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The damage card is discarded entirely and never counted or resolved. Compare the wording to similar rules that negate the effect of a critical hit but keep it as a face-down damage card, they say "flip face down without resolving", not "discard".
I disagree about its usefulness though. Pilot damage cards are only a minority of the deck, and critical hits (that don't hit shields) are only a minority of the damage you take. So when it works its awesome, but a lot of the time it's just a wasted point and elite skill slot that's literally a blank card. Even if I'm limited to 1-point upgrades I'd rather take veteran instincts or adrenaline rush.
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