American Superconductor (AMSC)

Liquidity and Capital Resources

At March 31, 2009, we had cash, cash equivalents, marketable securities and restricted cash of $117.2 million compared to $119.4 million at March 31, 2008, a decrease of $2.2 million. Our cash, cash equivalents, marketable securities and restricted cash are summarized as follows (in thousands):

The decrease in cash and cash equivalents, marketable securities and restricted cash was primarily the result of translation effects on cash balances denominated in foreign currency.

For fiscal 2008, net cash used by operating activities was $2.4 million compared to a use of $17.8 million in fiscal 2007. The decrease in cash used by operations is due primarily to a lower net loss of $8.8 million, an increase in non-cash stock-based compensation expenses of $4.0 million and a net increase in cash used for working capital.

For fiscal 2008, net cash used in investing activities was $3.5 million compared to a use of $40.5 million in fiscal 2007. The decrease in cash used in investing activities was driven primarily by the reduction in restricted cash and a net reduction in the marketable securities activity as a result of reducing purchases of commercial paper and investing in treasury money market funds, a cash equivalent.

As of March 31, 2009, we have invested in total approximately $14.9 million in our 344 superconductors production line. These expenditures were made to enable us to achieve a gross production capacity of approximately 720,000 meters annually of 344 superconductors on our 40 mm manufacturing technology and to prepare to migrate to our 100 mm manufacturing technology. We estimate that an additional $28.0 million to $35.0 million of capital expenditures would be needed for a full commercial manufacturing operation with a gross capacity of approximately 9 million meters of wire per year.

For fiscal 2008, cash provided by financing activities was $12.5 million compared to $108.4 million in fiscal 2007. The decrease was due to proceeds received from our public stock offering during the second quarter of fiscal 2007 and a decrease in proceeds from the exercise of employee stock options.

Although our cash requirements fluctuate based on a variety of factors, including customer adoption of our products and our research and development efforts to commercialize our products, we believe that our available cash will be sufficient to fund our working capital, capital expenditures, and other cash requirements for at least the next twelve months and will enable us to withstand the current restrictive credit environment.

We also have unused lines of credit of €0.5 million (or approximately $0.7 million), which is available until June 30, 2010, and CNY 8.9 million (or approximately $1.3 million), which is available until June 5, 2009.

The possibility exists that we may pursue additional acquisition and joint venture opportunities in the future that may affect liquidity and capital resource requirements.

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Liquidity
and Capital Resources

At March 31, 2009, we had cash, cash equivalents, marketable securities and restricted cash of $117.2
million compared to $119.4 million at March 31, 2008, a decrease of $2.2 million. Our cash, cash equivalents, marketable securities and restricted cash are summarized as follows (in thousands):

Liquidity and Capital Resources

At December 31, 2008, we had cash, cash equivalents, marketable securities and restricted cash of $122.6 million compared to $119.4 million at March 31, 2008, an increase of $3.2 million. Our cash and cash equivalents, marketable securities and restricted cash are summarized as follows (in thousands):

The increase in cash and cash equivalents, marketable securities and restricted cash was primarily the result of proceeds from the exercise of stock options in the nine months ended December 31, 2008, partially offset by foreign currency translation effects on euro-denominated cash balances.

For the nine months ended December 31, 2008, net cash used by operating activities was $0.8 million compared to a use of $17.5 million for the same period of fiscal 2007. The decrease in cash used by operations is due to a lower net loss and lower cash used for working capital, primarily related to a decrease in days sales outstanding as a result of improved collections and an increase in accounts payable and accrued expenses, partially offset by an increase in inventory as we prepared to meet customer deliveries scheduled for the fourth quarter of fiscal 2008 and fiscal 2009.

For the nine months ended December 31, 2008, net cash used in investing activities was $21.7 million compared to $35.4 million for the same period of fiscal 2007. The decrease in cash used in investing activities was driven primarily by the reduction in restricted cash.

As of December 31, 2008, we have invested in total approximately $14.7 million in our 344 superconductors production line. These expenditures were made to enable us to achieve a gross production capacity of approximately 720,000 meters annually of 344 superconductors on our 4 cm manufacturing technology and to prepare to migrate to our 10 cm manufacturing technology. We estimate that an additional $28.0 million to $35.0 million of capital expenditures would be needed for a full commercial manufacturing operation with a gross capacity of approximately 9 million meters of wire per year.

For the nine months ended December 31, 2008, cash provided by financing activities was $12.2 million compared to $107.6 million in the same period of fiscal 2007. The decrease was due to proceeds received from our public stock offering during the second quarter of fiscal 2007, offset in part by an increase in proceeds from the exercise of employee stock options.

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AMERICAN SUPERCONDUCTOR CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS—Continued

Although our cash requirements fluctuate based on a variety of factors, including customer adoption of our products and our research and development efforts to commercialize our products, we believe that our available cash will be sufficient to fund our working capital, capital expenditures, and other cash requirements for the next several years and will enable us to withstand the current restrictive credit environment.

We also have unused lines of credit of €0.6 million (or approximately $0.8 million), which is available until June 30, 2010 and CNY 1.1 million (or approximately $0.2 million) which is available until June 5, 2009.

The possibility exists that we may pursue additional acquisition and joint venture opportunities in the future that may affect liquidity and capital resource requirements.

Liquidity and Capital Resources

At September 30, 2008, we had cash, cash equivalents, marketable securities and restricted cash of $128.9 million compared to $119.4 million at March 31, 2008, an increase of $9.5 million. Our cash, cash equivalents, marketable securities and restricted cash are summarized as follows (in thousands):

The increase in cash and cash equivalents, marketable securities and restricted cash was primarily the result of approximately $12 million in cash received from the exercise of employee stock options in the first six months of fiscal 2008.

For the six months ended September 30, 2008, net cash provided by operating activities was $3.5 million compared to a use of $11.5 million for the same period of fiscal 2007. The increase in cash provided by operations is due to a lower net loss and lower cash used for working capital, primarily related to a decrease in accounts receivable as a result of improved collections, partially offset by an increase in inventory as we prepare to meet customer deliveries scheduled in the third and fourth quarters of fiscal 2008.

For the six months ended September 30, 2008, net cash used in investing activities was $25.8 million compared to $19.5 million for the same period of fiscal 2007. The increase in cash used in investing activities was driven primarily by the net increase in cash used to purchase marketable securities, net of maturities, partially offset by a reduction in restricted cash.

As of September 30, 2008, we have invested in total approximately $14.5 million in our 344 superconductors production line. These expenditures were made to enable us to achieve a gross production capacity of approximately 720,000 meters annually of 344 superconductors on our 4 cm manufacturing technology and to prepare to migrate to our 10 cm manufacturing technology. We estimate that an additional $28.0 million to $35.0 million of capital expenditures would be needed for a full commercial manufacturing operation with a gross capacity of approximately 9 million meters of wire per year.

For the six months ended September 30, 2008, cash provided by financing activities was $12.0 million compared to $102.0 million in the same period of fiscal 2007. The decrease was due to proceeds received from our secondary offering during the first quarter of fiscal 2007, offset in part by an increase in proceeds from the exercise of employee stock options.

Although our cash requirements fluctuate based on a variety of factors, including customer adoption of our products and our research and development efforts to commercialize our products, we believe that our available cash will be sufficient to fund our working capital, capital expenditures, and other cash requirements for the next several years and will enable us to withstand the current restrictive credit environment.

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AMERICAN SUPERCONDUCTOR CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS—Continued

We also have an unused line of credit of €0.6 million (or approximately $0.9 million), which is available until June 30, 2010.

The possibility exists that we may pursue additional acquisition and joint venture opportunities in the future that may affect liquidity and capital resource requirements.

Liquidity and Capital Resources

At June 30, 2008, we had cash, cash equivalents, marketable securities and restricted cash of $131.5 million compared to $119.4 million at March 31, 2008, an increase of $12.1 million. Our cash, cash equivalents, marketable securities and restricted cash are summarized as follows (in thousands):

The increase in cash and cash equivalents, marketable securities and restricted cash was primarily the result of cash received from the exercise of employee stock options in the first quarter of $10.9 million.

We have generated operating losses since our inception, and expect to incur an operating loss in fiscal 2008 as well.

For the first quarter of fiscal 2008, net cash provided by operating activities was $3.2 million compared to a use of $8.3 million in the first quarter of fiscal 2007. The increase in cash provided by operations is due to a lower net loss and lower cash used for working capital, primarily related to a decrease in accounts receivable as a result of improved collections.

For the first quarter of fiscal 2008, net cash used in investing activities was $12.4 million compared to net cash provided by investing activities of $1.5 million in the first quarter of fiscal 2007. The increase in cash used in investing activities was driven primarily by the net increase in cash invested in marketable securities.

As of June 30, 2008, we have invested in total approximately $14.5 million in the 344 superconductors production line. These expenditures were made to enable us to achieve a gross production capacity of approximately 720,000 meters annually of 344 superconductors on our 4 cm manufacturing technology and prepare to migrate to our 10 cm manufacturing technology. We estimate that an additional $28.0 million to $35.0 million of capital expenditures would be needed for a full commercial manufacturing operation with a gross capacity of approximately 9 million meters of wire per year.

For the first quarter of fiscal 2008, cash provided by financing activities was $10.9 million compared to $6.0 million in the first quarter of fiscal 2007. This change is due to an increase in proceeds from the exercise of employee stock options received during the first quarter of fiscal 2008.

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AMERICAN SUPERCONDUCTOR CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS—Continued

Although our cash requirements fluctuate based on a variety of factors, including customer adoption of our products and our research and development efforts to commercialize our products, we believe that our available cash will be sufficient to fund our working capital, capital expenditures, and other cash requirements for the next several years.

We also have an unused line of credit of €0.6 million (or approximately $0.9 million), which is available until June 30, 2010.

The possibility exists that we may pursue additional acquisition and joint venture opportunities in the future that may affect liquidity and capital resource requirements.

Liquidity and Capital Resources

At March 31, 2008, we had cash, cash equivalents and marketable securities of $106.2 million compared to $35.3 million at March 31, 2007, an increase of $70.9 million. Our cash, cash equivalents and marketable securities are summarized as follows (in thousands):

The increase in cash and cash equivalents and marketable securities was primarily the result of receiving $93.6 million in net proceeds from our July 2007 public offering (see below). The amount as of March 31, 2008 excludes $13.2 million of restricted cash.

We have generated operating losses since our inception, and expect to continue incurring operating losses until at least until the end of fiscal 2008.

For fiscal 2007, net cash used by operating activities was $17.8 million compared to a use of $22.8 million in fiscal 2006. The decrease in cash used by operations is due to a lower net loss, partially offset by higher cash used for working capital, primarily related to an increase in accounts receivable.

For fiscal 2007, net cash used in investing activities was $40.5 million compared to a use of less than $0.1 million in fiscal 2006. The increase in cash used by investing activities was driven primarily by the net increase in cash invested in marketable securities and an increase in restricted cash used as collateral for performance bonds issued on turnkey projects.

As of March 31, 2008, we have invested in total approximately $14.5 million in the 344 superconductors production line. These expenditures were made to enable us to achieve a gross production capacity of approximately 720,000 meters annually of 344 superconductors on our 4 cm manufacturing technology and prepare to migrate to our 10 cm manufacturing technology. We estimate that an additional $28.0 million to $35.0

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million of capital expenditures would be needed for a full commercial manufacturing operation with a gross capacity of approximately 9 million meters of wire per year.

For fiscal 2007, cash provided by financing activities was $108.4 million compared to $3.5 million in fiscal 2006. On July 25, 2007, we completed a public offering of 4.7 million shares of our common stock at $21.25 per share. Net proceeds from the offering (after deducting underwriting discounts, commissions and offering expenses) were $93.6 million. An additional $14.8 million of proceeds from the exercise of stock options was also received during the period.

Although our cash requirements fluctuate based on a variety of factors, including customer adoption of our products and our research and development efforts to commercialize our products, we believe that our available cash will be sufficient to fund our working capital, capital expenditures, and other cash requirements for the next several years.

We also have an unused line of credit of €0.6 million (or approximately $0.9 million), which is available until June 30, 2010.

The possibility exists that we may pursue additional acquisition and joint venture opportunities in the future that may affect liquidity and capital resource requirements.

Liquidity and Capital Resources

At
March 31, 2008, we had cash, cash equivalents and marketable securities of $106.2 million compared to $35.3 million at March 31, 2007, an increase of $70.9 million. Our cash, cash equivalents and marketable securities are summarized as
follows (in thousands):

The increase in cash and cash equivalents and marketable securities was primarily the result of
receiving $93.6 million in net proceeds from our July 2007 public offering (see below). The amount as of March 31, 2008 excludes $13.2 million of restricted cash.

FACE="Times New Roman" SIZE="2">We have generated operating losses since our inception, and expect to continue incurring operating losses until at least until the end of fiscal 2008.

Liquidity and Capital Resources

At December 31, 2007, we had cash, cash equivalents and marketable securities of $107.8 million compared to $35.3 million at March 31, 2007, an increase of $72.5 million. Our cash, cash equivalents and marketable securities are summarized as follows (in thousands):

The increase in cash and cash equivalents and marketable securities to $107.8 million at December 31, 2007 from $35.3 million at March 31, 2007 was primarily the result of receiving $94.3 million in net proceeds from our July 2007 public offering (see below).

We have generated operating losses since our inception, and expect to continue incurring operating losses until at least until the end of the fiscal year ending March 31, 2009.

For the nine months ended December 31, 2007, net cash used by operating activities was $17.5 million compared to a use of $16.7 million by operating activities in the same period a year ago. The increase in cash used by operations is due to higher cash used for working capital, primarily an increase in accounts receivable, offset by a lower net loss excluding non-cash items.

For the nine months ended December 31, 2007, net cash used in investing activities was $35.4 million, compared to a use of $6.7 million in the same period a year ago. The increase was driven primarily by the net increase in cash invested in marketable securities and an increase in restricted cash used as collateral for performance bonds issued on turnkey projects.

As of December 31, 2007, we have invested in total approximately $13.8 million in the 344 superconductors production line, and we anticipate spending approximately an additional $1.8 million on this line in the fiscal year ending March 31, 2008. These expenditures are being made to enable us to achieve a gross production capacity of approximately 720,000 meters annually of 344 superconductors on our 4 cm manufacturing technology and prepare to migrate to our 10 cm manufacturing technology. We estimate that an additional $28.0 million to $35.0 million of capital expenditures would be needed for a full commercial manufacturing operation with a gross capacity of approximately 9 million meters of wire per year.

For the nine months ended December 31, 2007, cash provided by financing activities was $107.6 million compared to $1.1 million in the same period a year ago. On July 25, 2007, we completed a public offering of 4.7 million shares of our common stock at $21.25 per share. Net proceeds from the offering (after deducting underwriting discounts and commissions, but before deducting offering expenses) were $94.3 million. An additional $14.0 million of proceeds from the exercise of stock options was also received during the period.

Although our cash requirements fluctuate based on a variety of factors, including customer adoption of our products and our research and development efforts to commercialize our products, we believe that our available cash will be sufficient to fund our working capital, capital expenditures, and other cash requirements for the next several years.

We also have an unused line of credit of €0.6 million (or approximately $0.9 million), which is available until June 30, 2010.

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We had backlog at December 31, 2007 (excluding amounts included in accounts receivable) of approximately $168.1 million from government and commercial customers, compared to $180.3 million at September 30, 2007. Backlog represents the value of contracts and purchase orders received, less the revenue recognized to date on those contracts and purchase orders. The sequential decrease in backlog is due to a slower period for new orders, and the reduction of backlog driven by record revenue in the third quarter. The current backlog, including $17.6 million on U.S. government contracts, is subject to certain standard cancellation provisions. The current backlog includes approximately $11.6 million related to DOE awards for a 2G cable installation with LIPA and a fault current limiter project with Southern California Edison, and approximately $1.5 million of the letter contract with DHS, but does not include the remaining $21.1 million of the full contract value that was awarded on January 22, 2008. Additionally, several of our government contracts are being funded incrementally, and as such, are subject to the future authorization and appropriation of government funding on an annual basis. We have a history of successful performance under incrementally-funded contracts with the government.

Of the backlog amount of $168.1 million as of December 31, 2007, approximately 72% is billable to and potentially collectable from our customers within the next 12 months.

The possibility exists that we may pursue additional acquisition and joint venture opportunities in the future that may affect liquidity and capital resource requirements.

Liquidity and Capital Resources

At September 30, 2007, we had cash, cash equivalents and marketable securities of $118.2 million compared to $35.3 million at March 31, 2007, an increase of $82.9 million. Our cash, cash equivalents and marketable securities are summarized as follows (in thousands):

The increase in cash and cash equivalents to $87.1 million at September 30, 2007 from $15.9 million at March 31, 2007 was primarily the result of receiving $94.3 million in net proceeds from our July 2007 public offering (see below).

We have generated operating losses since our inception, and expect to continue incurring operating losses until at least until the end of the fiscal year ending March 31, 2009.

For the six months ended September 30, 2007, net cash used by operating activities was $11.5 million compared to a use of $15.5 million by operating activities in the same period a year ago. The improvement in cash used from operations is primarily due to lower net loss excluding non-cash items.

For the six months ended September 30, 2007, net cash used in investing activities was $19.5 million, compared to a use of $7.6 million in the same period a year ago. The increase was driven primarily by the net increase in cash invested in marketable securities.

As of September 30, 2007, we have invested in total approximately $11.9 million in the 344 superconductors production line, and we anticipate spending approximately an additional $3.2 million on this line in the fiscal year ending March 31, 2008. These expenditures are being made to enable us to achieve a gross production capacity of approximately 720,000 meters annually of 344 superconductors in December 2007 on our 4 cm manufacturing technology, and prepare to migrate to the our 10 cm manufacturing technology. We estimate that an additional $28.0 million to $35.0 million of capital expenditures would be needed for a full commercial manufacturing operation with a gross capacity of approximately 9 million meters of wire per year.

For the six months ended September 30, 2007, cash provided by financing activities was $102.0 million compared to $0.9 million in the same period a year ago. On July 25, 2007, we completed a public offering of 4.7 million shares of our common stock at $21.25 per share. Net proceeds from the offering (after deducting underwriting discounts and commissions, but before deducting offering expenses) were $94.3 million. An additional $8.2 million of proceeds from the exercise of stock options was also received during the period.

Although our cash requirements fluctuate based on a variety of factors, including customer adoption of our products and our research and development efforts to commercialize our products, we believe that our available cash will be sufficient to fund our working capital, capital expenditures, and other cash requirements for the next several years.

We also have an unused line of credit of €0.6 million (or approximately $0.8 million) which is available until June 30, 2010.

We had backlog at September 30, 2007 (excluding amounts included in accounts receivable) of approximately $180.3 million from government and commercial customers, compared to $75.1 million at June 30, 2007. Backlog represents the value of contracts and purchase orders received, less the revenue

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recognized to date on those contracts and purchase orders. The sequential increase in backlog is due to $90.0 million of orders from our largest customer, Sinovel, for wind turbine electrical systems. The current backlog, including $18.3 million on U.S. government contracts, is subject to certain standard cancellation provisions. The current backlog includes approximately $12.1 million of backlog related to DOE awards for a 2G cable installation with LIPA and a fault current limiter project with Southern California Edison, and approximately $0.5 million of the letter contract with DHS, but does not include the remaining $24.0 million of the full contract that is currently being negotiated. Additionally, several of our government contracts are being funded incrementally, and as such, are subject to the future authorization and appropriation of government funding on an annual basis. We have a history of successful performance under incrementally-funded contracts with the government of the backlog amount of $180.3 million as of September 30, 2007, approximately 64% is billable to and potentially collectable from our customers within the next 12 months.

The possibility exists that we may pursue additional acquisition and joint venture opportunities in the future that may affect liquidity and capital resource requirements.

Liquidity and Capital Resources

At June 30, 2007, we had cash, cash equivalents and marketable securities of $30.5 million compared to $35.3 million at March 31, 2007, a decrease of $4.8 million. Our cash, cash equivalents and marketable securities are summarized as follows (in thousands):

The decrease in cash and cash equivalents to $15.1 million at June 30, 2007 from $15.9 million at March 31, 2007 was primarily the result of $8.3 million net cash used in operating activities, $0.7 million of restricted cash for a performance bond, and $1.5 million for the purchase of capital equipment, partially offset by $4.1 million in the maturity of marketable securities and $6.0 million in proceeds from the issuance of common stock. The $8.3 million use of cash in operating activities was primarily related to the net loss of $9.7 million and changes in working capital of $4.7 million, partially offset by depreciation and amortization of $2.3 million, non-cash stock-based compensation expense of $1.2 million, $1.0 million stock warrant revaluation, an asset impairment charge of $0.6 million and the $0.9 million inventory write-down.

We have generated operating losses since our inception in 1987 and expect to continue incurring losses until at least the end of the fiscal year ending March 31, 2009. Operating losses for the fiscal years ended March 31, 2007, March 31, 2006, and 2005 contributed to net cash used by operating activities of $22.8 million, $19.6 million and $9.3 million, respectively, for these periods. For the quarter ended June 30, 2007, net cash used by operating activities was $8.3 million.

On July 25, 2007, we completed a public offering of 4.7 million shares of our common stock at $21.25 per share. Net proceeds from the offering (after deducting underwriting discounts and commissions, but before deducting offering expenses) were $94.3 million.

Although our cash requirements fluctuate based on a variety of factors, including customer adoption of our products and our research and development efforts to commercialize our products, we believe that our available cash will be sufficient to fund our working capital, capital expenditures, and other cash requirements for the next several years.

Pending the uses described above, we intend to invest the net proceeds of this offering in short-term, interest-bearing, investment-grade securities.

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We also have an unused line of credit of €0.7 million (or approximately $0.9 million) which is available until August 31, 2007, after which the amount decreases to €0.6 million (or $0.8 million) and is available until June 30, 2010.

As of June 30, 2007, we have invested approximately $10.1 million in the 344 superconductors production line, and we anticipate spending approximately $6.0 million on this line in the year ended March 31, 2008. These expenditures are being made to enable us to a) achieve a gross production capacity of approximately 720,000 meters annually of 344 superconductors in December 2007 on our 4 cm manufacturing technology, and b) prepare to migrate to the our 10 cm manufacturing technology. We estimate that an additional $28.0 million to $35.0 million of capital expenditures would be needed for a full commercial manufacturing operation with a gross capacity of approximately 9 million meters of wire per year.

We had backlog at June 30, 2007 (excluding amounts included in accounts receivable) of approximately $75.1 million to be received after June 30, 2007 from government and commercial customers, compared to $79.5 million at March 31, 2007. Backlog represents the value of contracts and purchase orders received, less the revenue recognized to date on those contracts and purchase orders. The current backlog, including $10.1 million on U.S. government contracts, is subject to certain standard cancellation provisions. The current backlog includes approximately $0.9 million of the letter contract with DHS, but does not include the remaining $24.0 million of the full contract that is currently being negotiated. It also does not include any funds from DOE awards that were announced in June 2007. Additionally, several of our government contracts are being funded incrementally, and as such, are subject to the future authorization and appropriation of government funding on an annual basis. We have a history of successful performance under incrementally-funded contracts with the government

Of the backlog amount of $75.1 million as of June 30, 2007, approximately 74% is billable to and potentially collectable from our customers within the next 12 months.

The possibility exists that we may pursue additional acquisition and joint venture opportunities in the future that may affect liquidity and capital resource requirements.

To date, inflation and foreign exchange have not had a material impact on our financial results.

Liquidity and Capital Resources

At March 31, 2007, we had cash, cash equivalents and marketable securities of $35,324,000 compared to $65,669,000 at March 31, 2006, a decrease of $30,345,000.

The decrease in cash and cash equivalents to $15,925,000 at March 31, 2007 from $35,171,000 at March 31, 2006 was primarily the result of net cash of $22,761,000 used in operating activities and $10,046,000 for the purchase of capital equipment, partially offset by $11,223,000 net proceeds from the sale of marketable securities and $3,524,000 proceeds from the issuance of common stock.

The principal uses of cash during the year ended March 31, 2007 were a net loss of $34,675,000, a $6,281,000 increase in accounts receivable, and $10,046,000 in capital expenditures, primarily related to the 2G pilot production line. This was partially offset by depreciation and amortization expense of $4,750,000, non-cash stock-based compensation expense of $3,680,000, inventory write-downs of $1,201,000 primarily related to the SuperVAR unit, an increase in accounts payable and accrued expenses of $3,595,000, a decrease in inventory of $1,072,000, and an increase of $2,641,000 in deferred revenue. The increase in accounts receivable was the result of delays in milestone payments on the 36.5 MW motor program and a higher accounts receivable balance at AMSC Power Systems business unit due in part to higher system sales in the month of March 2007. The decrease

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AMERICAN SUPERCONDUCTOR CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

in inventory relates to the deferred program costs of $3,082,000 inventoried on the 36.5MW project as of the end of March 31, 2006 (due to the funding limitation), compared with deferred program costs of $1,173,000 as of March 31, 2007 related primarily to the LIPA project. We expect cash use to decline significantly in the year ending March 31, 2008 compared to the cash use in the year ended March 31, 2007, as we expect to collect receivables from certain customers (particularly the 36.5 MW motor milestone payments coming due from the Navy of $6,844,000), reduce capital spending as we complete the scale-up for the 344 superconductors pilot plant, and generate a higher level of positive cash flow at AMSC Power Systems compared to prior year in connection with the higher projected level of sales.

We have generated operating losses since our inception in 1987 and expect to continue incurring losses through at least the end of the fiscal year ending March 31, 2009. Operating losses for the years ended March 31, 2007, 2006, and 2005 contributed to net cash used by operating activities of $22,761,000, $19,589,000, and $9,283,000, respectively, for these periods.

Although our cash requirements fluctuate based on a variety of factors, including customer adoption of our products and our research and development efforts to commercialize our products, we believe that our available cash will be sufficient to fund our working capital, capital expenditures, and other cash requirements through at least the end of the year ending March 31, 2009.

We also have an unused line of credit of €685,000 (or approximately $913,000) which is available until August 31, 2007; an amount of €585,000 (or approximately $780,000) is available until June 30, 2010.

In the year ended March 31, 2007, we invested approximately $8,400,000 in the 344 superconductors production line, and we anticipate spending approximately $6,000,000 on this line in the year ended March 31, 2008. These expenditures are being made to enable us to a) achieve a gross production capacity of approximately 720,000 meters annually of 344 superconductors in December 2007 on our 4 cm manufacturing technology, and b) prepare to migrate to the our 10cm manufacturing technology. We estimate that an additional $28,000,000 to $35,000,000 of capital expenditures would be needed for a full commercial manufacturing operation with a gross capacity of approximately 9 million meters of wire per year.

We have backlog (excluding amounts included in accounts receivable) of approximately $79,500,000 to be received after March 31, 2007 from government and commercial customers, compared to $23,761,000 at March 31, 2006. Backlog represents the value of contracts and purchase orders received, less the revenue recognized to date on those contracts and purchase orders. The $55,739,000 increase in backlog from March 31, 2006 to March 31, 2007 was a result of $83,532,000 in new orders and contracts received during the year ended March 31, 2007 along with acquiring $27,308,000 of incremental backlog associated with the Windtec acquisition, adjusted to exclude the intercompany PowerModule orders already included in backlog. The new orders of $83,532,000 were comprised primarily of $59,961,000 in new system, power converter and Windtec-related (fourth quarter only) orders in our AMSC Power Systems business unit. Also contributing was the government contract modification, which provided $13,344,000 in additional funding on the Navy 36.5 MW motor program, thereby increasing the contract value of the program to $90,150,000 and converting it from a cost-plus-incentive-fee contract to a firm-fixed-price contract on April 26, 2006. The Navy 36.5 MW contract modification specifies a milestone payment plan. We received cash payments of $6,500,000 during the year ended March 31, 2007. We anticipate that we will receive the remaining $6,844,000 over the next two quarters for the milestones associated with the assembly, testing and delivery of the motor to the Navy. The additional new orders added into our backlog during the year ended March 31, 2007 were partially offset by revenues recognized on the 36.5 MW motor program and LIPA cable project, as work continued to progress on these

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AMERICAN SUPERCONDUCTOR CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

multi-year contracts, which were originally awarded in February and April of 2003, respectively. The current backlog, including $10,503,000 on U.S. government contracts, is subject to certain standard cancellation provisions. Additionally, several of our government contracts are being funded incrementally, and as such, are subject to the future authorization and appropriation of government funding on an annual basis. We have a history of successful performance under incrementally-funded contracts with the government.

Of the backlog amount of $79,500,000 as of March 31, 2007, approximately 75% is billable to and potentially collectable from our customers within the next 12 months.

The possibility exists that we may pursue additional acquisition and joint venture opportunities in the future that may affect liquidity and capital resource requirements.

To date, inflation and foreign exchange have not had a material impact on our financial results.