American Superconductor (AMSC)

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):

R&D expenses (exclusive of amounts classified as costs of revenue and amounts offset by cost-sharing funding) increased by 26% to $19.7 million, or 11% of revenue, for fiscal 2008 from $15.7 million, or 14% of revenue, for fiscal 2007. The increase in R&D expenses was driven primarily by internal product development costs in our AMSC Power Systems business unit to support future growth opportunities and our next-generation product offerings. The increase in R&D expenditures reclassified to costs of revenue were a result of increased efforts under license and development contracts for wind turbine designs in AMSC Windtec. Aggregated R&D expenses, which include amounts classified as costs of revenue and amounts offset by cost-sharing funding, increased 19% to $39.5 million, or 22% of revenue, for fiscal 2008 compared to $33.2 million, or 30% of revenue, for fiscal 2007. The increase in fiscal 2008 was driven primarily by the factors described above.

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Research and development

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):

R&D expenses (exclusive of amounts classified as costs of revenue and amounts offset by cost-sharing funding) decreased by 10% to $15.7 million, or 14% of revenue for fiscal 2007, from $17.5 million, or 33% of revenue, for fiscal 2006. The decrease in R&D expenses was driven by a reduction in workforce as a result of the re-alignment of the AMSC Wires and SuperMachines business units in March 2007, partially offset by the added costs from the acquisitions of Windtec and PQS and additional internal product development costs in our Power Systems business unit. The decrease in R&D expenditures reclassified as a cost of revenues is a result of less R&D reclassified into cost of revenues to support government funded programs, primarily related to completing and delivering the 36.5MW motor to the Navy in June 2007. Aggregated R&D expenses, which include amounts classified as costs of revenues and amounts offset by cost-sharing funding, decreased 24% to $33.2 million, or 30% of revenue, for fiscal 2007 compared to $43.4 million, or 83% of revenue, for fiscal 2006. The decrease in

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fiscal 2007 was driven primarily by a lower level of externally funded program costs on the 36.5 MW motor program, as well as the factors described above.

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):

R&D expenses (exclusive of amounts classified as costs of revenue and amounts offset by cost-sharing funding) increased by 34% and 25% to $5.3 million and $14.9 million, or 13% and 12% of revenue, for the three and nine months ended December 31, 2008, respectively, from $4.0 million and $12.0 million, or 12% and 16% of revenue, for the same periods of the prior fiscal year, respectively. The increase in R&D expenses was driven by internal product development costs in our AMSC Power Systems business unit to support future growth opportunities and our next-generation product offerings. The increases in R&D expenditures reclassified to costs of revenue were a result of increased support of government-funded programs, primarily HYDRA, FCL and LIPA II. Aggregated R&D expenses, which include amounts classified as costs of revenue and amounts offset by cost-sharing funding, increased 49% and 21% to $10.2 million and $30.5 million, or 25% of revenue, for the three and nine months ended December 31, 2008, respectively, from $6.8 million and $25.2 million, or 21% and 34% of revenue, for the same periods of the prior fiscal year, respectively. The increases in the third quarter and first nine months of fiscal 2008 were driven primarily by the factors described above.

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AMERICAN SUPERCONDUCTOR CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS—Continued

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):

R&D expenses (exclusive of amounts classified as costs of revenue and amounts offset by cost-sharing funding) increased by 24% and 20% to $4.7 million and $9.6 million, or 12% of revenue, for each of the three and six months ended September 30, 2008, respectively, from $3.8 million and $8.0 million, or 18% of revenue and 19% of revenue, for the same periods of the prior fiscal year, respectively. The increase in R&D expenses was driven by internal product development costs in our Power Systems business unit to support future growth opportunities and our next generation product offerings. The increases in R&D expenditures reclassified to costs of revenue were a result of increased support of government funded programs, primarily HYDRA and NAVSEA. Aggregated R&D expenses, which include amounts classified as costs of revenue and amounts offset by cost-sharing funding, increased 34% and 11% to $10.5 million and $20.3 million, or 26% of revenue and 25% of revenue, for the three and six months ended September 30, 2008, respectively, from $7.9 million and $18.4 million, or 36% of revenue and 44% of revenue, for the same periods of the prior fiscal year, respectively. The increases in the second quarter and first six months of fiscal 2008 were driven primarily by the factors described above.

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):

R&D expenses (exclusive of amounts classified as costs of revenue and amounts offset by cost-sharing funding) increased by 17% to $4.9 million, or 12% of revenue, for the first quarter of fiscal 2008, from $4.2 million, or 21% of revenue, for the first quarter of fiscal 2007. The increase in R&D expenses was driven by internal product development costs in our Power Systems business unit to support future growth opportunities and our next generation product offerings. The decrease in R&D expenditures reclassified to costs of revenue is a result of less R&D reclassified into costs of revenue in the first quarter of fiscal 2008 to support government funded programs, primarily the 36.5 MW motor program and LIPA I Project. Aggregated R&D expenses, which include amounts classified as costs of revenue and amounts offset by cost-sharing funding, decreased 6% to $9.8 million, or 25% of revenue, for the first quarter of fiscal 2008 compared to $10.5 million, or 53% of revenue, for the first quarter of fiscal 2007. The decrease in the first quarter of fiscal 2008 was driven primarily by a lower level of externally funded program costs on the 36.5 MW motor program, as well as the factors described above.

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AMERICAN SUPERCONDUCTOR CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS—Continued

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):

R&D expenses (exclusive of amounts classified as costs of revenue and amounts offset by cost-sharing funding) increased by 17% to $17.5 million, or 33% of revenue, in fiscal 2006 from $15.0 million, or 29% of revenue, in fiscal 2005 as a result of two factors: a lower percentage of the R&D cost was classified as costs of revenue due to the lower level of funded prototype development contract work in AMSC Superconductors related to the Navy 36.5 MW motor program, and a higher level of internally-funded R&D spending incurred which was

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focused on 2G wire scale-up efforts. Aggregated R&D expenses, which include amounts classified as costs of revenue and amounts offset by cost-sharing funding, decreased by 5% to $43.4 million, or 83% of revenue, in fiscal 2006 from $45.5 million, or 90% of revenue, in fiscal 2005. The decrease was due primarily to a lower level of externally-funded R&D spending at AMSC Superconductors. The decrease in R&D spending at AMSC Superconductors was partially offset by a $0.4 million increase in AMSC Power Systems R&D spending, primarily related to the recently acquired Windtec. In addition, there was $0.9 million in stock-based compensation expense classified as R&D expense in fiscal 2006 in connection with our adoption of SFAS No. 123(R).

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):

R&D expenses (exclusive of amounts classified as costs of revenue and amounts offset by cost-sharing funding) decreased by 3% to $4.0 million for the three months ended December 31, 2007 from $4.1 million for the same period of the prior year. The decrease in R&D expenses was driven by a reduction in workforce as a result of the re-alignment of the AMSC Wires and SuperMachines business units in March 2007, partially offset by the added costs from the acquisitions of Windtec and PQS and additional internal product development costs in our Power Systems business unit. R&D expenses (exclusive of amounts classified as costs of revenue and amounts offset by cost-sharing funding) increased by 2% to $12.0 million for the nine months ended December 31, 2007 from $11.7 million for the same period of the prior year. The increase is a result of less R&D reclassified into cost of revenues to support government funded programs, as well as the factors described above. Aggregated R&D expenses, which include amounts classified as costs of revenues and amounts offset by cost-sharing funding, decreased 29% and 16% to $6.8 and $25.2 million for the three and nine months ended

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December 31, 2007, respectively, compared to $9.7 million and $30.1 million for the same periods a year ago, respectively. The decrease for the three months ended December 31, 2007 was driven by the same factors described above and a lower level of externally funded program costs on the 36.5MW motor program as the motor was completed in July 2007. The decrease for the nine months ended December 31, 2007 was driven primarily by a lower level of externally funded program costs on the 36.5 MW motor program, as well as the factors described above.

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):

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R&D expenses (exclusive of amounts classified as costs of revenue and amounts offset by cost-sharing funding) increased by 7% and 5% to $3.8 million and $8.0 million in the three and six months ended September 30, 2007, respectively, from $3.5 million and $7.6 million for the same periods of the prior year, respectively. The increases in R&D expenses were driven by the acquisition of PQS, higher stock-based compensation expenses and higher legal costs associated with patent activity. Aggregated R&D expenses, which include amounts classified as costs of revenues and amounts offset by cost-sharing funding increased 7% to $7.9 million for the three months ended September 30, 2007, compared to $7.4 million for the same period a year ago. The increase was driven by the same factors described above. Aggregated R&D expenses decreased 10% to $18.4 million for the six months ended September 30, 2007, compared to $20.4 million for the same period a year ago. The decrease was driven primarily by a lower level of externally funded program costs on the 36.5 MW motor program and a reduction in workforce as a result of the re-alignment of the AMSC Wires and SuperMachines business units in March 2007, partially offset by the added costs from the acquisitions of Windtec and PQS.

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):

R&D expenses (exclusive of amounts classified as costs of revenue and amounts offset by cost-sharing funding) increased to $4.2 million in the quarter ended June 30, 2007 from $4.1 million for the same quarter last year. This decrease was primarily a result of a higher level of internally funded spending at AMSC Power Systems as a result of the recent acquisitions of Windtec and PQS, partially offset by a lower level of internally funded spending in AMSC Superconductors as a result of the re-alignment of the AMSC Wires and SuperMachines business units in March 2007. Aggregated R&D expenses, which include amounts classified as costs of revenue and amounts offset by cost-sharing funding, decreased by $2.6 million to $10.5 million in the quarter ended June 30, 2007 from $13.1 million for the same quarter last year. This decrease was primarily a result of the lower level of externally funded program costs on the 36.5MW motor program and the reduction in workforce as a result of the re-alignment of the AMSC Wires and SuperMachines business units in March 2007, partially offset by the recent acquisitions of Windtec and PQS.

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:

R&D expenses (exclusive of amounts classified as costs of revenue and amounts offset by cost-sharing funding) increased by $5,924,000 to $14,961,000 in the year ended March 31, 2006 from $9,037,000 in the year ended March 31, 2005 primarily as a result of two factors: a lower percentage of the R&D cost incurred was classified as costs of revenue due to the lower level of funded prototype development contract work in AMSC Superconductors on the 36.5MW motor program and a higher level of internally-funded R&D spending incurred primarily focused on 2G wire development and scale-up activities, as well as higher internally-funded R&D spending at AMSC Power Systems.

Aggregated R&D expenses, which include amounts classified as costs of revenue and amounts offset by cost-sharing funding, increased by $2,245,000 to $45,549,000 in the year ended March 31, 2006 from $43,304,000 in the year ended March 31, 2005, as a result of the aforementioned higher levels of internal R&D expenditures in both business units, partially offset by a lower level of externally-funded R&D spending at AMSC Superconductors. Aggregated R&D expenses were reduced by $2,234,000 in the year ended March 31, 2006 as a result of the deferral of certain program-specific costs in inventory in connection with the March 31, 2006 limitation of funding from the Navy as of March 31, 2006 on the 36.5 MW motor program.

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:

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R&D expenses (exclusive of amounts classified as costs of revenue and amounts offset by cost-sharing funding) increased to $4,099,000 and $11,700,000 in the three and nine months ended December 31, 2006, respectively, from $4,039,000 and $11,198,000 for the same periods last year primarily as a result of two factors: a lower percentage of the R&D cost was classified as costs of revenue due to the lower level of funded prototype development contract work in SuperMachines related to the Navy 36.5 MW motor program, and a higher level of internally-funded R&D spending was incurred in AMSC Wires, primarily focused on 2G wire scale-up efforts. Aggregated R&D expenses, which include amounts classified as costs of revenue and amounts offset by cost-sharing funding, were $9,665,000 and $30,111,000 in the three and nine months ended December 31, 2006, respectively, compared to $13,761,000 and $33,878,000 for the same periods of the prior year. The decease in third-quarter aggregated R&D spending compared to the prior year was due primarily to a lower level of externally-funded R&D spending at SuperMachines. On a nine-month basis, the decrease in aggregated R&D spending, compared to prior year, reflected the aforementioned higher levels of internal R&D expenditures in AMSC Wires offset by a lower level of externally-funded R&D spending at SuperMachines.

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:

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R&D expenses (exclusive of amounts classified as costs of revenue and amounts offset by cost-sharing funding) decreased by $225,000 to $3,539,000 in the quarter ended September 30, 2006 from $3,764,000 for the same prior-year quarter primarily as a result of a higher percentage of R&D cost being offset by cost-sharing funding from the Title III contract. R&D expenses increased by $442,000 to $7,601,000 for the six months ended September 30, 2006 from $7,159,000 for the same period of the prior year primarily as a result of higher stock compensation expense in connection with our adoption of SFAS No. 123(R) on April 1, 2006. Stock compensation expense included in R&D expense was $206,000 and $432,000 in the three and six-month periods ended September 30, 2006, respectively. Aggregated R&D expenses, which include amounts classified as costs of revenue and amounts offset by cost-sharing funding, decreased by $1,883,000 to $7,355,000 in the three months ended September 30, 2006 from $9,238,000 in the same period of the prior year primarily as a result of a lower level of externally funded R&D spending on the Navy 36.5MW motor project. Aggregated R&D expenses increased by $329,000 to $20,446,000 for the six months ended September 30, 2006 from $20,117,000 in the same prior-year period as a result of a higher level of spending in AMSC Wires on 2G wire scale-up efforts and additional stock compensation costs associated with our adoption of SFAS No. 123(R), partially offset by a lower level of externally funded prototype development contract work at SuperMachines.