Shortly following the space shuttle accident in February 2003, Spacehab received $17.7 million in insurance proceeds from the Underwriters, Spacehab's commercial insurers for the Research Double Module.

In January 2004 the Underwriters filed a complaint seeking return of the money alleging, among other things, that such proceeds were paid erroneously primarily due to the fact that NASA had not paid indemnification due to the Company prior to the payment of the insurance proceeds and that the Company had not cooperated with the Underwriters in protecting their right of subrogation.

Spacehab and the Underwriters have agreed to jointly pursue recovery against NASA with Spacehab leading the appeals process.

The Underwriters will participate in a recovery, if any, net of legal costs, in accordance with a pre-agreed schedule which limits Spacehab's liability with the Underwriters to $500,000. Also in accordance with the agreement, the Underwriters will dismiss their complaint against Spacehab with prejudice.

To date, two claims have been filed with NASA regarding losses sustained on the STS-107 space shuttle accident.

The first claim, the contract claim, which was filed in January 2004 for recovery of Spacehab's module and associated equipment, totaled $87.7 million and included subrogation of insurance proceeds of $17.7 million received from the Underwriters.

NASA paid Spacehab $8.0 million plus interest in October 2004 claiming its liability was limited under the contract.

In December 2004 Spacehab appealed the denial of its contract claim beyond $8.0 million through the Armed Services Contract Board of Appeals. On May 5, 2005 NASA filed its answer to Spacehab's complaint with the Board of Appeals. Spacehab is now proceeding with discovery.

Spacehab filed a second claim in November 2004, the tort claim, for $79.7 million ($87.7 million less the partial recovery of $8.0 million) under the Federal Tort Claims Act (FTCA).

NASA has not answered the Company's FTCA claim. Upon NASA's denial or failure to respond to the claim, the Company has the option to pursue this claim through appeal to the Federal District Court.

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