Unless the context otherwise requires, all references in this Quarterly Report on Form 10-Q (this "Quarterly Report") to "Maxwell," the "Company," "we," "us," and "our" refer to Maxwell Technologies, Inc. and its subsidiaries; all references to "Maxwell SA" refer to our European Subsidiary, Maxwell Technologies, SA.

Some of the statements contained in this document and incorporated herein by reference discuss our plans and strategies for our business or make other forward-looking statements, as this term is defined in the Private Securities Litigation Reform Act. The words "anticipates," "believes," "estimates," "expects," "plans," "intends," "may," "could," "will," "continue," "seek," "should," "would" and similar expressions are intended to identify these forward-looking statements, but are not the exclusive means of identifying them. These forward-looking statements reflect the current views and beliefs of our management; however, various risks, uncertainties and contingencies could cause our actual results, performance or achievements to differ materially from those expressed in, or implied by, our statements. Such risks, uncertainties and contingencies include, but are not limited to, the following:

• financial markets in the United States, Europe and Asia have been experiencing disruption for several months, including, among other things, increased volatility in securities prices, severely diminished liquidity and credit availability, ratings downgrades of certain investments and declining valuations of others;

• decline in the domestic and global economies that may delay development and introduction by our customers of products that incorporate our products;

• our success in introducing and marketing new products into existing and new markets;

• our ability to manufacture existing and new products in volumes demanded by our customers and at competitive prices with adequate gross margins;

• market success of the products into which our products are integrated;

• our ability in growing markets to increase our market share relative to our competitors;

• our ability to successfully integrate our business with operations of businesses we may acquire;

• our ability to finance the growth of our business with internal resources or through outside financing at reasonable rates; and

• our ability to produce our products at quality levels demanded by our customers.

Many of these factors are beyond our control. Additionally, there can be no assurance that we will not incur new or additional unforeseen costs in connection with the ongoing conduct of our business. Accordingly, any forward-looking statements included herein do not purport to be predictions of future events or circumstances and may not be realized.

For a discussion of important risks associated with an investment in our securities, including factors that could cause actual results to differ materially from expectations referred to in the forward-looking statements, see Risk Factors in Part II, Item 1A of this document or as disclosed in Part I, Item 1A, of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2008. We do not have any obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Executive Summary

We begin Management's Discussion and Analysis of Financial Condition and Results of Operations with an overview of our business. Subsequently, we provide a summary of some of the highlights from the nine months ended September 30, 2009, followed by a discussion of the different aspects of our business. We then proceed to discuss our results of operations for the three and nine months ended September 30, 2009 compared with the same periods in 2008. This is followed by an analysis of changes in our balance sheet and cash flows and discussion of our capital requirements and financing activities in the section entitled "Liquidity and Capital Resources." We then review recent and pending accounting pronouncements along with the market risks on our business.

Overview

Maxwell Technologies, Inc. is a Delaware corporation that is headquartered in San Diego, California. We originally incorporated in 1965 under the name "Maxwell Laboratories, Inc." In 1996, we changed our name to Maxwell Technologies, Inc. We develop, manufacture and market energy storage and power delivery products for transportation, industrial telecommunications and other applications and microelectronic products for space and satellite applications.

Maxwell has two manufacturing locations (San Diego, California and Rossens, Switzerland). In addition, we have a contract manufacturer in the Longgang District, Shenzhen China. Maxwell operates as one operating segment called High Reliability, which is comprised of three product lines:

• Ultracapacitors: Our primary focus is on ultracapacitors, energy storage devices that possess a unique combination of high power density, long operational life and the ability to charge and discharge very rapidly. Our BOOSTCAP® ultracapacitor cells and multi-cell modules provide highly reliable energy storage and power delivery solutions for applications in multiple industries, including transportation, automotive, telecommunications, energy and consumer and industrial electronics.

• High-Voltage Capacitors: Our CONDIS® high-voltage capacitors are extremely robust devices that are designed and manufactured to perform reliably for decades in all climates. These products include grading and coupling capacitors and capacitive voltage dividers that are used to ensure the safety and reliability of electric utility infrastructure and other applications involving transport, distribution and measurement of high-voltage electrical energy.

• Radiation-Mitigated Microelectronic Products: Our radiation-mitigated microelectronic products include high-performance, high-density power modules, memory modules and single board computers that incorporate our proprietary RADPAK® packaging and shielding technology and novel architectures that enable them to withstand the effects of environmental radiation and perform reliably in space.

Our goal is to meet or exceed the life of the application product and service needs of our customers through continuous improvements of the effectiveness of all our business processes. We aim to design and manufacture our products to perform reliably for the life of the products and systems into which they are integrated. We seek to achieve high reliability through the application of proprietary technologies and rigorously controlled design, development, manufacturing and test processes. This high reliability strategy emphasizes the development and marketing of products that could enable us to achieve higher profit margins than commodity electronic components and systems.

Highlights of the Nine Months Ended September 30, 2009

We reported revenue of $26.1 million and a net loss of $4.6 million, or $0.18 per diluted share, for the third quarter of 2009; compared with revenue of $21.4 million and a net loss of $5.7 million, or $0.27 per diluted share, for the same quarter in 2008. We reported revenue of $73.3 million and a net loss of $12.9 million, or $0.54 per diluted share, for the nine months ended September 30, 2009; compared with revenue of $57.5 million and a net loss of $16.2 million, or $0.79 per diluted share, for the nine months ended September 30, 2008.

During the nine months ended September 30, 2009, we continued to focus on developing strategic alliances, introducing new products, increasing production capacity to meet anticipated future demand, reducing product costs, funding capital improvements, augmenting executive management and improving production processes. Some of these efforts are described below:

• In September, we announced the availability of our PC-10 ultracapacitor with proprietary electrode for enhancing the reliability of backup power in enterprise storage, powering smart utility meters, and benefiting a variety of other industrial applications.

• In September, we announced that Continental AG, one of the world's leading automotive electronics and mechatronics suppliers, has selected Maxwell's BOOSTCAP® ultracapacitors as the energy storage element of a voltage stabilization system it has developed for automobiles.

• In August, we announced the promotion of George Kreigler III to the new position of chief operating officer, with overall responsibility for our operations in the U.S., Europe and Asia.

• In July, we announced the appointment of Sacha Jenny to vice president and general manager of our Swiss subsidiary, Maxwell Technologies SA.

• In July, we entered into a global catalog distribution agreement with Mouser Electronics, Inc., known for its rapid introduction of the newest products.

• In May, we raised money from the sale of two million shares of common stock in a public offering underwritten by Roth Capital Partners. In June the underwriter exercised its option to purchase and additional 300,000 shares. In total we sold 2.3 million shares for a total of $18.6 million, net of expenses.

• In April, we received purchase orders with a total value of approximately $13.5 million from three of China's leading transit bus producers for BOOSTCAP® ultracapacitor modules to support braking energy recuperation and torque assist functions in diesel-electric hybrid transit buses.

• In January, we announced that Vanner Inc., a manufacturer of electrical power conversion products, has selected our BOOSTCAP ® ultracapacitor modules to provide burst power for a retrofit diesel engine starter system that will be installed in Chicago transit buses.

Results of Operations and Financial Condition:

The Third Quarter of 2009 Compared with the Third Quarter of 2008

The following table presents certain unaudited statement of operations data
expressed as a percentage of revenue for the periods indicated:



                                                             Quarter Ended
                                                             September 30,
                                                            2009        2008
      Revenue                                                 100  %     100  %
      Cost of sales                                            62  %      71  %

      Gross profit                                             38  %      29  %
      Operating expenses:
      Selling, general and administrative                      28  %      28  %
      Research and development                                16  %       19  %

      Total operating expenses                                 44  %      47  %

      Loss from operations                                     (6 )%     (18 )%
      Other expense, net                                      (12 )%      (9 )%

      Loss from continuing operations before income taxes     (18 )%     (27 )%
      Income tax provision                                      0  %       0  %

      Net loss                                                (18 )%     (27 )%

Loss from operations for the third quarter of 2009 improved $2.3 million, or 57%, compared with the same quarter one year ago. Various items influenced the improvement in our operations; the primary influences include an increase in gross profit and decreases in costs of research and development as a percentage of revenue. Additional year over year fluctuations are discussed below.

Net loss for the third quarter of 2009 was $1.1 million lower than the same quarter one year ago. Net loss reported in the current quarter was $4.6 million, or $0.18 per share, while net loss was $5.7 million, or $0.27 per share, in the same quarter one year ago. The decrease in net loss was driven by a decrease in the loss from operations of $2.3 million and amortization of debt discount of $480,000, offset in part by an increase in the loss on embedded derivative and warrants of $1.8 million.

Revenue and Gross Profit

The following table presents a comparison of third quarter 2009 and 2008
revenue, cost of sales and gross profit for the quarters ended September 30,
2009 and 2008 (in thousands, except percentage):



                       Quarter Ended              Quarter Ended                         %
                    September 30, 2009         September 30, 2008         Increase    Change
                                  % of                       % of
                                   Net                        Net
                     Amount      Revenue        Amount      Revenue
   Revenue         $    26,101       100 %    $    21,380       100 %    $    4,721       22 %
   Cost of sales        16,164        62 %         15,239        71 %           925        6 %

   Gross profit    $     9,937        38 %    $     6,141        29 %    $    3,796       62 %

Revenue. In the third quarter of 2009, revenue increased 22% to $26.1 million, compared with $21.4 million in the same quarter one year ago. Product revenue increased 24% or $5.1 million and license fee and service revenue decreased 100% or $407,000. The increase in total revenue was influenced primarily by higher volume in our ultracapacitor and microelectronic product lines.

A substantial amount of our revenue is generated through our Swiss subsidiary. As such, reported revenue can be materially impacted by the fluctuation of the Swiss Franc to U.S. dollar, our reporting currency. However, the impact for comparing revenue for the third quarter of 2009 compared with the same quarter one year ago was less than half of one percent as the weighted-average foreign exchange rate of the U.S. dollar to the Swiss Franc was $0.9414 per Swiss Franc for the quarter ended September 30, 2009 compared with $0.9370 per Swiss Franc for the same quarter one year ago.

The following table presents revenue mix by product line for the quarters ended September 30, 2009 and 2008:

                                               Quarters Ended
                                                September 30,
                                               2009        2008
                    Ultracapacitors               40 %       36 %
                    High-Voltage Capacitors       40 %       45 %
                    Microelectronics              20 %       19 %

                    Total                        100 %      100 %

Gross Profit. In the third quarter of 2009, gross profit increased $3.8 million or 62% compared with the same quarter one year ago. Gross profit increased $2.4 million due to net reductions of product costs and $1.4 million due to an increase in the sales volume. As a percentage of revenue, gross profit increased to 38% compared with 29% in the same period one year ago.

As sales of our ultracacitors product line have increased, the volume has reached a point where more cost effective means of shipping can be used. We are now utilizing a higher mix of ocean freight rather than air freight. As a result, freight costs during the third quarter of 2009 have decreased $552,000, or 43%, compared with the same quarter one year ago. As a percentage of ultracapacitor product revenue, freight costs have decreased to 4% in the third quarter of 2009, down from 13% in the same quarter one year ago. The increase in gross profit during the third quarter of 2009 compared with the same quarter one year ago improved by $405,000 due to favorable foreign currency exchange rates. Gross profit for the third quarter of 2009 was impacted negatively by lower license fee and service revenue of $407,000 compared with the third quarter of 2008.

Selling, General & Administrative (SG&A) Expense

The following table presents selling, general and administrative (SG&A) expense
for the third quarter of 2009 and 2008 (in thousands, except percentage):



                                                                                                                %
                                        Third Quarter 2009          Third Quarter 2008          Increase      Change
                                                      % of                        % of
                                                       Net                         Net
                                         Amount      Revenue         Amount      Revenue
Selling, general and administrative    $    7,288         28 %     $    6,044         28 %     $    1,244         21 %

SG&A expenses were 28% of revenue for third quarter of 2009, which is the same as the quarter one year ago, although total expense increased by $1.2 million, or 21%. The increase in expense of $1.2 million was driven primarily by $482,000 of executive severance, increases of $433,000 in labor costs, $365,000 of legal and professional fees related primarily to our internal review of our international operations, $155,000 of expenses related to German sales operations and $111,000 in commissions. These increases were partially offset by decreases of $191,000 in travel costs, $109,000 in corporate legal fees and $102,000 in depreciation expense.

Research & Development (R&D) Expense

The following table presents research and development (R&D) expense for the
third quarter of 2009 and 2008 (in thousands, except percentage):



                                      Quarter Ended                 Quarter Ended                             %
                                    September 30, 2009            September 30, 2008          Increase      Change
                                                  % of                          % of
                                                   Net                           Net
                                    Amount       Revenue          Amount       Revenue
Research and development          $    4,274          16 %      $    4,003          19 %      $     271          7 %

R&D expenses were 16% of revenue for the third quarter of 2009, compared with 19% from the same quarter one year ago, while total expenses increased by $271,000 or 7%. The increase in absolute dollars was driven primarily by increases of $299,000 of labor costs and $88,000 of product introduction costs. These increases were partially offset by a decrease in facility costs of $72,000.

Provision for Income Taxes

We recorded an income tax provision of $33,000 for the third quarter of 2009 compared with $11,000 for the same quarter in 2008. This provision is related to our Swiss operations. Unremitted earnings of foreign subsidiaries have been included in the consolidated financial statements without giving effect to the United States taxes that may be payable as it is not anticipated such earnings will be remitted to the United States.

Nine Months Ended September 30, 2009 Compared with Nine Months Ended
September 30, 2008

The following table presents certain unaudited statement of operations data
expressed as a percentage of revenue for the periods indicated:



                                                           Nine Months Ended
                                                             September 30,
                                                           2009           2008
    Revenue                                                  100 %         100 %
    Cost of sales                                             65 %          72 %

    Gross profit                                              35 %          28 %
    Operating expenses:
    Selling, general and administrative                       25 %          29 %
    Research and development                                  16 %          19 %

    Total operating expenses                                  41 %          48 %

    Loss from operations                                      (6 )%        (20 )%
    Other expense, net                                       (11 )%         (7 )%

    Loss from continuing operations before income taxes      (17 )%        (27 )%
    Income tax provision                                       1 %           1 %

    Net loss                                                 (18 )%        (28 )%

Loss from operations for the nine months ended September 30, 2009 improved $4.4 million, or 6%, compared with the same period one year ago. Various items influenced the improvement in our operations; the primary influences include an increase in gross profit and decreases in SG&A and R&D as a percentage of revenue. More specifics of these areas are discussed below.

Net loss for the nine months ended September 30, 2009 improved $3.3 million, or 20%, compared with the same period one year ago. Net loss reported for the nine months ended September 30, 2009 was $12.9 million, or $0.54 per share, while net loss was $16.2 million, or $0.79 per share, in the same period one year ago. The improvement in net loss was impacted negatively by $5.2 million of higher losses on embedded derivatives and warrants during the nine months ended September 30, 2009 compared with the same period one year ago.

Revenue and Gross Profit

The following table presents revenue, cost of sales and gross profit for the
nine months ended September 30, 2009 and 2008 (in thousands, except percentage):



                     Nine Months Ended          Nine Months Ended                      %
                    September 30, 2009         September 30, 2008        Increase    Change
                                  % of                       % of
                                   Net                        Net
                     Amount      Revenue        Amount      Revenue
   Revenue         $    73,314       100 %    $    57,504       100 %    $  15,810       27 %
   Cost of sales        47,409        65 %         41,427        72 %        5,982       14 %

   Gross profit    $    25,905        35 %    $    16,077        28 %    $   9,828       61 %

Revenue. During the nine months ended September 30, 2009, revenue increased 27% to $73.3 million, compared with $57.5 million in the same period one year ago. Product revenue increased 31% or $17.3 million and license fee and service revenue decreased 100% or $1.5 million. The increase in total revenue was influenced primarily by higher volume in our ultracapacitor and microelectronic product lines.

A substantial amount of our revenue is generated through our Swiss subsidiary. As such reported revenue can be materially impacted by the fluctuation of the Swiss Franc to U.S. dollar, our reporting currency. The year to date weighted-average foreign exchange rate of the U.S. dollar to the Swiss Franc decreased 5% to $0.9030 per Swiss Franc for the nine months ended September 30, 2009, down from $0.9506 per Swiss Franc for the same period one year ago. To quantify this change, the revenues from foreign operations generated during the nine months ended September 30, 2009 compared with the same period one year ago decreased $2.4 million due to the decrease in foreign exchange rates.

The following table presents revenue mix by product line for the nine months ended September 30, 2009 and 2008:

                                             Nine Months Ended
                                               September 30,
                                             2009           2008
                  Ultracapacitors                39 %         34 %
                  High-Voltage Capacitors        42 %         47 %
                  Microelectronics               19 %         19 %

                  Total                         100 %        100 %

Gross Profit. During the nine months ended September 30, 2009, gross profit increased $9.8 million or 61% compared with the same period one year ago. Gross profit increased $5.4 million due to net reductions of product costs and $4.4 million due to an increase in the volume of sales. As a percentage of revenue, gross profit increased to 35% compared with 28% in the same period one year ago.

As sales of our ultracacitors product line have increased, the volume has reached a point where cost effective means of shipping can be used. We are now utilizing a higher mix of ocean freight rather than air freight. As a result, freight costs during the nine months ended September 30, 2009 have decreased $1.4 million, or 51%, compared with the same period one year ago. As a percentage of ultracapacitor product revenue, freight costs have decreased to 7% during the nine months ended September 30, 2009 compared with 34% in the same period one year ago. The increase in gross profit during the nine months ended September 30, 2009 compared with the same period one year ago was reduced by $903,000 due to unfavorable foreign currency exchange rates. Gross profit for the nine months ended September 30, 2009 was negatively impacted by lower license fee and service revenue of $1.5 million compared with the same period in 2008.

Selling, General & Administrative (SG&A) Expense

The following table presents selling, general and administrative (SG&A) expense
for the nine months ended September 30, 2009 and 2008 (in thousands, except
percentage):



                                          Nine Months Ended          Nine Months Ended                       %
                                         September 30, 2009         September 30, 2008         Increase    Change
                                                       % of                       % of
                                                        Net                        Net
                                          Amount      Revenue        Amount      Revenue
Selling, general and administrative     $    17,962        25 %    $    16,448        29 %    $    1,514        9 %

SG&A expenses were 25% of revenue for the nine months ended September 30, 2009, compared with 29% from the same period one year ago, while total expense increased by $1.5 million, or 9%. This increase in absolute dollars was driven primarily by increases of $1.2 million of labor, $519,000 of expenses related to German sales operations, $509,000 of legal and professional fees related primarily to our internal review of our international operations, $482,000 of executive severance and $234,000 of stock-based compensation expense. These increases were partially offset by greater foreign currency transaction gains of $827,000, decreases of $447,000 in travel expenses and $243,000 related to a decrease in exchange rates.