Our proprietary carbonate DFC power plants electrochemically (without combustion) produce electricity directly from readily available hydrocarbon fuels such as natural gas and biogas. Customers buy fuel cells to reduce cost and pollution, and improve power reliability. Electric generation without combustion significantly reduces harmful pollutants such as NOX and particulates. Higher fuel efficiency results in lower emissions of carbon dioxide ("CO2"), a major component of harmful greenhouse gases, and also results in less fuel needed per kWh of electricity generated and Btu of heat produced. Greater efficiency reduces customers' exposure to volatile fuel costs and minimizes operating costs. Our fuel cells operate 24/7 providing reliable power to both on-site customers and for grid-support applications.
Compared to other power generation technologies, our products offer significant advantages including:
• Virtually zero emissions

• High fuel efficiency

• Ability to site units locally as distributed power generation

• Potentially lower cost power generation

• Byproduct heat ideal for cogeneration applications

• Reliable, 24/7 baseload power

• Quiet operation

Typical customers for our products include manufacturers, mission critical institutions such as correction facilities and government installations, hotels, and customers who can use renewable gas for fuel such as breweries, food processors and wastewater treatment facilities. Our MW-class products are also used as grid support applications for utility customers. With increasing demand for renewable and ultra-clean power options and increased volatility in electric markets, our customers gain control of power generation economics, reliability, and emissions. Our fuel cells also offer flexible siting, easy permitting, and the ability to use multiple fuels.
Recent Developments
POSCO Power
In June 2009, the Company entered into a Product Sales Contract with Posco Power for a total of 30.8 MW of FuelCell Energy DFC modules and components. The order represents an estimated sales value to the Company of $58 million and calls for delivery of units during 2010 and early 2011.
In conjunction with this sales contract, the Company also executed a Memorandum of Agreement whereby the parties have agreed to enter into a licensing agreement to allow POSCO Power to assemble FuelCell Energy cell and module components into stack modules for sale in South Korea. POSCO Power will purchase $25 million of FuelCell Energy common stock at $3.59 per share (the 10-day average FuelCell Energy stock closing price through June 8, 2009) once the licensing agreement is finalized. Prior to this investment, POSCO Power's ownership interest in the Company's common stock was approximately 5 percent which will increase once this investment is finalized to approximately 14 percent based on total common stock outstanding as of June 8, 2009.
Connecticut Project 150 Program
Under the state's Renewable Portfolio Standards program, the Connecticut Department of Public Utility Control (DPUC) issued a final decision approving
27.3 MW in April 2009 bringing the total of projects incorporating FuelCell Energy power plants awarded to 43.5 MW. These include: a 14.3 MW power plant for grid support, 18.8 MW of DFC-ERG® power plants to be located at four natural gas distribution stations, a 3.2 MW DFC/Turbine (DFC/T) for an electrical substation, and 7.2 MW at two hospitals. The DFC-ERG and DFC/T power plants are FuelCell Energy's highest-efficiency products and are twice as efficient as the average U.S. fossil fuel power plant. Cash Management Plan
The credit crisis is creating delays in order flow affecting the Company's cash estimates for the quarter and fiscal year. The Company has partially offset higher cash use with lower capital spending and other company-wide cost reductions. In February 2009, the Company initiated a six percent workforce reduction, a suspension of employer contributions to the 401(k) plan and a salary freeze except for production employees. As a result, the Company expects reduced cash use in 2009 compared to 2008, although cash use for fiscal 2009 may not meet the Company's previous expectations as the credit crisis is delaying the contract negotiation and closure process.
We are operating at a 30 MW run-rate and our current backlog is approximately 18 MW. While we have visibility to future orders, further adjustments to the Company's production rate and spending may be made to mitigate cash use as appropriate to reflect current market conditions. Our liquidity will be dependent on achieving the order volumes and cost reductions on our fuel cell products necessary to sustain profitable operations. We may also raise capital through an equity offering. The timing and size of any financing will depend on multiple factors including the impact of the global recession, future order flow and the need to adjust production capacity. There can be no assurance that we will be able to obtain additional financing in the future, if at all. If we are unable to raise additional capital, our growth potential will be adversely affected and we may have to modify our plans.

The American Recovery and Reinvestment Act The American Recovery and Reinvestment Act (ARRA), enacted in February 2009, directs more than $30 billion dollars for energy initiatives and another $20 billion in tax incentives for renewable energy and energy efficiency over the next 10 years. Projects using FuelCell Energy's stationary fuel cells may be eligible to receive benefits under the following provisions of the ARRA:
• A new federal Investment Tax Credit (ITC) grant provision allows project developers to fund projects by applying for a grant through the Department of the Treasury. Previously the ITC could only be used as a credit against taxable income;

• The ARRA repeals certain ITC limitations and now allows the credit to be taken on a greater percentage of total project costs;

• For certain projects put in service during 2009, developers can claim accelerated depreciation up to 50 percent of the adjusted cost basis of the property. For projects beginning operation between 2009 and January 1, 2011, developers can claim the same accelerated depreciation benefits on the adjusted basis of the project as of January 1, 2010. For developers using the ITC or cash grant, 42.5 percent can be deducted immediately;

• An additional $3.2 billion was allocated for the U.S. Department of Energy's Energy Efficiency and Renewable Energy (EERE) program to apply to state block grants. These funds are for clean energy programs and include installation of high efficiency fuel cell power plants to provide ultra-clean, reliable electricity;

• $300 million was directed to the U.S. Department of Defense for research, development, evaluation, and demonstration of projects that employ fuel cell, solar, and wind sources for energy generation;

• A $1.6 billion bond program was included that provides new clean energy bonds to finance facilities that generate electricity from ultra-clean sources such as fuel cells.

Available Information
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports are available free of charge through the Investor Relations section of our website (www.fuelcellenergy.com) as soon as practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission. Material contained on our website is not incorporated by reference in this report. Our executive offices are located at 3 Great Pasture Road, Danbury, CT 06813.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES Refer to Critical Accounting Policies and Estimates in our 2008 Form 10-K for information on accounting policies and estimates that we consider critical in preparing our consolidated financial statements. Our accounting policies include significant estimates we make using information available at the time the estimates are made. However, these estimates could change materially if different information or assumptions were used.

RESULTS OF OPERATIONS
Management evaluates the results of operations and cash flows using a variety of key performance indicators. Indicators that management uses include revenues compared to prior periods and internal forecasts, costs of our products and results of our "cost-out" initiatives, and operating cash use. These are discussed throughout the 'Results of Operations' and 'Liquidity and Capital Resources' sections.
Comparison of Three Months ended April 30, 2009 and April 30, 2008 Revenues and costs of revenues
The following tables summarize the components of our revenues and cost of revenues for the three months ended April 30, 2009 and 2008 (dollar amounts in thousands), respectively:

                                  Three Months Ended                   Three Months Ended
                                    April 30, 2009                       April 30, 2008                Percentage
                                                Percent of                           Percent of         Decrease
                              Revenues           Revenues          Revenues           Revenues        in Revenues
Revenues:
Product sales and
revenues                    $     19,308                 84 %    $     26,440                 84 %             (27 %)
Research and development
contracts                          3,556                 16 %           5,203                 16 %             (32 %)

Total                       $     22,864                100 %    $     31,643                100 %             (28 %)




                                  Three Months Ended                   Three Months Ended
                                    April 30, 2009                       April 30, 2008                Percentage
                                                Percent of                           Percent of         Decrease
                              Cost of            Cost of           Cost of            Cost of          in Cost of
                              Revenues           Revenues          Revenues           Revenues          Revenues
Cost of revenues:
Product sales and
revenues                    $     28,614                 91 %    $     39,787                 89 %             (28 %)
Research and development
contracts                          2,837                  9 %           4,831                 11 %             (41 %)

Total                       $     31,451                100 %    $     44,618                100 %             (30 %)

Total revenues for the three months ended April 30, 2009 decreased by $8.8 million, or 28 percent, to $22.8 million from $31.6 million during the same period last year. Total cost of revenue for the three months ended April 30, 2009 decreased by $13.2 million or 30 percent to $31.5 million. Product sales and revenues
The Company has historically sold its fuel cell products below cost while the market develops and product costs are reduced. We have been engaged in a formal commercial cost-out program since 2003 to reduce the total life cycle costs of our power plants. We have made significant progress primarily through value engineering our products, manufacturing process improvements and higher production levels, technology improvements and global sourcing. We currently estimate that product sales and revenues will be gross margin profitable when the Company achieves annual production volumes in the 35 to 70 MW range depending on product mix. Our current annual production volume is approximately 30 MW. As a measure of cost reduction progress prior to achieving positive margins, the Company calculates a cost-to-revenue ratio which is cost divided by revenue. Refer to the liquidity and capital resources section of this document for future discussion of the Company's plans for implementing our cost reduction efforts and increasing annual order volume.

Analysis for the three-month comparable periods ended April 30, 2009 and 2008:

                                          Three              Three
                                       Months Ended       Months Ended
                                        April 30,          April 30,         Percentage
                                           2009               2008             Change
 Product sales and revenues           $       19,308     $       26,440              (27 %)
 Cost of Product sales and revenues           28,614             39,787              (28 %)

 Loss on product sales and revenues   $       (9,306 )   $      (13,347 )            (30 %)

 Cost-to-revenue ratio                          1.48               1.50               (1 %)

Product sales and revenue decreased $7.1 million to $19.3 million for the three months ended April 30, 2009 compared to $26.4 million for the same period in the prior year. Revenue in the second quarter included approximately $17.0 million of power plant sales, $0.4 million related to site engineering and construction work for projects where the Company is responsible for complete power plant system installation, $1.3 million related to service agreements and component sales and approximately $0.6 million of revenue related to power purchase agreements. Prior year revenues were higher due to a build of inventory in prior periods being applied to customer contracts in the quarter. POSCO Power, one of our strategic distribution partners, accounted for approximately 80 percent and 69 percent of total product sales and revenues for the periods ended April 30, 2009 and 2008, respectively.
Cost of product sales and revenues decreased to $28.6 million for the quarter ended April 30, 2009 compared to $39.8 million the same period of 2008. The ratio of product cost to sales was 1.48 to 1 compared to 1.50 to 1 during the same period a year ago and 1.52 to 1 in the first quarter of 2009. The cost ratio has been favorably impacted by the shift to MW production and lower unit costs across all product lines partially off-set by higher service agreement costs due to the timing of stack replacements, compared to the prior year quarter.
Net of revenues, service agreements and aftermarket costs totaled approximately $5.2 million in the second quarter of fiscal 2009 compared to $4.1 million in the same period of the prior year. Excluding this impact, the ratio of product cost to sales would have been 1.23 to 1 during the second quarter of fiscal 2009, compared to 1.39 to 1 during the same period a year ago. We expect replacement of older stacks will continue over the next several years. As a result, we expect to continue to incur losses in order to maintain power plants. Future costs for maintaining legacy service agreements will be determined by a number of factors including life of the stack, used replacement stacks available, the Company's limit of liability on service agreements and future operating plans for the power plant. Given these considerations, the Company expects a similar impact in 2009 as was reported in 2008 and then expects the impact to decline in 2010 and 2011.
Cost of product sales and revenues includes costs to manufacture and ship our power plants and power plant components to customers, site engineering and construction costs where the Company is responsible for complete power plant system installation, warranty costs (currently expensed as incurred due to limited operating experience), and costs to service power plants for customers with long-term service agreements (including maintenance and stack replacement costs incurred during the period). Cost of sales also includes Power Purchase Agreement ("PPA") operating costs and adjustments required to value our inventory at the lower of cost or market. As our fuel cell products are in their initial stages of development and market acceptance, we have not historically provided for a loss reserve estimate on product or service contracts.

Research and development contracts
Research and development revenue decreased to $3.6 million for the three months ended April 30, 2009 compared to $5.2 million for the same period in 2008. Cost of research and development contracts decreased to $2.8 million during the second quarter of 2009 compared to $4.8 million for 2008. Margin from research and development contracts for the second quarter was approximately $0.7 million or 20 percent compared to $0.4 million or 7 percent in the second quarter of 2008. The decline in revenue compared to the prior year is due to the completion of several government programs in the second half of fiscal 2008 and transition to the Phase II coal-based SOFC contract which was awarded late in the first quarter of fiscal 2009. In January, the U.S. Department of Energy (DOE) awarded the Company Phase II of the MW-class coal-based SOFC contract, a $30.2 million contract of which the DOE has agreed to fund $21.0 million with the remaining amount to be funded by the Company.
Research and development contract backlog was $19.5 million of which Congress has authorized funding of $7.6 million as of April 30, 2009 compared to $8.0 million ($6.9 million funded) at April 30, 2008. Administrative and selling expenses
Administrative and selling expenses for the quarter ended April 30, 2009 totaled $4.8 million, a decrease of $1.0 million compared to $5.8 million in the same period of the prior year. This decrease is due to lower spending as a result of the cash management plan implemented in fiscal 2009 and lower stock-based compensation of approximately $0.4 million. Research and development expenses
Research and development expenses totaled $5.1 million during the three months ended April 30, 2009, a decrease of $0.9 million compared to $5.9 million recorded in the same period of the prior year. The decrease is related to the cash management plan implemented in fiscal 2009 and the level of engineering effort supporting manufacturing operations. Loss from operations
Loss from operations for the three months ended April 30, 2009 totaled $18.4 million, approximately twenty-six percent lower than the $24.7 million loss from operations recorded in the comparable period last year. The decrease in loss from operations is due to lower product sales, lower administrative and selling expenses and lower research and development expenses and improved margins on research and development contracts. The lower loss is also attributable to cost reductions across all product lines and a shift to MW-class production.
Loss from equity investments
Our ownership interest in Versa at April 30, 2009 was 39%. We account for Versa under the equity method of accounting. Our share of equity losses for the three months ended April 30, 2009 and 2008 were $0.2 million and $0.6 million, respectively. This decrease is due to lower research and development activity at Versa.
Interest and other income, net
Interest and other income, net, decreased to $0.1 million for the three months ended April 30, 2009 compared to $0.8 million for the same period in 2008. The decrease is due to lower interest income on lower average invested balances and lower interest rates.

Provision for income taxes
We believe that due to our commercialization efforts, our DFC products will continue to incur losses. Based on projections for future taxable income over the period in which the deferred tax assets are realizable, management believes that significant uncertainty exists surrounding the recoverability of the deferred tax assets. Therefore, no tax benefit has been recognized related to current or prior year losses and other deferred tax assets. Comparison of Six Months ended April 30, 2009 and April 30, 2008 Revenues and costs of revenues
The following tables summarize the components of our revenues and cost of revenues for the six months ended April 30, 2009 and 2008 (dollar amounts in thousands), respectively:

                                  Six Months Ended                   Six Months Ended               Percentage
                                   April 30, 2009                     April 30, 2008                 Increase
                                              Percent of                         Percent of        (decrease) in
                             Revenues          Revenues         Revenues          Revenues           Revenues
Revenues:
Product sales and
revenues                    $    38,339                86 %    $    36,208                78 %                  6 %
Research and development
contracts                         6,248                14 %         10,454                22 %                (40 %)

Total                       $    44,587               100 %    $    46,662               100 %                 (4 %)




                                  Six Months Ended                   Six Months Ended
                                   April 30, 2009                     April 30, 2008               Percentage
                                              Percent of                         Percent of         Decrease
                              Cost of          Cost of           Cost of          Cost of          in Cost of
                             Revenues          Revenues         Revenues          Revenues          Revenues
Cost of revenues:
Product sales and
revenues                    $    57,551                92 %    $    59,197                86 %              (3 %)
Research and development
contracts                         5,075                 8 %          9,271                14 %             (45 %)

Total                       $    62,626               100 %    $    68,468               100 %              (9 %)

Total revenues for the six months ended April 30, 2009 decreased by $2.1 million, or 4 percent, to $44.6 million from $46.7 million during the same period last year. Total cost of revenue for the six months ended April 30, 2009 decreased by $5.8 million or 9 percent to $62.6 million. Product sales and revenues
The Company has historically sold its fuel cell products below cost while the market develops and product costs are reduced. We have been engaged in a formal commercial cost-out program since 2003 to reduce the total life cycle costs of our power plants. We have made significant progress primarily through value engineering our products, manufacturing process improvements and higher production levels, technology improvements and global sourcing. We currently estimate that product sales and revenues will be gross margin profitable when the Company achieves annual production volumes in the 35 to 70 MW range depending on product mix. Our current annual production volume is approximately 30 MW. As a measure of cost reduction progress prior to achieving positive margins, the Company calculates a cost-to-revenue ratio which is cost divided by revenue. Refer to the liquidity and capital resources section of this document for future discussion of the Company's plans for implementing our cost reduction efforts and increasing annual order volume.

Analysis for the six-month comparable periods ended April 30, 2009 and 2008:

                                           Six                Six
                                       Months Ended       Months Ended
                                        April 30,          April 30,         Percentage
                                           2009               2008             Change
 Product sales and revenues           $       38,339     $       36,208                6 %
 Cost of Product sales and revenues           57,551             59,197               (3 %)
. . .