of The Space Store, LLC of $189,000 was recorded as other increase for theperiod ended March 31, 2007.

Income Taxes.Based on our projected effective tax rate for fiscal year 2007 and 2006, werecorded a tax benefit of $69,000 for the nine month period ended March 31,2007 and an immaterial amount of tax expense for the nine month period endedMarch 31, 2006.

Net Loss.Net loss for the nine months ended March 31, 2007 was approximately $3.1million or $0.24 per share as compared to net loss of approximately $12.4million or $0.98 per share for the nine months ended March 31, 2006.

**Liquidityand Capital Resources**

Our primary sourceof liquidity is cash flow from operations. The principal uses of cash flow thataffect our liquidity position are operational expenditures, including leases oncertain space assets. In October 2007 our $10.3 million of subordinated convertiblenotes mature. Although the Company has cash on hand as of March 31, 2007 of$19.5 million, $7.2 million of that cash is restricted to performance under along term contract. In addition, the Company’s only remaining contractutilizing our space shuttle configured cargo module is expected to be completedin August 2007.

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

*CashFlows From Operating Activities.*Cash provided by operationsfor the nine months ended March 31, 2007 and 2006 was $15.2 million and $2.3million, respectively. The significant items affecting the differences in cashflows from operating activities for the nine months ended March 31, 2007 ascompared to the nine months ended March 31, 2006 are discussed below:

·                  Netloss for the nine months ended March 31, 2007 was $3.1 million as compared tonet loss for the nine months ended March 31, 2006 of $12.4 million. Included inthe net loss for the nine months ended March 31, 2006  is $6.3 million recognized as a result of thewrite-down of our flight unit three asset

·                  Depreciationand amortization for the nine months ended March 31, 2007 was $4.8 million ascompared to $4.5 million for the nine months period ended March 31, 2006

·                  Forthe nine months ended March 31, 2007, changes in assets used cash fromoperations of $0.7 million which resulted primarily from an increase inaccounts receivable and prepaid expenses. For the nine months ended March 31,2006, changes in assets provided cash of $5.2 million

·                  Forthe nine months ended March 31, 2006, we recorded a non-cash charge of $0.6million due to the acceleration of debt placement costs due to the conversionof $52.9 million of 8% convertible subordinated notes due October 2007 into5.5% senior convertible notes due October 2010

·                  Changesin liabilities for the nine months ended March 31, 2007 provided cash fromoperations of $14.1 million. This change was due primarily to the increases inaccounts payable, accrued expenses, and other liabilities of $3.7 million, anincrease in restricted cash of $7.2 million in advances on our constructioncontract, and an increase in customer deposits of $3.1 million. The increase inadvances on the construction contract was primarily due to receiving theinitial milestone payments on our contract with a governmental agency to designand build a new processing facility. Other increases in accounts payable andaccrued expenses include costs incurred on missions in progress most of whichwill require cash payments in the fourth quarter

·                  Forthe nine months ended March 31, 2006, changes in liabilities consumed cash fromoperations of $1.8 million. This change in liabilities was primarily due to thedecreases in accounts payable, accrued expenses and other liabilities of $1.4million and the decrease of $0.4 million in deferred revenue

*CashFlows From Investing Activities*. For the nine months endedMarch 31, 2007 and 2006, cash flows used in investing activities were $7.6million and $0.4 million, respectively. The significant items affecting thedifferences in cash flows from investing activities for the nine months endedMarch 31, 2007 as compared to the nine months ended March 31, 2006 arediscussed below:

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·                  Purchasesof property and equipment of $0.4 million for the nine months ended March 31,2007 as compared to $1.3 million for the nine months ended March 31, 2006. Thisdifference was primarily due to capital expenditures for our Astrotech SPF inFlorida for ongoing capital improvements during the latter period

·                  Forthe nine months ended March 31, 2007 cash flows from investing activitiesincluded an increase in restricted cash of $7.2 million as compared to adecrease in restricted cash of $1.0 million for the nine months ended March 31,2006

*CashFlows From Financing Activities.*For the nine months endedMarch 31, 2007 and 2006, cash flows used in financing activities were $1.6million and $3.4 million, respectively. The significant items affecting thedifferences in cash flows from financing activities for the nine months endedMarch 31, 2007 as compared to the nine months ended March 31, 2006 arediscussed below:

·                  Forthe nine months ended March 31, 2007 we had net payments on our Astrotechpayload processing facility of $1.6 million as compared to $1.5 million for thenine months ended March 31, 2006. We have completely paid this mortgage as ofDecember 31, 2006

·                  Forthe nine months ended March 31, 2006 we incurred $1.9 million of financingcosts related to the exchange of our 8% convertible subordinated notes

On March 25, 2003the Board of Directors authorized us to repurchase up to $1.0 million of ouroutstanding common stock at market prices. Any purchases under our stockrepurchase program may be made from time to time in the open market throughblock trades or otherwise in accordance with applicable regulations of the SEC.As of March 31, 2007 we had repurchased 116,100 shares at a cost of $117,320under the program. We will continue to evaluate the stock repurchase programand the funds authorized for the program, which represents an average cost of$1.01 per share. This stock repurchase program remains available for purchasesof our stock.

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

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

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

 
| **Contractual Obligations**                                 | ** ** | **At  March 31,  2007** | ** ** | **Remaining in  Fiscal Year  2007** | ** ** | **Fiscal  Year  2008** | ** ** | **Fiscal  Year  2009** | ** ** | **Fiscal  Year  2010** | ** ** | **Fiscal  Year  2011** | ** ** | **Fiscal  Year  2012** | ** ** | **Thereafter** | ** ** |
|------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|----------------|------------|
| Short-term Debt                                                  |       | $                            | 10,306     |                                          | $          | —                 |       | $                      | 10,306     |                   | $          | —                 |       | $                      | —     |           | $          | — |   | $ | — |   | $ | — |   |
| Long-term Debt                                                   |       | $                            | 52,944     |                                          | $          | —                 |       | $                      | —     |                   | $          | —                 |       | $                      | —     |           | $          | 52,944 |   | $ | — |   | $ | — |   |
| Leases on ICC/VCC Assets(1)                                      |       | 11,677                       |       | 3,704                                         |       | 3,889                  |       | 4,084                  |       | —                 |       | —                 |       | —                 |       | —         |       |
| Other Operating Leases(2)                                        |       | 11,802                       |       | 708                                           |       | 1,254                  |       | 951                    |       | 962                    |       | 750                    |       | 529                    |       | 6,649          |       |
| Total Contractual Cash Obligations (excluding interest payments) |       | $                            | 73,699     |                                          | $          | 1,603                  |       | $                      | 5,186      |                   | $          | 5,077                  |       | $                      | 962        |           | $          | 53,694 |   | $ | 529 |   | $ | 6,649 |   |

 

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(1) -  Infiscal year 2006 we exercised a four-year option on our ICC/VCC leases withAstrium. We have returned the ICC/VCC assets to Astrium GmbH and arere-negotiating the terms of the lease obligations. Rental payments of $3.7million due in the quarter ended March 31, 2007 are past due but paidsubsequent to quarter end.

(2) -  Infiscal year 2005 we executed sale leaseback transactions for our corporate andSPPF buildings. For the remainder of fiscal year 2007 we expect to receive netpayments of $0.2 million for subleases. For fiscal years 2008 and 2009 weexpect to receive net payments of approximately $0.4 million and $0.1 million,respectively for subleases.

As of December 31,2006 we had forecasted a March 31, 2007 cash balance of $2.3 million. Actualcash for March 31, 2007 is $19.5 million which includes $7.2 million ofrestricted cash. The primary differences between the projected cash of $2.3million and actual unrestricted cash of $12.3 million results from thenon-payment on our ICC/VCC leases of $3.7 million and a $6.6 million differencein cash expenditures made to Astrium for integration and operations support ascompared to our projection for the quarter ended March 31, 2007. Thisdifference is due to the timing of receipt of accounts payable invoices and thecompletion of milestones. Below are the quarterly projected cash inflows andoutflows for the remainder of calendar year 2007:
| ** **                                 | ** ** | **(Dollars in thousands)**                 | ** ** |
|--------------------------------------------|------------|--------------------------------------------|------------|
|                                            | ** ** | **Quarter   Ending   6/30/2007** | ** ** | **Quarter   Ending   9/30/2007** | ** ** | **Quarter   Ending   12/31/2007** | ** ** |
| Cash receipts expected  on contracted work |       | 15,869                                     |       | 12,814 |   | 6,406 |   |
|                                       |       |                                       |       |   |   |   |   |
| Expected cash cost of  operations          |       | (15,608                                    | )          | (11,676 | ) | (6,245 | ) |
|                                       |       |                                       |       |   |   |   |   |
| Astrium ICC/VCC leases                     |       | (3,704                                     | )          | — |   | — |   |
|                                       |       |                                       |       |   |   |   |   |
| Interest and debt  service                 |       | (1,868                                     | )          | — |   | (12,174 | ) |
|                                       |       |                                       |       |   |   |   |   |
| Net change in cash                         |       | (5,312                                     | )          | 1,138 |   | (12,013 | ) |
|                                       |       |                                       |       |   |   |   |   |
| Projected ending cash balance              |       | 7,017                                      |       | 8,155 |   | (3,858 | ) |

### **Off-Balance SheetArrangements**

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

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

We have nomaterial changes to the disclosure made on this matter in our Annual Report onForm 10-K for the year ended June 30, 2006.

# **ITEM 4. CONTROLS AND PROCEDURES**

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

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

# **PART II: OTHER INFORMATION**

# **ITEM 1. LEGAL PROCEEDINGS**

On February 21,2007, the Company dismissed with prejudice all litigation against NASA relatingto losses incurred by the Company as a result of the February 2003 SpaceShuttle *Columbia* accident.

In January 2004the Company initiated a formal proceeding against NASA in which the Company wasseeking damages in the amount of $87.7 million for the loss of its ResearchDouble Module as a result of the *Columbia* accident.In October 2004, NASA responded to this claim with the determination that itsliability was $8.2 million, including interest, and paid SPACEHAB this amount.SPACEHAB subsequently filed an appeal with the Armed Services Board of ContractAppeals and over the past two years, the two parties have proceeded withpreparations for a court hearing planned for July 2008. The Company also fileda tort claim in November 2004, seeking damages of $79.7 million for the loss ofthe RDM, to which the court granted a motion in June 2006 to stay the caseuntil resolution of the Company’s contract claim appeal.

As a result of the claimdismissal, the Company paid Lloyd’s of London, the insurer of the RDM, $0.5million in accordance with the May 12, 2005 agreement with Lloyd’s subsequentto quarter end.

As of March 31, 2007, theCompany is not a party to any pending or threatened proceedings, which inmanagement’s opinion, would have a material adverse effect on our business,financial condition, or results of operation.

# **ITEM1A.  RISK FACTORS**

Item 1A of Part I of ourAnnual Report on Form 10-K for the fiscal year ended June 30, 2006 includes adetailed discussion of the risk factors that could materially affect ourbusiness, financial condition or future results of operations. The informationpresented below is a discussion of the material changes and/or updates to theserisk factors and should be read in conjunction with the risk factors andinformation disclosed in the Form 10-K.

As previously discussedin our fiscal year ended 2006 Form 10-K, the Company has identified a risk thatour financial condition and results of operations could be materially adverselyaffected if our flight assets are not utilized beyond the single remainingmission as of March 31, 2007, in which our single module is currently scheduledfor a August 2007 launch on the space shuttle.

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# **ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

During the nine monthsended March 31, 2007 we did not issue any unregistered securities.

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

During the nine monthsended March 31, 2007 we did not have any defaults upon senior securities.

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

On December 12,2006 we held our annual meeting of shareholders. See our Form 10-Q for thethree months ended December 31, 2006 for the results of that meeting.

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**ITEM 6. EXHIBITS**

The following exhibitsare filed herewith:
| Exhibit   No. | ** ** | **Description**                                                                                              |
|---------------|------------|--------------------------------------------------------------------------------------------------------------|
|          |       |                                                                                                         |
| 16            |       | Changes in Registrant’s Independent Registered  Public Accounting Firm.                                 |
|          |       |                                                                                                         |
| 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: May 8, 2007                           |  /s/Thomas B. Pickens, III |   |
|   |  Thomas B. Pickens, III                |
|   |  President and Chief Executive Officer |
|   |                                        |
|   |                                        |
|   |  /s/Brian K. Harrington                |   |
|   |  Brian K. Harrington                   |
|   |  Senior Vice President and             |
|   |  Chief Financial Officer               |
|        |                                             |  |  |

 

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