The Company's research double module and related equipment were destroyed, along with the space shuttle and her crew, during reentry at the conclusion of the STS-107 mission. In November 2004 Spacehab filed a claim with NASA under the Federal Tort Claims Act of $79.7 million for recovery of the losses on the flight. After NASA failed to respond to the claim within a reasonable period of time, the Company was left no choice but to consider the claim as denied and then pursue restitution in the Federal Court system.

Under the FTCA, Spacehab claims that NASA's actions and omissions led to the space shuttle disaster and the destruction of the Company's flight assets. The complaint identifies the tragedy as a foreseeable consequence of NASA's negligence as documented in the Columbia Accident Investigation Board report, which represents the findings of the post-accident investigation.

Investigators found that Columbia's destruction was caused by insulating foam that came loose at high speed from the external tank on launch and damaged the orbiter's wing. The CAIB found NASA was long aware of the danger and frequency of these kinds of foam strikes; a very serious one which occurred just two missions before the STS-107 mission. As alleged in the complaint, NASA ignored its own rules, failed to fix the problem, and improperly allowed Columbia to launch in the face of this unaddressed danger. NASA has stated that the Agency 'accepts the findings of the CAIB' and 'embraced the report and all that is included in it.'

"We are disappointed that NASA took no action to resolve this claim, and that we had to resort to the courts in order to achieve a fair and reasonable settlement," stated Michael E. Kearney, Spacehab's president and chief executive officer.

"These valuable assets, developed through private capital investment, have served NASA well on 19 missions,� Kearney said. �We believe the private sector's participation in the space program is essential to the maturation of a robust space industry, but this goal is made extremely difficult in the current environment where 'business as usual' is prevalent."

To date, two claims have been filed with NASA. The first, the contract claim, was filed in January 2004 for recovery of the module and associated equipment. It totaled $87.7 million and included subrogation of insurance proceeds of $17.7 million received from underwriters. NASA paid $8.0 million plus interest in October 2004 claiming its liability was limited under the contract.

In December 2004, Spacehab appealed the denial of the contract claim beyond $8.0 million through the Armed Services Contract Board of Appeals. The contract claim is in the discovery phase. The second claim, the tort claim, was filed in November 2004 for $79.7 million ($87.7 million less the partial recovery of $8.0 million).

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