ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. For this purpose, any statements contained herein that relate to future events or conditions, including without limitation, the statements under "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" and in Part II, "Item 1A. Risk Factors" and located elsewhere herein regarding industry prospects our prospective results of operations or financial position, may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," and similar expressions are intended to identify forward-looking statements. Such forward-looking statements represent management's current expectations and are inherently uncertain. The important factors discussed below under the caption "Risk Factors" in Item 1A, among others, could cause actual results to differ materially from those indicated by forward-looking statements made herein and presented elsewhere by management from time to time. Any such forward-looking statements represent management's estimates as of the date of this Quarterly Report on Form 10-Q. While we may elect to update such forward-looking statements at some point in the future, we disclaim any obligation to do so, even if subsequent events cause our views to change. These forward-looking statements should not be relied upon as representing our views as of any date subsequent to the date of this Quarterly Report on Form 10-Q.

American Superconductor and design, AMSC, D-VAR, PQ-IVR, PowerModule, Secure Super Grids, and Windtec are trademarks or registered trademarks of American Superconductor Corporation. Other trademarks or service marks appearing in this Quarterly Report on Form 10-Q are the property of their respective holders.

Executive Overview

American Superconductor Corporation was founded in 1987. We are a leading energy technologies company, offering an array of solutions based on two proprietary technologies: programmable power electronic converters and high temperature superconductor ("HTS") wires. Our products, services and system-level solutions enable cleaner, more efficient and more reliable generation, delivery and use of electric power. The programmability and scalability of our power electronic converters differentiate them from most competitive offerings. Our HTS wires carry 150 times the electrical current of comparably sized copper wire. The two primary markets we serve are the wind energy market and the power transmission and distribution-or "power grid"-market.

Our HTS wire addresses constraints on the power grid by increasing the electric current carrying capacity of the transmission cables comprising these power grids and by providing current limiting functionality in cables and stand-alone devices. In addition, our HTS wire, when incorporated into primary electrical equipment such as motors and generators, can provide increased manufacturing and operating savings due to a significant reduction in the size and weight of this equipment. Also, our power electronic converters increase the quantity, quality and reliability of electric power that is transmitted by electric utilities or consumed by large industrial entities.

Our products are in varying stages of commercialization. Our power electronic converters have been sold commercially, as part of integrated systems, to electric utilities, manufacturers and wind farm developers, owners and operators since 1999. We began production of our first generation, or "1G" HTS wire in 2003, although its principal applications (power cables, fault current limiters, rotating machines and specialty magnets) are currently in the prototype stage. Some of these prototypes are funded by U.S. government contracts, primarily with the Department of Defense ("DOD") and Department of Energy ("DOE").

We started initial production of 344 superconductors, our brand name for what is generically known as second generation or "2G" HTS wire, in November 2007. Our gross production capacity is approximately 720,000 meters of 344 superconductors per year.

Our fiscal year begins on April 1 and ends on March 31. This document refers to fiscal 2008, which is the period beginning on April 1, 2008 and concluding on March 31, 2009. The second quarter of fiscal 2008 began on July 1, 2008 and concluded on September 30, 2008.

Our cash requirements depend on numerous factors, including successful completion of our product development activities, ability to commercialize our product prototypes, rate of customer and market adoption of our products and the continued availability of U.S. government funding during the product development phase. Significant deviations to our business plan with regard to these

factors, which are important drivers to our business, could have a material adverse effect on our operating performance, financial condition, and future business prospects. We expect to pursue the expansion of our operations through internal growth and potential strategic alliances and acquisitions.

Critical Accounting Policies and Estimates

The preparation of consolidated financial statements requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ under different assumptions or conditions. There were no significant changes in the second quarter of fiscal 2008 in our critical accounting policies as disclosed in our Form 10-K for fiscal 2007, which ended on March 31, 2008.

Results of Operations

Three and six months ended September 30, 2008 compared to the three and six months ended September 30, 2007

We operate and report our financial results to the Chief Executive Officer in two reportable business segments: AMSC Power Systems and AMSC Superconductors.

AMSC Power Systems supplies power electronic systems used in wind turbines; produces products to increase electrical grid capacity and reliability and to regulate wind farm voltage for the electrical grid; licenses proprietary wind turbine designs to manufacturers of such systems and provides consulting services to the wind industry.

AMSC Superconductors focuses on the manufacturing of HTS wire and coils; the design and development of HTS products, such as power cables, fault current limiters and motors; and the management of large-scale HTS projects, such as HTS power cable system design, manufacturing and installation.

Revenues

Total revenues increased by 87% and 94% to $40.4 million and $80.2 million for
the three months and six months ended September 30, 2008, respectively, from
$21.6 million and $41.4 million for the three months and six months ended
September 30, 2007, respectively. Our revenues are summarized as follows (in
thousands):



                                     Three months ended       Six months ended
                                       September 30,           September 30,
                                      2008         2007       2008        2007
            Revenues:
            AMSC Power Systems     $    35,576   $ 19,186   $  71,506   $ 33,554
            AMSC Superconductors         4,799      2,437       8,686      7,838

            Total                  $    40,375   $ 21,623   $  80,192   $ 41,392

Revenues in our AMSC Power Systems unit consist of revenues from wind turbine electrical systems, wind turbine license and development contracts as well as D-VAR®, PQ-IVR ®, SVC, and PowerModule™ product sales, service contracts, and consulting arrangements. We also offer to engineer, install and commission our products on a turnkey basis for our customers. Our Power Systems business unit accounted for 88% and 89% of total revenues for the three months and six months ended September 30, 2008, respectively, compared to 89% and 81% of total revenues for the same periods of fiscal 2007. Revenues in the Power Systems unit increased by 85% and 113% to $35.6 million and $71.5 million in the second quarter and first six months of fiscal 2008 from $19.2 million and $33.6 million for the same periods in fiscal 2007, respectively. The increases were primarily due to higher sales of wind electrical systems and core components, including our PowerModule product, primarily in the Asia-Pacific region. The remainder of the increase was primarily due to higher sales related to turnkey power systems projects which included our D-VAR and SVC products.

A substantial portion of our revenues are derived from one customer, Sinovel Wind Co., Ltd., a manufacturer of wind energy systems based in China. Sales to Sinovel represented 63% and 59% of our total revenues for the second quarter of fiscal 2008 and 2007, respectively, and 65% and 52% of our total revenues for the first six months of fiscal 2008 and 2007, respectively.

Revenues in our AMSC Superconductors business unit consist of contract revenues, HTS wire sales, revenues under government-sponsored electric utility projects, and other prototype development contracts. AMSC Superconductors revenue is primarily recorded using the percentage-of-completion method. Our AMSC Superconductors unit accounted for 12% and 11% of total revenues for the three and six months ended September 30, 2008, respectively, compared to 11% and 19% of total revenues for the same periods of fiscal 2007. AMSC Superconductors revenue increased by 97% and 11% to $4.8 million and $8.7 million in the second quarter and first six months of fiscal 2008, respectively. Revenues from significant AMSC Superconductors government funded contract revenues are summarized as follows (in thousands):

                                                       Revenue Earned              Revenue Earned for the three months               Revenue Earned for the six months
                              Expected Total              through                          ended September 30,                              ended September 30,
                              Contract Value         September 30, 2008                2008                     2007                   2008                    2007
Project Name
HYDRA                         $        24,908       $              6,065       $               1,398       $           434       $           2,420       $             620
LIPA I                                 27,458                     27,353                          23                   297                      30                   3,470
LIPA II                                 9,000                      1,744                         434                    -                    1,266                      -
DOE-FCL                                 3,065                      2,174                         688                    -                    1,252                      -
36.5 MW Motor                          90,150                     90,150                          -                     94                      -                    1,283
NAVSEA Motor Study                      5,885                      5,352                       1,792                   586                   2,412                     855

The HYDRA project is discussed further below. LIPA I is a project to install an HTS power cable system at transmission voltage using our first generation HTS wire for Long Island Power Authority. LIPA II is an installation of an HTS power cable utilizing our second generation HTS wire for Long Island Power Authority. DOE-FCL is a development and in-grid demonstration of a transmission voltage SuperLimiter FCL. The 36.5 MW Motor project is an HTS motor developed for the U.S. Navy. The NAVSEA Motor Study is a project designed to test the HTS motor.

The increase in AMSC Superconductors revenue for the second quarter of fiscal 2008 was driven primarily by higher revenues from our HYDRA, LIPA II, DOE-FCL and NAVSEA projects.

We are recognizing HTS cable project revenues in fiscal 2008 from the Project HYDRA contract with Consolidated Edison, Inc., which is being funded by the U.S. Department of Homeland Security ("DHS") and was announced on May 21, 2007. DHS is expected to invest up to a total of $24.9 million in the development of a new high temperature superconductor power grid technology to enable Secure Super Grids™. Secure Super Grids utilize customized HTS wires, HTS power cables and ancillary controls to deliver more power through the grid while also being able to suppress power surges that can disrupt service. While the final contract was being negotiated, we worked under letter contracts with DHS. On January 22, 2008, we executed the final contract with DHS. Of the total $24.9 million in funding expected from DHS, it has committed funding of $10.7 million to us through September 30, 2008. We recognized $1.4 million in revenue related to the Project HYDRA during the second quarter of fiscal 2008. Consolidated Edison and Southwire Company are subcontractors to us on this project.

Cost-sharing funding

In addition to reported revenues, we also received funding of $0.4 million and $1.3 million for the three and six months ended September 30, 2008, respectively, under U.S. government cost-sharing agreements with the U.S. Air Force and the DOE, compared to $0.6 million and $1.2 million for the same periods of fiscal 2007. The increase in cost-sharing funding is primarily due to the Advanced Technology Program ("ATP"), which commenced in November 2007. All of our cost-sharing agreements provide funding in support of development work on 344 superconductors being done in our AMSC Superconductors business unit. We anticipate that a portion of our funding in the future will continue to come from cost-sharing agreements as we continue to develop joint programs with government agencies. Funding from government cost-sharing agreements is recorded as an offset to research and development ("R&D") and selling, general and administrative ("SG&A") expenses, rather than as revenue. As of September 30, 2008, we anticipate recognizing an additional $2.3 million offset to R&D and SG&A expenses related to these cost-sharing agreements over the next two years.

Costs of Revenue

Costs of revenue increased by 85% and 80% to $29.7 million and $57.9 million, for the three and six months ended September 30, 2008, respectively, compared to $16.0 million and $32.2 million for the same periods of fiscal 2007. Gross margin was 26.5% and 27.8% for the three and six months ended September 30, 2008, respectively, compared to 26.0% and 22.2%, respectively, for the same periods of fiscal 2007. The increases in gross margin were due primarily to a higher mix of Power Systems sales as compared to Superconductors sales and a $0.9 million inventory write-off for a SuperVAR® synchronous condenser was recorded in the six months ended September 30, 2007. These factors were partially offset by higher depreciation in the current fiscal year related to the Company's 2G production equipment.

Operating Expenses

Research and development

A portion of our R&D expenditures related to externally funded development contracts has been classified as costs of revenue (rather than as R&D expenses). Additionally, a portion of R&D expenses was offset by cost-sharing funding. Our R&D expenditures are summarized as follows (in thousands):