United States
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)
ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the fiscal year ended December 31, 2002

OR

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the transition period from to

Commission file number 0-10964

MAXWELL TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

Delaware		95-2390133
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

9244 Balboa Avenue San Diego, California 92123
(Address of principal executive offices)

Registrant’s telephone number, including area code: (858) 279-5100

Securities registered pursuant to Section 12(b) of the Act: None

Name of each exchange on which registered: Nasdaq National Market (“Nasdaq”)

Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.10 per share

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES ý NO o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the Registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act).

YES ý NO o

The aggregate market value of the Common Stock of the Registrant held by non-affiliates of the Registrant on March 5, 2003, based on the closing price at which the Common Stock was last sold on Nasdaq as of March 5, 2003, was $92,033,907.

The number of shares of the Registrant’s Common Stock outstanding as of March 5, 2003 was 13,736,404 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive Proxy Statement for the 2003 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A (including the Appendix thereto) are incorporated by reference in Part III of this Report.

MAXWELL TECHNOLOGIES, INC.

INDEX TO ANNUAL REPORT ON FORM 10-K

For the fiscal year ended December 31, 2002

PART I

Item 1.	Business
Item 2.	Properties
Item 3.	Legal Proceedings
Item 4.	Submission of Matters to a Vote of Security Holders
Item 4.1	Executive Officers of the Registrant

PART II

Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters
Item 5a.	Sale of Unregistered Securities
Item 6.	Selected Financial Data
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7a.	Quantitative and Qualitative Disclosures about Market Risk
Item 8.	Financial Statements
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

PART III

Item 10.	Directors and Executive Officers of the Registrant
Item 11.	Executive Compensation
Item 12.	Security Ownership of Certain Beneficial Owners and Management
Item 13.	Certain Relationships and Related Transactions
Item 14.	Controls and Procedures
Item 15.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K

PART I

Unless the context otherwise requires, all references in this Annual Report on Form 10-K to “Maxwell,” the “Company,” “we,” “us,” and “our” refer to Maxwell Technologies, Inc. and its subsidiaries; all references to “Montena Components” refer to our subsidiary Montena Components, Ltd. which has been renamed to Maxwell Technologies, SA; all references to “Electronic Components Group” refer to our former subsidiary, Maxwell Electronic Components Group, Inc. which has been merged into Maxwell; all references to “I-Bus/Phoenix” refer to our subsidiary, I-Bus/Phoenix, Inc., and its subsidiaries; and all references to “PurePulse” refer to our subsidiary, PurePulse Technologies, Inc. This Form 10-K may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements involve risks and uncertainties. The Company’s actual results may differ significantly from the results discussed in any forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in “Risk Factors” herein. Discussions containing such forward-looking statements may be found in the material set forth under “Item 1. Business,” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as within this Form 10-K generally.

We file annual, quarterly and special reports, proxy statements and other information with the SEC. Our SEC filings are available free of charge to the public over the Internet at the SEC’s website at http://www.sec.gov. Our SEC filings are also available on our website at http://www.maxwell.com as soon as reasonably practicable following the time that they are filed with or furnished to the SEC. You may also read and copy any document we file with the SEC at its public reference rooms in Washington, D.C., New York, NY and Chicago, IL. Please call the SEC at (800) SEC-0330 for further information on the public reference rooms.

Item 1. Business

Overview

Maxwell sells reliability. We develop, manufacture and market electronic components and systems that perform reliably for the life of the end products and systems into which they are integrated. Our customer value proposition is based on the guarantee that our products will not fail. We achieve high reliability through the application of proprietary technology, and through rigorously controlled design, development, manufacturing and test processes. Our strategic focus on high reliability enables us to deliver high-value products that ensure mission critical uptime, durability and full functionality of our customers’ end products and, therefore, to command higher profit margins than traditional electronic products.

Based on our strategy, we develop, manufacture and market high-reliability power and microelectronic products for original equipment manufacturers (OEMs) in multiple industries. Our power products address applications in transportation, telecommunications, consumer and industrial electronics, electric utility infrastructure and medical imaging and industrial automation systems. Our microelectronics products primarily address applications in aerospace. Our power product lines are comprised of ultracapacitors, high voltage capacitors, and custom power and energy storage systems. Our microelectronic product lines are comprised of radiation-shielded power modules, memory modules and single board computers. We also design and sell automated winding equipment used to produce metalized film capacitors and lithium batteries.

In the second half of 2002, we initiated a series of steps to intensify the focus on our strategy and to exit non-strategic businesses:

• In July 2002, we acquired Montena Components Ltd., a Swiss manufacturer and marketer of ultracapacitors, high voltage capacitors and battery and capacitor winding equipment. This acquisition brought to Maxwell additional power business focused on high reliability components and additional design and production capabilities that enhance Maxwell’s profile as a reliable, global supplier. Montena Components is located in Rossens, Switzerland, near major automotive and industrial development and manufacturing centers in Germany, France and Italy.

• In September 2002, we suspended the operations of our PurePulse Technologies subsidiary, which had been developing pulsed-light purification systems. We are preserving PurePulse’s intellectual property for a possible future sale.

• In September 2002, we sold the computing systems business of our I-Bus/Phoenix subsidiary. Although that business had a strategic focus on high reliability/high availability computer servers, the markets for such systems, particularly telecommunications, had deteriorated so dramatically that we concluded that near-term growth prospects for our computing systems business were limited.

• In September 2002, we sold our non-core TeknaSeal glass-to-metal seals business and in December 2002, we sold a small power factor correction product line that did not fit our high reliability strategy.

• During the third quarter of 2002, we began integrating the power systems business of I-Bus/Phoenix into our Electronic Components Group. Our current power systems products address the high reliability and power quality requirements of our medical imaging and industrial automation systems OEM customers. New power system products scheduled for introduction in 2003 incorporate our ultracapacitor and other proprietary power electronics technologies to address high reliability back-up power applications in the industrial market.

• In early 2003, we completed the integration and relocation of our power systems business into our principal manufacturing facility in San Diego, California, and vacated and listed for sale the company-owned facility that formerly housed the North American operations of I-Bus/Phoenix. This consolidation allows more efficient use of our remaining facilities and personnel, and the sale of the vacated facility will provide the Company with additional cash resources.

• Also in early 2003, we formed an ultracapacitor manufacturing and marketing alliance in China with Yeong-Long Technologies Co., Ltd., a $200 million per annum manufacturer of electrolytic capacitors, to commercialize our proprietary BOOSTCAP® ultracapacitors in China and to position us as a global supplier of ultracapacitors with production facilities in the U.S., Europe and China.

With the completion of these actions, virtually all of Maxwell’s revenue now is derived from the sale of power and microelectronic products and winding equipment, and the Company’s internal operations are concentrated in two primary facilities, one in San Diego, California, and the other in Rossens, Switzerland.

Industry, Markets and Maxwell’s Solutions

We have focused our business on high reliability power and microelectronic products and high reliability automated winding equipment.

• High reliability power and microelectronic products:

• Ultracapacitors for electrical energy storage and delivery of peak power for a variety of applications.

• High voltage grading and coupling capacitors and capacitor voltage dividers used in electric utility infrastructure, high voltage laboratories and other applications involving transport, distribution and measurement of high voltage electrical energy.

• Power distribution and power conditioning modules for integration into larger medical imaging and other industrial systems for delivery of consistent, high quality power.

• Radiation shielded microelectronic components, including power modules, memory modules and single board computers for aerospace and military applications.

• Winding machines and automated assembly lines used to manufacture metalized film capacitors and lithium batteries.

Maxwell’s solutions apply our expertise and proprietary power and microelectronics technology at both the component level and the systems level for specialized, high value applications in which the customer requires high reliability. We intend to be a leading supplier of high reliability power and microelectronic components and systems for such specialized, high-value applications.

Energy Storage and Power Delivery Components - Ultracapacitors

New power-hungry electronic products such as digital cameras and wireless communications devices, increasing demand for electric power in trains and motor vehicles to assist vehicle power trains and to operate on-board electronic systems, and the need for highly reliable back-up power are creating significant markets for energy storage and power delivery. In many applications, power demand varies widely from moment to moment, and peak power demand typically is much greater than the average power requirement. For example, automobiles require much more power to accelerate from a stop than to maintain a constant speed. In other applications, such as in digital cameras, more power is needed to display images on a screen than to store images in memory.

Engineers generally address peak power needs by designing the primary energy source, such as an engine or a battery system, to the size needed to satisfy peak demands, even if those demands occur for only a few seconds at a time. Sizing an entire system for peak power needs, rather than for the average power requirement, is costly and inefficient. Such systems can be significantly improved by storing electrical energy generated from a primary energy source such as an engine or battery and then delivering that energy in controlled high power bursts only when high power is required. Such high power delivery provides electrical systems with dynamic power range to meet peak power demands for periods of time ranging from fractions of a second to several minutes. This enables new functionality, reduces system size and cost and improves performance and reliability.

The following diagram presents the separation of energy storage and peak power delivery from a primary energy source. The components that enable this separation permit new designs to optimize the efficiency and cost effectiveness of electrical power systems.

Peak Power Application Model

Although batteries currently are the most widely used component for both primary energy sourcing and energy storage/peak power delivery, ultracapacitors, advanced batteries and fly wheels increasingly are being used for energy storage and peak power delivery. We believe ultracapacitors will become a component of choice for energy storage and peak power delivery because ultracapacitors have significant performance advantages over batteries, including:

• delivery of up to 10 times the instantaneous power;

• lower weight for storage of comparable electrical energy;

• deeper discharge and faster recharge;

• more reliable operation in extreme temperatures (–40 degrees C to +75 degrees C);

• require little or no maintenance;

• have minimal environmental issues associated with disposal; and

• can operate reliably for the life of any application.

We believe that ultracapacitors and other energy storage/peak power delivery devices are enabling and emerging and potentially enormous market for energy storage/peak power delivery separate from energy generation devices. As a result, we believe that electrical systems in the future, whether in a digital camera or in a hybrid internal combustion/electric vehicle, increasingly will be designed to separate and optimize energy generation and energy storage/peak power delivery.

Any application that requires the storage of electrical energy and the discharge of highly variable amounts of power is a potential market for ultracapacitors and other energy storage and power delivery components. We expect that components designed to meet these power delivery requirements will capture an increasing share of the energy storage market that we believe currently is addressable with ultracapacitors, which is estimated to be approximately $350 million per annum. We believe that the addressable market has the opportunity to grow in the future to multi-billions of dollars per annum as new electrical system designs are developed and commercialized.

Maxwell is a global leader in commercializing ultracapacitor technology. Ultracapacitors are ideally suited for applications that require highly efficient energy storage and repeated bursts of electric power lasting from fractions of a second up to several minutes. With no moving parts, ultracapacitors provide a simple, solid state, highly reliable solution to buffer short term mismatches between power available and power required.

Unlike batteries, capacitors can be recharged from any electrical energy source as quickly as they are discharged, and they operate reliably through hundreds of thousands of discharge/recharge cycles with minimal degradation of performance. Traditional capacitors discharge power too rapidly to be suitable for many power delivery applications. Ultracapacitors have greater energy storage capability than traditional capacitors and can discharge power over time periods ranging from fractions of a second to several minutes. Used in tandem with batteries, ultracapacitors can provide bursts of power to meet power demand peaks, enhance performance and significantly extend battery life. Where alternative sources of recharge energy are available, ultracapacitors can replace batteries entirely.

Our BOOSTCAP ultracapacitors provide dynamic range and peak power for applications that require periodic bursts of power, whether for an internal combustion/electric hybrid drive train or a battery pack for consumer or industrial electronic devices. Ultracapacitors can be linked together in modules and charged from any primary energy source, such as a battery, engine, fuel cell or electrical outlet, and deliver high power on demand. Virtually any device with peak power demands greater than its average power requirement is a candidate for our ultracapacitors as part of its energy storage and power delivery system.

We offer our proprietary BOOSTCAP ultracapacitors in several form factors, ranging from five-farad postage stamp size small cells to cylindrical 2,700-farad large cells that are approximately two inches in diameter and six inches long. We are able to supply these cells in volumes and at price points that are opening numerous market opportunities for energy storage and peak power delivery. Our small cell ultracapacitors have been designed into consumer electronics such as digital cameras, industrial electronics such as actuators, remote transmitting devices, bar code scanners, computer memory boards and transportation applications such as electric rail alarm systems and electric actuators, or latches, for aircraft and automobile doors. Many of the end products into which our small cell ultracapacitors have been designed now are beginning commercial production. Our large cell ultracapacitors have been designed into industrial applications such as uninterruptible back up power systems and transportation applications such as hybrid buses and trucks, electric rail systems and capacitive starting systems for diesel engines. These design-ins are in the prototyping and evaluation phase and not yet in commercial production.

The charts below describe the current primary applications for Maxwell’s BOOSTCAP ultracapacitors that either are in commercial production or in the prototyping and evaluation phase.

5 Farad to 100 Farad Small Cell Ultracapacitors

Market	Application	Stage of Commercialization

Consumer Electronics
• Digital cameras	Battery enhancement and peak power supply	Beginning commercial production

Industrial Electronics
• Bar code scanners • Utility meters • Actuators • IV pumps • Memory boards	Energy storage, back up power and peak power supply	Beginning commercial production

Energy Generation
• Windmill power generators	Energy storage and peak power supply	Beginning commercial production for windmill applications

• Stationary fuel cell systems	Energy storage and peak power supply	Stationary fuel cell applications are in the prototyping and evaluation phase

Transportation
• Helicopter airbags • Emergency lighting • Airplane door actuators • Pilot transponders • Automobile door actuators	Energy storage, back up power and peak power supply	Beginning commercial production, except automobile door actuators which are in the prototyping and evaluation phase

Our small cell ultracapacitors have entered commercial production. This means that our customers have begun commercial production of the end products into which our ultracapacitors have been designed and they require production quantities of ultracapacitors from our factory. We expect 2003 to be our first year of production of multi-millions of small cell ultracapacitors.

1500 and 2700 Farad Large Cell Ultracapacitors

Market	Application	Stage of Commercialization
Industrial & Telecommunications
• Uninterruptible power supply systems	• Backup power for uninterruptible power supply systems for telecommunication base stations and automated industrial factories	Prototyping and evaluation of rack mount modules developed by Maxwell
	• Energy storage and peak power supply for automated industrial equipment	Prototyping and evaluation of modules developed by Maxwell

Transportation
• Rail systems	• Recapture of braking energy and initial acceleration for electric trains. Same for roller coasters and other theme park rides.	Prototyping and evaluation of in-station and on-board modules developed by third party system integrators
	• Capacitive starting systems for diesel locomotives	Prototyping and evaluation of capacitive starting subsystems developed by third party integrators
• Bus and truck systems	• Recapture of braking energy and initial acceleration for diesel/electric hybrid drive trains. Same for fuel cell drive trains.	Prototyping and evaluation of buses and trucks developed by third party integrators
	• Capacitive starting systems for diesel engines	Prototyping and evaluation of capacitive starting subsystems developed by third party integrators
	• All electric short-haul buses, fork lifts, vans and other high stop/start vehicles	Prototyping and evaluation of vehicles developed by third party integrators
• Automobile systems (12 and 42 volts)	• Recapture of braking energy • Initial acceleration for internal combustion/electric hybrid drive trains. Same for fuel cell drive trains. • Electric power steering and electric braking	Prototyping and evaluation of modules developed by Maxwell and by third party integrators and of electrical subsystems developed by third party integrators

Our large cell ultracapacitors have been designed into larger integrated prototype systems that are being evaluated by potential end customers. We expect 2003 to bring increased sampling and prototyping activity with certain applications moving into commercial production in 2004. We are preparing Maxwell to be positioned to produce multi-millions of large cell ultracapacitors beginning in 2005.

To facilitate adoption of ultracapacitors for applications such as bus, truck and auto power trains, electric rail systems, uninterruptible power supplies and fuel cells, which require integrated packs consisting of multiple ultracapacitor cells, we are complementing our internal capabilities with those of third parties who possess the systems integration and power and thermal management capabilities to provide fully integrated power packs to satisfy the energy storage and power delivery demands of these larger systems.

High Voltage Capacitors

Electric utility grids have switches, circuit breakers, step-down transformers and measurement instruments responsible for the transport, distribution and measurement of high voltage electricity. These systems need to be protected from high voltage arcing, which predominately is achieved through the use of high voltage capacitors.

The current market for high voltage grading and coupling capacitors, capacitor voltage dividers and other special high voltage capacitors is estimated to be approximately $40 million per year.

Maxwell, through its acquisition of Montena Components, is a leader in the design and production of high voltage capacitors, with more than twenty years of experience in the industry. Engineers who have specific expertise in high voltage systems develop and test our capacitors in our high voltage laboratory in Rossens, Switzerland. Our capacitors are produced through a proprietary automated winding and assembly process to ensure their consistent quality and high reliability performance.

Power Systems Products

High reliability power distribution and power conditioning systems are required to provide a “clean” and consistent flow of electric power to sensitive medical imaging systems and automated manufacturing equipment. We engineer and manufacture such systems, enabling our OEM customers to focus their efforts on overall design and integration of the larger systems they supply to their end customers. Such power solutions frequently require customization. Also, as time-to-market is critical for many such applications, rapid design and production capabilities are required of suppliers providing these systems. Therefore, the proliferation of complex electronic systems with specific power distribution and power conditioning requirements has created attractive markets for specialized power product manufacturers who possess the engineering and manufacturing know-how and experience to provide design-intensive, custom solutions.

The current market for three-phase uninterruptible power supplies, or UPS, and power distribution and power conditioning products for our target market of five kilovolts and lower, is estimated to be approximately $3 billion.

At present, many of our power distribution and power conditioning products are based on our customers’ designs. We are developing improved power systems products based on our own designs that intend to improve performance and reliability, and to reduce cost for our customers while also permitting us to expand sales and improve product line gross margins. For example, we have developed, and plan to introduce in 2003, solid-state energy storage systems incorporating our BOOSTCAP ultracapacitors to replace batteries for short-term back-up power in UPS systems. Unlike batteries, ultracapacitors require no maintenance. Also, because ultracapacitors recharge in seconds, as compared to batteries, which require hours to recharge, ultracapacitors provide more reliable back-up power in the event of multiple power interruptions over a short time period, such as hours or within a day.

Radiation-Shielded Microelectronics

Manufacturers of commercial and military satellites and other spacecraft require on-board microelectronics that meet specific functional requirements, and that will not fail when they are exposure to anticipated levels of radiation. In the past, microelectronics for these special applications have used radiation-hardened silicon. The supply of radiation-hardened silicon is diminishing because there are fewer fabricators of specialty silicon. As a result, demand for commercial off-the-shelf silicon, protected in radiation-shielded packages, is growing. Radiation-shielded commercial silicon also provides higher functionality and costs significantly less than radiation-hardened silicon. The ability to provide radiation-shielded silicon requires expertise in power electronics, circuit design, silicon selection, radiation shielding and high quality assurance testing.

Current worldwide sales of radiation-shielded microelectronics for the satellite market are estimated at more than $200 million annually.

We design, manufacture and market radiation-shielded microelectronics, including power modules, memory modules and single board computers, for the aerospace and military markets. We design customized microelectronics together with highly adaptable, proprietary, packaging and shielding and other radiation mitigation techniques to allow OEMs to use powerful, low cost, commercial off-the-shelf components protected with the level of radiation shielding required for reliable performance in the environment in which they are to be deployed.

Winding Equipment

Manufacturers of capacitors and lithium batteries require high-speed coil winding machines to assemble their products. Manufacturers of high-quality metalized film capacitors and of lithium primary batteries require highly reliable winding machines capable of high speed, high quality and high yield production of the components.

The current market for winding machines for these applications is estimated to be approximately $40 million per year.

Maxwell, through its acquisition of Montena Components, is a leader in the design and production of precision automated winding machines for metalized film capacitors and lithium batteries, with more than twenty years of experience in the industry. We have engineers with specific expertise in the design and construction of winding machines that reliably can produce high quality components with high-speed and very high yield throughput. We focus on customer applications that require precise production of components with strict product specifications. Our winding equipment not only is capable of producing precise components, but also is designed for high yields and long operating lifetimes.

Manufacturing

With the acquisition of Montena Components, and the divestitures of our non-core computing and glass-to-metal seals businesses in 2002, we have consolidated manufacturing for our power components and systems and microelectronic products into the Company’s principal production facilities located in San Diego, California, and Rossens, Switzerland.

Over the past three years, we have made substantial capital investments to build and outfit state-of-the-art production facilities, including advanced information technology infrastructure, and have implemented new manufacturing and business processes and systems to increase our production capacity and improve efficiency and product quality. Our production facilities have been designed with flexible overhead power grids and modular manufacturing cells and equipment that allow factory operations to be reconfigured rapidly at minimal expense. We believe that our manufacturing facilities and resources give us sufficient capacity to meet near term demand for all of our products.

Ultracapacitors

Our objective with all of our BOOSTCAP ultracapacitor products is to be a highly reliable, multi-location, global supplier of these products for customer applications that require high power density in small packages for energy storage and power delivery.

In February 2003, we formed an ultracapacitor manufacturing and marketing alliance in China with Yeong-Long Technologies Co., Ltd., a $200 million per annum manufacturer of electrolytic capacitors, to commercialize our proprietary BOOSTCAP ultracapacitors in China and to position us as a global supplier of ultracapacitors with production facilities in the U.S., Europe and China.

We have installed an automated assembly line at our San Diego production facility to make our small cell ultracapacitors. This automated line can produce approximately 40,000 to 50,000 small cells per day with very high yields by industry standards. We produce our large cell ultracapacitors on pilot production lines in our San Diego and Rossens production facilities. We are designing our large cells to incorporate lower cost materials and facilitate future high-speed automated manufacturing. In addition to significantly reducing material cost, the new design will reduce the number of components required to make a finished cell and reduces the number of manufacturing process steps to a fraction of those required for previous designs.

High Voltage Capacitors

We produce our high voltage grading and coupling capacitors at our Rossens production facility. We are the only producer that manufactures high voltage capacitors with automated winding and assembly processes. This gives us ample capacity to satisfy customer demand and to produce consistent, high quality and highly reliable products.

Power Systems Products

We assemble and test our power distribution and power conditioning units and solid-state energy storage systems in our San Diego production facility. We rely on third party suppliers for fabrication and assembly of printed circuit boards, sheet metal enclosures and major subassemblies.

Radiation-Shielded Microelectronics

We produce our microelectronics products at our San Diego facility. We have reengineered our production processes for radiation-shielded microelectronics, resulting in dramatic improvement in cycle time required to produce and test microelectronics and a significant increase in yield of components that comply with customer-required quality and performance standards. We believe that we now have ample capacity and top tier manufacturing capabilities for highly reliable, radiation-shielded power modules, memory modules and single board computers for the aerospace and military markets.

Winding Equipment

At our facility in Switzerland, we produce high-speed coil winding equipment that is used to assemble metalized film capacitors and lithium batteries. We have ample capacity to satisfy customer demand. We intend in the future to outsource more of the subassemblies that comprise the equipment that we sell and to focus more of our efforts on design and final integration, calibration and test.

Suppliers

We generally purchase components and materials, such as electronic components, dielectric materials and enclosures of metal and plastic, from a number of suppliers. For certain products, we rely on a limited number of suppliers or a single supplier. Although we believe there are alternative sources for components and materials currently obtained from a single source, there can be no assurance that we will be able to identify and qualify alternative suppliers in a timely manner. We seek to reduce our dependence on sole and limited source suppliers.

Marketing and Sales

Across all our product lines, we market and sell components and systems for integration by OEMs into larger systems and other end products through both direct and indirect sales organizations in North America, Europe and Asia. Because the introduction of emerging technologies requires customer acceptance of new and different technical approaches, and because many of our OEM customers have rigorous vendor qualification processes, the initial sale for our products can take weeks or months.

Our principal marketing strategy is to cultivate long-term customer relationships by becoming a preferred supplier with an opportunity to compete for multiple supply agreements and follow-on contracts with our key OEM customers. As these design-in sales tend to be technical and engineering-intensive, we organize customer specific teams composed of sales, engineering, research and development and other technical personnel to work closely with our customers across multiple disciplines to satisfy their requirements for form, fit, function, environment and mechanics. As time-to-market often is the primary consideration in our customers’ decisions to outsource components or systems and in their selection of a vendor, the initial sale and design-in process frequently evolves into ongoing account management to ensure on-time delivery and responsive technical support and problem solving.

Our business units conduct marketing programs intended to position and promote their products, including trade shows, seminars, advertising, public relations, distribution of product literature and websites on the Internet. We employ marketing communications specialists to develop and implement our marketing programs, design and develop marketing materials, negotiate advertising media purchases, write and place product news releases and manage our marketing websites.

Competition

Each of our business operations has competitors, many of whom have longer operating histories, significantly greater financial, technical, marketing and other resources, greater name recognition, and a larger installed base of customers. In some of the target markets for our emerging technologies, we face competition from products utilizing alternative technologies.

Ultracapacitors

Although a number of companies are developing capacitor technology, we have two principal competitors in ultracapacitor or supercapacitor products: Panasonic, a division of Matsushita Electric Industries, Ltd., and EPCOS AG. The key competitive factors are price, performance (energy stored and power delivered per unit volume), form factor, operational lifetime and breadth of product offerings. We believe that we compete favorably with respect to these competitive factors. Ultracapacitors also compete with other technologies, including high power batteries in power quality and peak power applications, and with flywheels and batteries in back-up energy storage applications.

High Voltage Capacitors

Our principal competitors in the high voltage capacitor markets are in-house production groups of certain of our customers and other independent manufacturers such as the Coil Product Division of Trench Limited in Canada and Europe and Hochspannungsgeräte Porz GmbH in Germany. We believe that we compete favorably with respect to being a consistent, reliable supplier of highly reliable high voltage capacitors, and with respect to our expertise in high voltage systems.

Power Systems Products

The markets for our power distribution and power conditioning products are highly fragmented, with no single dominant participant. In the medical and industrial markets in which our product offerings are concentrated, we compete with several participants, including Liebert Corporation, OnLine Power, Inc., Teal Electronics Corporation and Controlled Power Corporation. We believe that we compete favorably in these markets on price, quality and functionality.

Radiation-Shielded Microelectronics

Our radiation-shielded power modules, memory modules and single board computers compete with the products of traditional radiation-hardened integrated circuit suppliers such as Honeywell Corporation, Lockheed Martin Corporation and BAE Systems. We also have competition from commercial suppliers with product lines that have favorable radiation tolerance characteristics, such as Temic Instruments B.V. in Europe and National Semiconductor and Analog Devices Inc. Our proprietary radiation shielding technology enables us to provide flexible, low cost radiation protection solutions utilizing the most advanced commercial off-the-shelf electronic circuits and processors. In that market segment, we compete with high reliability packaging houses such as Austin Semiconductor, Inc., White Microelectronics, Inc. and Teledyne Microelectronics, a unit of Teledyne Technologies, Inc. for monolithic and multichip modules.

Winding Equipment

Our principal competitors in winding machines for metalized film capacitors and lithium batteries are Asian designers and manufacturers. We believe that we compete favorably in the segment of the market that requires precision machines that produce consistent, high quality components with high throughput and very high yields.

Research and Development

We maintain active research and development programs to improve existing products and to develop new products. For the year ended December 31, 2002, research and development expenditures totaled approximately $8.4 million, compared with $11.5 million and, $8.7 million in the fiscal years ended December 31, 2001 and December 31, 2000, respectively.

In general, our product development focuses on:

• designing and producing products that will not fail for the life of the system or end product into which they are integrated;

• enhancing the performance of existing products and developing new, technologically advanced products;

• developing new products to meet identified market opportunities; and

• making our products more compact and less expensive to manufacture to meet the performance, form factor and pricing demands of our customers.

Most of the current research, development and engineering activity for our high reliability products is focused on material sciences, including electrically conducting and dielectric materials, ceramics and radiation tolerant silicon and ceramic composites, to improve performance, reliability, ease of manufacture and cost. Efforts also are focused on product design for high-volume manufacturing and on manufacturing engineering and manufacturing processes.

The principal focus of our ultracapacitor development activities is to increase power density and delivery and to dramatically reduce cost. Our ultracapacitor designs focus on low-cost, high-capacity devices in standard sizes ranging from five farad to 2700 farad cells. Our goal is to penetrate cost sensitive applications at very high volumes (millions of cells per year beginning in 2003 for small cells and in 2005 for large cells).

The principal focus of our high voltage capacitor development efforts is to reduce the weight and size of the capacitors while improving high voltage performance characteristics. We also are directing our design efforts to develop high voltage capacitors for additional applications.

The principal focus of our microelectronics product development activities is on circuit design, shielding and other radiation-mitigation techniques that allow the use of powerful, off-the-shelf commercial silicon components in aerospace and military applications where ultra high reliability is an absolute requirement.

Our power systems design and development efforts have been concentrated on integrating our ultracapacitor technology into an innovative energy storage module to provide a more reliable, compact, lower maintenance alternative to batteries for short-term backup power in uninterruptible power supplies.

The principal focus of our winding machine development efforts is to address particular customer needs based on their capacitor or lithium battery design specifications. We also look to standardize machine platforms and subassemblies to reduce our production costs and lead times.

Intellectual Property

As our businesses expand, we are placing increased emphasis on patents to provide protection for certain key technologies and products. Our success will depend in part on our ability to maintain our patents, add to them where appropriate, and to develop new products and applications without infringing the patent and other proprietary rights of third parties. As of December 31, 2002, we held 38 issued patents and pending patent applications in the United States relating to our high reliability power and microelectronic products. We routinely secure patents in the United States and corresponding foreign patents in principal countries of Europe and Asia. At present, we do not rely on licenses from any third parties to produce or commercialize our products.

We have patent portfolios covering the technologies associated with our power and microelectronic products. These patents and patent applications primarily relate to;

• the electrode design and cell packaging techniques we use to produce our BOOSTCAP ultracapacitors;

• our power conditioning products and ultracapacitor-based solid-state energy storage products; and

• the designs for our microelectronics, including technology to protect our microelectronics from radiation.

Our high voltage capacitor products and our winding machines are based on our know-how and trade secrets rather than on patents. In the future we intend to pursue patent protection in these product areas in addition to continued trade secret protection of certain aspects of the products and their production.

Establishing and maintaining proprietary products and technologies is a key element of our success. Although we attempt to protect our intellectual property rights through patents, trade secrets and other measures, there can be no assurance that these steps will be adequate to prevent misappropriation by third parties, or will be adequate under the laws of some foreign countries, which may not protect our proprietary rights to the same extent as do the laws of

the United States.

We use employee and third party confidentiality and nondisclosure agreements to protect our trade secrets and unpatented know-how. We require each of our employees to enter into a proprietary rights and nondisclosure agreement in which the employee agrees to maintain the confidentiality of all proprietary Company information and, subject to certain exceptions, to assign to the Company all rights in any proprietary information or technology made or contributed by the employee during his or her employment. In addition, we regularly enter into nondisclosure agreements with third parties, such as potential product development partners and customers.

Backlog

Our backlog for continuing operations as of December 31, 2002 and 2001 amounted to approximately $12.2 million, and $14.6 million, respectively. Backlog consists of firm orders for products not yet delivered. We expect to deliver substantially all of our current backlog within 12 months.

Government Regulation

The testing, sale and application of our power products require compliance and certification with a number of U.S. and foreign standards for electromechanical systems, such as Underwriters Laboratories (UL), Canadian Standards Association (CSA) and Committee European (CE). We incorporate compliance with such standards into the quality assurance protocols in building and testing our and power products.

Because of the nature of our operations and the use of hazardous substances in some of our ongoing manufacturing and research and development activities, we are subject to stringent federal, state and local laws, rules, regulations and policies governing the use, generation, manufacturing, storage, air emission, effluent discharge, handling and disposal of certain materials and wastes.

Foreign Sales

Our revenue from customers outside of the United States was $25.1 million, $21.8 million and $25.8 million in the years ended December 31, 2002, 2001 and 2000, respectively.

Significant Customers

Sales to General Electric Medical Systems (GEMS) amounted to approximately 29% of revenues for Maxwell High Reliability segment and 20% of our total revenue for 2002. Maxwell does not have a formal contract with GEMS. Sales to GEMS are made on purchase orders issued month-by-month and are comprised of several different products sold to two different “Modality Groups” which, in effect, are different customers within GEMS. In general Maxwell sells low margin “build to print” products to GEMS, which GEMS has decided to source beginning in 2003 from GEMS affiliates or other companies located in lower cost countries. As a result, we expect to record significantly lower future sales to GEMS.

Employees

At December 31, 2002, we had 285 full-time employees, including 226 in our high reliability power and microelectronic products segment, 42 in our winding equipment segment and 17 on our corporate staff. None of our employees is represented by a labor union. We consider our relations with our employees to be good.

Discontinued Operations - PurePulse Technologies

In September 2002, our PurePulse subsidiary suspended operations. PurePulse had been designing and developing systems that generate extremely intense, broad-spectrum, pulsed light to purify water and inactivate viruses and other pathogens that contaminate vaccines and products sourced from human or animal tissues, such as plasma derivatives, transfusion blood components and biopharmaceuticals. Although PurePulse attracted $3 million of equity capital from Millipore Corporation in March 2002, the venture capital and other equity markets deteriorated after that time, and PurePulse was not able to raise additional capital to fund its operations.

In December 2000, we identified PurePulse as not being part of the Company’s strategic focus for the future and adopted a plan to sell all or a part of PurePulse by the end of 2001. However, due to poor market conditions, we

were unable to secure a transaction under acceptable terms. The PurePulse segment was classified as a discontinued operation for financial reporting purposes in 2000, and had been carried as such through 2001 and the first three quarters of 2002.

In December 2001, PurePulse licensed its PureBright® technology to Culligan International Company for certain water purification applications, and in April 2002, it entered into an alliance with Millipore to develop and commercialize PureBright in-flow systems in exchange for future royalties to PurePulse. We plan to monitor these ongoing relationships, and PurePulse will preserve its intellectual property and technology for a possible future sale.

RISK FACTORS

An investment in our common stock involves a high degree of risk. Our business, financial condition and results of operations could be seriously harmed if any of the following risks occur. In any such case, the market price of our common stock could decline and you may lose all or part of the money you paid to buy our common stock.

The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties, including those not presently known to us or that we currently deem immaterial, may also result in decreased revenues, increased expenses or other events which could result in a decline in the price of our common stock.

We may not be able to develop or market commercial products successfully, and thus may not be able to achieve or maintain profitability in the future.

Historically, we have relied in part upon government contracts to fund our research and development, and we have derived a significant portion of our revenues from the government sector. In March 2001, we sold our defense contracting business, and we now generate revenue solely from developing, manufacturing and marketing commercial products, many of which have been developed since 2000. If we are unable to continue to develop or to market commercial products successfully, we may not achieve or maintain profitability in the future.

We have recently introduced many of our products into commercial markets and, upon such introductions, we also must introduce our capabilities as a reliable supplier of these products. Some of our products are alternatives to established products or provide capabilities that do not presently exist in the marketplace. Our products are sold in highly competitive and rapidly changing markets. The success of our products is significantly affected by their cost, technology standards and end user preferences. In addition, the success of our products depends on a number of factors, including our ability to:

• maintain an engineering and marketing staff sufficiently skilled to identify and design new products;

• overcome technical, financial and other risks involved in introducing new products and technologies;

• identify and develop a market for our new products and technologies and accurately anticipate demand;

• develop appropriate commercial sales and distribution channels;

• develop and manufacture new products at competitive prices;

• deliver products that meet our customers’ requirements for quality and reliability;

• increase our manufacturing capacity and improve manufacturing efficiency;

• respond to technological changes by improving our existing products and technologies;

• demonstrate that our products have technological and/or economic advantages over the products of our competitors; and

• respond to competitors that are more experienced, have significantly greater resources, and have a larger base of customers.

We may experience difficulty manufacturing our products, which would prevent us from achieving increased sales and market share.

We may experience difficulty in manufacturing our products in increased quantities, outsourcing the manufacturing of our products and improving our manufacturing processes. If we are unable to manufacture our products in increased quantities, or if we are unable to outsource the manufacture of our products or improve our manufacturing processes, we may be unable to increase sales and market share for our products. We have limited experience in manufacturing our products in high volume. It may be difficult for us to achieve the following results:

• increase the quantity of the new products we manufacture, especially those products that contain new technologies;

• reduce our manufacturing costs to a level needed to produce adequate profit margins; and

• design and procure automated manufacturing equipment.

It may also be difficult for us to solve management, technological, engineering and other problems related to our manufacturing processes. These problems include production volumes and yields, quality assurance, adequate and timely supply of materials and shortages of qualified management and other personnel. In addition, we may elect to have some of our products manufactured by third parties. If we outsource the manufacture of our products, we will face risks with respect to quality assurance, cost and the absence of close engineering support.

Our large cell ultracapacitors designed for automotive and transportation applications may not gain widespread commercial acceptance.

We have designed our large cell ultracapacitor products primarily for use in automotive and transportation applications. Currently, most of the major automotive companies are pursuing initiatives to develop alternative power sources for cars and trucks and to replace the traditional 12-volt electrical system with a 42-volt system. We believe our ultracapacitor provides an innovative, alternative power solution for both of these applications and are currently in discussions with several major automotive companies and their suppliers with regard to designing our ultracapacitor into their future products. However, there are other competing technologies such as nickel metal hydride batteries, combustion engines using alternative fuels and competing ultracapacitors. We believe that the long-term success of our ultracapacitors will be determined by our ability to outperform the competing technologies and to have our ultracapacitors widely designed into the next generation of the power drive trains in hybrid powered cars and trucks and the first generation of 42-volt electrical systems. If our ultracapacitors fail to achieve widespread commercial acceptance in this next generation of automotive products, our revenues and growth opportunities will be adversely impacted in future periods and our overall business prospects will be significantly impaired.

We may be unable to produce our large cell ultracapacitors in commercial quantities or reduce the cost of production enough to be commercially viable for widespread application.

If we are not able to produce large quantities of our large cell ultracapacitors in the near future at a dramatically reduced per unit cost, our large cell ultracapacitors may not be a commercially viable alternative to traditional or other alternative energy storage and power delivery devices. Although we have already begun selling a new type of BOOSTCAP large cell ultracapacitor designed for automotive and transportation applications, we have only produced this ultracapacitor in limited quantities and at a relatively high cost as compared with traditional energy storage and power delivery devices. We are currently investing significant resources in improving the cell design for higher performance at lower cost and in automating and scaling up our manufacturing capacity to permit us to produce this product in commercial quantities sufficient to meet the needs of our potential customers. Furthermore, we believe based on discussions with potential customers in the automotive and transportation industry that our ultracapacitors will not provide a commercially viable solution for our customers’ needs unless we are able to reduce the per unit cost dramatically below our current per unit cost. If we are not successful in the near future to reduce our cost of production and to establish the capability to produce large quantities of ultracapacitors, we may not be able to generate commercial acceptance of, and sufficient revenue from, this product to recapture our significant investment in the development and manufacturing scale-up of this product and our overall business prospects will be significantly impaired.

We have a history of losses and we may not achieve or maintain profitability in the future, which may decrease the market value of our stock.

We have incurred net losses in our last three fiscal years. In the future, we may experience significant fluctuations in our revenues and we may incur net losses from period to period as a result of a number of factors, including the following:

• the amounts invested in developing and marketing our products in any period as compared to the volume of sales of those products in the same period;

• fluctuations in demand for our products by OEMs;

• the prices at which we sell our products and services as compared to the prices of our competitors;

• the timing of our product introductions as compared to those of our competitors;

• the profit margins on our mix of product sales; and

• the dilution, debt, expenses, and/or charges we incur as part of acquisitions we have made or may make.

In addition, we incur significant costs developing and marketing products based on new technologies, and, in order to increase our market share, we may sell our products at profit margins below those we ultimately expect to achieve and/or significantly reduce the prices of our products and services in a particular quarter or quarters. The impact of the foregoing may cause our operating results to be below the expectations of public market analysts and investors, which may decrease the market value of our stock.

If our OEM customers fail to sell a sufficient quantity of products incorporating our components, or if the OEM’s sales timing and volume fluctuates, it would prevent us from achieving increased sales and market share.

Sales to a relatively small number of OEMs, as opposed to direct retail sales to customers, make up a significant percentage of our revenues. For example, sales to General Electric Medical Systems, or GEMS, accounted for approximately 20% of our total revenues for the fiscal year ended December 31, 2002. We do not have a formal contract with GEMS. Sales to GEMS are made on purchase orders issued on a monthly basis. In general Maxwell sells low margin “build to print” products to GEMS, which GEMS has decided to source beginning in 2003 from GEMS affiliates or other companies located in lower cost countries. As a result, we expect to record significantly lower future sales to GEMS.

Our ability to make sales to OEM customers depends on our ability to compete effectively primarily on price, delivery and quality and the success of GEMS products and programs that use our products. The timing and volume of these sales depend upon the sales levels and shipping schedules for the products of our OEM customers. Thus, even if we develop a successful component, our sales will not increase unless the product into which our component is incorporated is successful. If our OEM customers fail to sell a sufficient quantity of products incorporating our components, or if the OEM’s sales timing and volume fluctuates, it could prevent us from achieving sales. Our OEM customers typically require a long development and engineering process before incorporating our products and services into their systems and products. This period of time is in addition to the time we spend on basic research and product development. As a result, we are vulnerable to changes in technology or end user preferences.

Our opportunity to sell our products to our OEM customers typically occurs at infrequent intervals, depending on when the OEM customer designs a new product or enhances an existing one. If we are not aware of an OEM’s product development schedule, or if we cannot provide components or technologies when they develop their products, we may miss an opportunity that may not reappear for some time.

Continued poor economic conditions in the United States and abroad may adversely affect our OEM customers and prevent us from achieving sales and profit growth.

Many of our new products are components designed for new products and systems to be introduced to the marketplace by our OEM customers. Poor economic conditions in 2002 have slowed the introduction of new

products by our OEM customers and continued poor economic conditions may adversely affect our ability to market and sell our new products based on new technologies.

Our ability to increase market share and sales depends on our ability to hire and train marketing and sales personnel successfully.

Because many of our products are new, we have limited experience marketing and selling them. To sell our products, our marketing and sales personnel must demonstrate effectively the advantages of our products over the products offered by our competitors, in addition, we must be able to demonstrate the value of new technology in order to sell new products to existing or new customers. The highly technical nature of the products we offer requires that we retain and attract adequate marketing and sales personnel, and we may have difficulty doing that in a highly competitive employment market. Also, as part of our sales and marketing strategy, we enter into arrangements with distributors and sales representatives and depend upon their efforts to sell our products. Our arrangements with outside distributors and sales representatives may not be successful.

If we are unable to protect our intellectual property adequately, we could lose our competitive advantage in the industry segments in which we do business.

Our success depends on establishing and maintaining our intellectual property rights. If we are unable to protect our intellectual property adequately, we could lose our competitive advantage in the industry segments in which we do business. Although we try to protect our intellectual property rights through patents, trademarks, copyrights, trade secrets and other measures, these steps may not prevent misappropriation by third parties. We have taken steps to protect our intellectual property rights under the laws of certain foreign countries, but our efforts may not be effective to the extent that foreign laws are not as protective as United States laws. In addition, we face the possibility that third parties might “reverse engineer” our products to discover how they work and introduce competing products.

As our business has expanded, we have emphasized protecting our technologies and products through patents. Our success depends on maintaining our patents, adding to them where appropriate, and developing products and applications without infringing the patent and proprietary rights of others. The following risks are involved in protecting our patents:

• our patents may be circumvented or challenged and held unenforceable or invalid;

• our pending or future patent applications, if any, may not be issued in a timely manner and may not provide the protections we seek; and

• others may claim rights in the patented and other proprietary technology that we own or license.

If our patents are invalidated or if it is determined that we, or the licensor of the patent, does not hold sole rights to the patent, we could lose our competitive advantage in the industry segments in which we do business.

Competing research and patent activity in our product areas is substantial. Conflicting patent and other proprietary rights claims may result in disputes or litigation. Although we do not believe that our products or proprietary rights infringe third party rights, infringement claims could be asserted against us in the future. Also, we may not be able to stop a third party product from infringing our proprietary rights without litigation. If we are subject to such claims, or if we are forced to bring such claims, we could endure time-consuming, costly litigation resulting in product shipment delays and possible damage payments or injunctions that could prevent us from making, using or selling the infringing product. We may also be required to enter into royalty or licensing agreements as part of a judgment or settlement which could have a negative impact on the amount of revenue derived from our products or proprietary rights.

We face risks associated with the marketing, distribution and sale of our products internationally, and if we are unable to manage these risks effectively, it could impair our ability to grow our business abroad.

We derive a significant portion of our revenues from sales to customers located outside the United States. We expect our international sales to continue to represent a significant and increasing portion of our future revenues. As a result, our business will continue to be subject to certain risks, such as foreign government regulations, export controls, changes in tax laws, tax treaties, tariffs and freight rates. If we are unable to manage these risks

effectively, it could impair our ability to grow our business abroad.

We have recently acquired operations in Switzerland. Since we are relatively inexperienced in managing our international operations, we may be unable to focus on the operation and expansion of our worldwide business and to manage cultural, language and legal differences inherent in international operations. In addition, to the extent we are unable to respond to political, economic and other conditions in these countries effectively, our business, results of operations and financial condition could be materially adversely affected. Moreover, changes in the mix of income from our foreign subsidiaries, expiration of tax holidays and changes in tax laws and regulations could increase our tax rates.

As a result of our international operations, the United States dollar amount of our revenue and expenses is impacted by changes in foreign currency exchange rates.

If we are unable to retain key personnel, we could lose our technological and competitive advantage in some product areas and business segments.

Since we primarily focus on emerging technologies, our success depends upon the continued service of our key technical and senior management personnel. Some of our engineers are the key developers of our products and technologies and are recognized as leaders in their area of expertise. The loss of such engineers to our competitors could threaten our technological and competitive advantage in some product areas and business segments.

Our performance also depends on our ability to identify, hire, train, retain and motivate high quality personnel, especially key operations executives and highly skilled engineers. The industries in which we compete are characterized by a high level of employee mobility and aggressive recruiting of skilled personnel. Our employees may terminate their employment with us at any time.

If we are unable to secure qualified and adequate sources for our materials, components and sub-assemblies we may not be able to make our products at competitive costs and we may have difficulty meeting customer demand, which could damage our relationships with our customers.

Our ability to manufacture products depends in part on our ability to secure qualified and adequate sources of materials, components and sub-assemblies at prices that enable us to make our products at competitive costs. Some of our suppliers are currently the sole source of one or more items that we need to manufacture our products. Although we seek to reduce our dependence on sole and limited source suppliers, the partial or complete loss of these sources could have at least a temporary material effect on our business and results of operations, and damage customer relationships. On occasion, we have experienced difficulty in obtaining timely delivery of supplies from outside suppliers. This has adversely impacted our delivery time to our customers and there can be no assurance that such supply problems will not recur.

We may not be able to obtain sufficient capital to expand our business, which could require us to change our business strategy and result in decreased profitability and cause a loss of customers.

We believe that in the future we will need a substantial amount of capital for a number of purposes including the following:

• to meet anticipated volume production requirements for several of our product lines, in particular our ultracapacitors, which require high-speed automated production lines to achieve targeted customer volume and price requirements;

• to expand our manufacturing capabilities and establish viable production alternatives;

• to fund our continuing expansion into commercial markets;

• to achieve our long-term strategic objectives;

• to maintain and enhance our competitive position; and

• to acquire new or complementary businesses, product lines and technologies.

There can be no assurance that the necessary additional financing will be available to us on acceptable terms or at all. If adequate funds are not available, we may be required to change or delay our planned product commercialization strategy or our anticipated facilities expenditures, which could result in decreased profitability and cause a loss of customers.

Anti-takeover provisions in our certificate of incorporation and bylaws could prevent transactions that are in the best interest of our stockholders.

Some provisions in our certificate of incorporation could make it more difficult for a third party to acquire control of Maxwell, even if such change in control would be beneficial to our stockholders. We have a staggered board of directors, which means that our directors are divided into three classes. The directors in each class are elected to serve three-year terms. Since the three-year terms of each class overlap the terms of the other classes of directors, the entire board of directors cannot be replaced in any one year. Furthermore, our certificate of incorporation contains a “fair price provision” which may require a potential acquirer to obtain the consent of our board to any business combination involving Maxwell. Our certificate of incorporation and bylaws do not permit stockholder action by written consent or the calling by stockholders of a special meeting.

We have adopted a program under which our stockholders have rights to purchase our stock directly from us at a below-market price if a company or person attempts to buy us without negotiating with the board. This program is intended to encourage a buyer to negotiate with us, but may have the effect of discouraging offers from possible buyers.

The provisions of our certificate of incorporation and bylaws could delay, deter or prevent a merger, tender offer, or other business combination or change in control involving us that some, or a majority, of our stockholders might consider to be in their best interests. This includes offers or attempted takeovers that could result in our stockholders receiving a premium over the market price for their shares of our common stock.

Our common stock experiences limited trading volume and our stock price has been volatile.

Our common stock is traded on the Nasdaq National Market. The trading volume of our common stock each day is relatively low. This means that sales or purchases of relatively small blocks of stock can have a significant impact on the price at which our stock is traded. We believe that factors such as quarterly fluctuations in financial results, announcements of new technologies impacting our products, announcements by competitors or changes in securities analysts’ recommendations could cause the price of our stock to fluctuate substantially. These fluctuations, as well as general economic conditions such as recessions or higher interest rates, may adversely affect the market price of our common stock.

Item 2. Properties

We own or conduct our operations in the following major facilities:

Location	Approximate Square Feet	Uses	Leased/Owned
San Diego, California	84,500	Vacant – held for sale	Owned
San Diego, California	45,000	Corporate headquarters; High Reliability segment - R&D, manufacturing; sales and administration	Leased
Rossens, Switzerland	68,620	High Reliability segment - R&D, manufacturing; sales and administration	Leased
Matran, Switzerland	18,800	Winding Equipment segment - R&D, manufacturing; sales and administration	Leased

Item 3. Legal Proceedings

As of the date of this Form 10-K, we are not engaged in any legal proceedings that we expect will have a material adverse effect on our business, financial condition or results of operations.

Item 4. Submission of Matters to a Vote of Security Holders

None

Item 4.1 Executive Officers of the Registrant

Name	Age	Position

Carlton J. Eibl	42	Chief Executive Officer until succession to Richard Balanson in April 2003 and Director. Mr. Eibl was appointed a director in July 1998 and named chief executive officer and president in November 1999. From February 1999 until he formally joined us on December 1, 1999, Mr. Eibl served as president and chief operating officer of Stratagene Corporation, a privately-held biotechnology company. Mr. Eibl previously held various executive positions with Mycogen Corporation, a publicly-held diversified agribusiness and biotechnology company. Mr. Eibl joined Mycogen in 1993 as executive vice president. In 1995, he was appointed president and chief operating officer of Mycogen and in 1997 he became chief executive officer. The Dow Chemical Company acquired Mycogen at the end of 1998.

Richard D. Balanson	53	President and Chief Operating Officer and, effective as of April 2003, President and Chief Executive Officer. Dr. Balanson was appointed president and chief operating officer in May 2002. From August 1999 to May 2002, he was a Vice President of Maxwell and President of our former Maxwell Electronic Components Group. From 1996 until joining Maxwell in August 1999, Dr. Balanson was the president and chief operating officer for 3D Systems, a California-based manufacturer of rapid prototyping equipment. From 1994 to 1996, Dr. Balanson was the general manager and executive vice president of Maxtor Corporation, and before that was president and chief operating officer of Applied Magnetics Corporation.

James Baumker	52	Vice President, Chief Financial Officer. Mr. Baumker was appointed a Vice President in July 2001. From May 2000 to July 2001, he was Vice President of Finance and Administration at our I-Bus/Phoenix subsidiary. From August 1999 until May 2000, Mr. Baumker was Vice President and Chief financial Officer at Akkadix Corp., a privately held biotechnology company. From February 1999 until August 1999, he served as Chief Financial Officer of Stratagene Corporation, a privately-held biotechnology company. Mr. Baumker previously held various executive positions with Mycogen Corporation, a publicly-held diversified agribusiness and biotechnology company. Mr. Baumker joined Mycogen in 1987 as corporate controller. In 1995, he was appointed Vice President and Chief Financial Officer of Mycogen.

Richard Smith	61	Executive Vice President, Strategic Business Development and Secretary. Mr. Smith was appointed Executive Vice President in December 2002. From 2000 through 2002, he was Senior Vice President of Business Development of our former Electronic Components Group. From 1994 to 2000, Mr. Smith held a variety of management positions within Maxwell’s subsidiaries. Prior to 1994, Mr. Smith held a variety of executive positions at Teledyne, including President of its microwave, electronics, micronetics and kinetics business and vice president of engineering and programs for the aeronautics business. Mr. Smith has held other senior management positions in engineering, sales and business development in the electronics industry during his 40 years of experience.

PART II

Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters

Our common stock has been quoted on the Nasdaq National Market under the symbol “MXWL” since 1983. The following table sets forth the high and low sale prices per share of our common stock as reported on the Nasdaq National Market for the periods indicated.

		High		Low

Year Ended December 31, 2001	First Quarter	$	22.56	$	14.00
	Second Quarter	22.30		14.30
	Third Quarter	22.50		5.81
	Fourth Quarter	11.70		6.80

Year Ended December 31, 2002	First Quarter	11.48		8.75
	Second Quarter	14.50		7.42
	Third Quarter	8.50		4.05
	Fourth Quarter	7.80		5.20

The last reported sale price of common stock on the Nasdaq National Market on March 7, 2003, was $6.77 per share. As of March 5, 2003, there were 470 holders of record of the Company’s Common Stock.

We currently anticipate that any earnings will be retained for the development and expansion of our business and, therefore, we do not anticipate paying dividends on our Common Stock in the foreseeable future. In addition, under our bank credit agreement, neither we nor any of our subsidiaries may, directly or indirectly, pay any cash dividends to our stockholders.

Item 5a. Sale of Unregistered Securities

On July 5, 2002 the Company issued a total of 2,250,000 shares of common stock to Montena SA, a Swiss corporation, as part of the consideration for all of the outstanding shares of Montena SA’s subsidiary corporation, Montena Components Ltd. The Company’s shares were issued pursuant to the exemption from registration provided by Regulation S of the Securities and Exchange Commission. Montena SA is a Swiss corporation and the shares issued are considered restricted securities that cannot be resold except under an effective registration statement or pursuant to an exemption from the registration requirements.

In January 2002, we adopted a plan to complete merger transactions between Maxwell and our Electronic Components Group subsidiary and our I-Bus/Phoenix subsidiary whereby all of the minority shareholdings and options in such subsidiaries would be converted to shares and options of Maxwell. On April 15, 2002, these merger transactions resulted in the issuance of 565,000 shares of common stock. In February 2002, PacifiCorp Energy Ventures, Inc., the largest minority shareholder in the Electronic Components Group, exchanged its preferred shares of the Electronic Components Group for 518,000 common shares of Maxwell pursuant to its right under the original investment agreement. The shares issued in the merger transactions and the shares issued to PacifiCorp are considered restricted securities and cannot be resold except under an effective registration statement or pursuant to an exception for the registration request.

Item 6. Selected Financial Data

	Years Ended July 31,					Period Ended December 31,			Years Ended December 31,
	1998			1999		1999			1999*			2000			2001			2002
	(in thousands, except per share data)
Consolidated Statement of Operations Data:
Continuing Operations:
Sales	$	78,014		$	102,878	$	36,863		$	103,611		$	102,347		$	77,856		$	57,965
Income (loss) from continuing operations	1,423			3,939		(5,815		)	46			(16,291		)	(8,221		)	(35,324		)
Discontinued operations, net of taxes	(3,130		)	7,129		(7,276		)	(299		)	(26		)	(4,696		)	(4,832		)
Net income (loss)	$	(1,707	)	$	11,068	$	(13,091	)	$	(253	)	$	(16,317	)	$	(12,917	)	$	(40,156	)

Basic net income (loss) per share:
Income (loss) from continuing operations	$	0.17		$	0.42	$	(0.61	)	$	—		$	(1.66	)	$	(0.82	)	$	(2.88	)
Loss from discontinued operations	(0.37		)	0.76		(0.76		)	(0.03		)	-			(0.47		)	(0.39		)
Net income (loss)	$	(0.20	)	$	1.18	$	(1.37	)	$	(0.03	)	$	(1.66	)	$	(1.29	)	$	(3.27	)

Diluted net income (loss) per share:
Income (loss) from continuing operations	$	0.16		$	0.40	$	(0.61	)	$	—		$	(1.66	)	$	(0.82	)	$	(2.88	)
Loss from discontinued operations	(0.35		)	0.72		(0.76		)	(0.03		)	(0.01		)	(0.47		)	(0.39		)
Net income (loss)	$	(0.19	)	$	1.12	$	(1.37	)	$	(0.03	)	$	(1.67	)	$	(1.29	)	$	(3.27	)

	July 31,								December 31,
	1998			1999					1999*			2000			2001			2002
Consolidated Balance sheet Data:
Total assets	$	100,200		$	113,486				$	98,151		$	122,109		$	85,704		$	71,380
Cash, cash equivalents and short-term investments	$	20,934		$	7,948				$	2,885		$	2,686		$	25,559		$	11,091
Short-term debt	$	—		$	—				$	—		$	22,754		$	—		$	—
Long-term debt including current portion	$	2,462		$	3,688				$	474		$	—		$	6,000		$	2,975
Stockholders equity	$	80,153		$	97,168				$	84,416		$	69,754		$	59,731		$	49,951
Shares outstanding	9,210			9,557					9,664			9,877			10,168			13,726

*unaudited

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

In 2000 and 2001 we converted Maxwell from primarily an engineering and physics services company for the U.S. military and other governmental customers to a product driven commercial enterprise with predominantly commercial, as opposed to military and governmental, customers. This conversion involved the hiring of new

personnel, restructure and divestiture of businesses, building and outfitting new factories and the development and introduction of new products.

Beginning at the end of 2001 and continuing in 2002, our target telecommunications markets for our I-Bus Computing Systems business and our microelectronics business collapsed. During this same timeframe, we experienced a longer cycle than we had expected in getting our ultracapacitors designed into end products and having the end products go into commercial production.

These negative market forces impacted us at the same time that we were completing the rebuild and conversion of the Company as a product driven commercial enterprise. The result was that our cost structure and production capacity was well in excess of our immediate revenue opportunities.

We responded by tightly focusing our strategy and product lines around high reliability products. In the second half of 2002, we initiated a series of steps to intensify the focus on our strategy and to exit non-strategic businesses:

• In July 2002, we acquired Montena Components, a Swiss manufacturer and marketer of ultracapacitors, high voltage capacitors and battery and capacitor winding equipment. This acquisition brought to Maxwell additional power business focused on high reliability components and additional design and production capabilities that enhance Maxwell’s profile as a reliable, global supplier. Montena Components is located in Rossens, Switzerland, near major automotive and industrial development and manufacturing centers in Germany, France and Italy.

• In September 2002, we sold our non-core TeknaSeal glass-to-metal seals business for cash. Also, in December 2002, we sold a small power factor correction product line that did not fit our high reliability strategy.

• Also in early 2003, we formed an ultracapacitor manufacturing and marketing alliance in China with Yeong-Long Technologies Co., Ltd., a $200 million per annum manufacturer of electrolytic capacitors, to commercialize our proprietary BOOSTCAP ultracapacitors in China and to position us as a global supplier of ultracapacitors with production facilities in the U.S., Europe and China.

Business Segments

After the acquisition of Montena Components and the dispositions of our I-Bus computing systems business and TeknaSeal glass–to–metal seals business, which were completed during the third and fourth quarters of 2002, the Company’s businesses were organized into two segments, the High Reliability segment and the Winding Equipment segment. The High Reliability segment contains our high reliability power and microelectronic products, which currently include:

• Ultracapacitors for electrical energy storage and delivery of peak power for a variety of applications

• High voltage grading and coupling capacitors used in electric utility infrastructure, high voltage laboratories and other applications involving transport, distribution and measurement of high voltage electrical energy

• Power distribution and conditioning modules for integration into larger medical imaging and other industrial systems for delivery of consistent high quality power

• Radiation-shielded microelectronics, including power modules, memory modules and single board computers for aerospace and military applications

The Winding Equipment segment makes winding machines and automated assembly lines used to manufacture metalized film capacitors and lithium batteries.

Prior to the sale of its computing systems business at the end of the third quarter of 2002, the Company’s I-Bus/Phoenix Power and Computing Systems segment designed, manufactured and marketed applied computing systems and power distribution and power conditioning systems mainly to OEMs serving the telecommunications, industrial automation, broadcasting and medical imaging markets. The power distribution and conditioning systems now are part of our High Reliability segment. The restated I-Bus Computing Systems segment consists only of the computing business, which was sold in September 2002.

In June 2001, the Company sold substantially all of the assets (except for accounts receivable), liabilities and business operations of its Sierra KD Components business in Carson City, Nevada (“Sierra”). Sierra manufactured and commercialized ceramic filter capacitors with wire feedthroughs for implantable medical devices and ceramic capacitors for aerospace and commercial applications. On September 30, 2002, the Company sold its non- core TeknaSeal glass-to-metal seals business in Minneapolis, Minnesota. Both of these businesses, which were previously reported as part of the former Electronic Components segment, have been classified into a segment for reporting purposes called the Sierra and TeknaSeal segment.

Results of Operations

Sales

Our consolidated sales for 2002 were $58 million, a decrease of $19.9 million, or 26%, from 2001. Sharp declines in the sale of telecommunications equipment and continued weakness in the satellite and other industrial markets served by the Company negatively impacted reported results. Sales increased from the acquisition of Montena Components in July of 2002, contributing approximately $8 million of revenue for the remainder of 2002, and decreased due primarily to the impact on our sales from the declines in the markets mentioned above and to the divestitures of I-Bus Computing Systems and TeknaSeal in September 2002. Excluding the acquisition and the divestitures, our 2002 sales decreased $7.4 million or 19% compared to the same lines of business in 2001 primarily due to a decrease in sales of power products in the medical imaging market.

In 2001, our consolidated sales were $77.9 million, down $24.5 million, or 24%, from 2000. I-Bus Computing Systems sales declined $24.8 million, or 51% due to the conclusion of its computer supply contract with Siemens ElectroCom and weakness in other industrial and telecommunications markets. Sales declined $4.6 million due to the divestiture of Sierra in June 2001. Excluding sales by I-Bus Computing Systems and Sierra, our sales increased $4.9 million, or 12%, due primarily to strong demand in 2001 for our power systems in the medical imaging market.

Segment Sales – 2002 vs. 2001

Maxwell High Reliability: For the year ended December 31, 2002, sales increased $0.7 million, or 2%, to $40.1 million from $39.4 million for the year ended December 31, 2001. The acquisition of Montena Components in July 2002, which contributed an $8.1 million increase, and modest increases in microelectronics and BOOSTCAP ultracapacitors were offset by a decrease in sales of power products in the medical imaging market.

Outlook for 2003: We expect year-to-year revenue growth in 2003 compared with 2002, led by significant growth in ultracapacitor revenues. Increased ultracapacitor revenues will be partially offset by an expected decline in revenues from our other high reliability products. We expect a decline in power systems revenue as we transition our product mix to high margin proprietary designs and away from low margin build-to-print systems. We supply most of our low margin build to print power system products to GE Medical Systems, who has decided to source these products from affiliates or other companies located in low cost countries. As a result, we expect to record significantly lower future sales to GE Medical Systems. Revenues from our high voltage capacitors and our microelectronics are expected to decline in 2003 compared to 2002 because of anticipated weakness in the utility infrastructure and, separately, the satellite industries.

Winding Equipment: For the six-month period from our purchase of Montena in July 2002 and ending December 31, 2002, sales were $3.6 million.

Outlook for 2003: We believe that, when compared to annualized 2002 revenues, 2003 revenues will grow due to expected increased demand for winding machines used to produce metalized thin film capacitors and lithium batteries.

I-Bus Computing Systems: For the year ended December 31, 2002, sales decreased $13.1 million, or 54%, to $11 million from $24.1 million for the year ended December 31, 2001. We sold I-Bus Computing Systems in September 2002. The computing systems business was focused on high reliability, high availability computers and the markets for such systems, particularly telecommunications, deteriorated dramatically during the year, which negatively impacted results of operations.

Sierra and TeknaSeal: For the year ended December 31, 2002, sales decreased $11.1 million, or 77%, to $3.3 million from $14.4 million for the year ended December 31, 2001 due primarily to the sale of Sierra in June 2001 and the TeknaSeal business in September 2002.

Segment Sales – 2001 vs. 2000

Maxwell High Reliability: For the year ended December 31, 2001, sales increased $3.9 million, or 11%, to $39.4 million from $35.5 million for the year ended December 31, 2000. Power product sales increased $9.8 million, mainly in the medical imaging market, but were offset by decreases in microelectronics and ultracapacitors due to a decline in the commercial satellite market, primarily related to the deterioration in telecommunications and delays in the adoption of ultracapacitors in automotive and consumer electronics markets.

I-Bus Computing Systems: For the year ended December 31, 2001, sales decreased $24.8 million, or 51%, to $24.1 million from $48.9 million for the year ended December 31, 2000. The decreases were due primarily to the conclusion of a computer supply contract with Siemens ElectroCom and weakness in other industrial and telecommunications markets.

Sierra and TeknaSeal: For the year ended December 31, 2001, sales decreased $3.6 million, or 20%, to $14.4 million from $18 million for the year ended December 31, 2000 due primarily to the sale of Sierra in June 2001. Although revenues at TeknaSeal increased $1 million, this increase was more than offset by reduced revenue as a result of the sale of Sierra in June 2001.

Total Costs and Expenses

Cost of sales was $51.1 million in 2002, a decrease of 23% from 2001. In 2001, cost of sales was $66.6 million, compared with $80.2 million in 2000. Cost of sales as a percent of net sales was 88%, 86% and 78% in 2002, 2001 and 2000, respectively. Gross profit margins have been negatively impacted by the downturn in the general economy and, in particular, the telecommunications equipment, satellite and other industrial markets served by the Company. This resulted in inventory charges for excess and obsolete inventory and under-utilized production

facilities.

Outlook for 2003: During the second half of 2002, we significantly reduced our fixed production costs primarily through consolidating U.S. production into one facility in San Diego. We have also reallocated resources to improve quality, cycle times, yields and reduce material costs. We expect gross margins to improve quarter over quarter in 2003 as a result of these initiatives and improved revenue mix.

Selling, General and Administrative (SG&A) expenses were $18.1 million in 2002, a decrease of 19% from 2001. In 2001, SG&A was $22.5 million, compared with $25.7 million in 2000. SG&A as a percent of net sales was 31%, 29% and 25% in 2002, 2001 and 2000, respectively. Although we have dramatically reduced SG&A costs and improved efficiencies in response to market conditions, SG&A as a percent of sales has increased because of lower product revenues.

Research and development (R&D) expenses were $8.4 million in 2002, a decrease of 27%, which is mainly attributable to reductions in, and the sale of, I-Bus Computing Systems. In 2001, R&D was $11.5 million, compared with $8.7 million in 2000. R&D as a percent of net sales was 15%, 15% and 9% in 2002, 2001 and 2000, respectively.

Outlook for 2003: SG&A plus R&D totaled approximately $5 million during the just completed fourth quarter of 2002. Although we will increase R&D funding for our BOOSTCAP ultracapacitors and new products, such as our energy storage modules that contain BOOSTCAP ultracapacitors, we expect total spending for SG&A and R&D on a quarterly basis to be comparable to our fourth quarter 2002.

Acquisitions, Divestitures, Restructuring and Other

In July 2002, we acquired Montena Components, a provider of ultracapacitors and high voltage capacitors to OEM customers and automated winding equipment used to produce capacitors and lithium batteries, for $3 million in cash and 2.25 million common shares of Maxwell. This acquisition brought additional high reliability power business focused on ultracapacitors and high voltage capacitors and additional design and production capabilities that enhance our profile as a reliable, global supplier.

Net (gain) loss on sale of businesses, were $6.5 million in 2002 and ($39.1) million in 2001.

In September 2002, we sold the I-Bus Computing Systems business for $7.0 million in debt and certain other consideration. In order to position the business for sale, we incurred $1.5 million in restructuring charges related mainly to severance. We also incurred $7.6 million in charges related to goodwill impairment and other asset write-downs related to that business. The loss on the disposition totaled $7.0 million as we fully reserved for the note due to risks of collectability.

In September 2002, we also sold our non-core TeknaSeal glass-to-metal seals business for $5.5 million in cash, of which $1 million is held in an escrow account that is expected to be released to the Company ratably over the next four calendar quarters. Approximately $0.4 million of the $5.5 million proceeds is payable to certain former employees of TeknaSeal. We recorded a net gain of $0.2 million in the fourth quarter of 2002 and expect to record additional gains as funds are released to us from escrow.

In June 2001, we sold the Sierra business for $46.9 million in cash. The Company retained accounts receivable as of the acquisition date, which amounted to $2.5 million. We recorded a net pre-tax gain of $39.1 million in 2001.

Restructuring charges were $1.6 million in 2002 and $2.3 million in 2000. In 2002, the restructuring charges related mainly to restructuring I-Bus Computing Systems and our actions to position that business for sale. In the first half of 2002, I-Bus/Phoenix introduced new applied computing products that had been developed in 2001. However, the market for applied computing products, particularly in telecommunications, deteriorated throughout 2002. The Company responded to the poor market conditions for computing systems and other capital goods by restructuring I-Bus/Phoenix. In June 2002, the Company began implementing the restructuring plan and recorded restructuring charges of $0.7 million. In addition, the Company also determined that certain components in inventory had been adversely impacted. Accordingly, the Company recorded an inventory charge of $3.0 million for certain excess and obsolete raw material components and finished goods. This charge is included in Cost of Sales. During the third fiscal quarter of 2002, the Company decided to sell the applied computing business of I-Bus/Phoenix to a new company organized by former I-Bus/Phoenix senior managers. In preparation for the sale and

to configure the I-Bus/Phoenix computing business to be self-supporting, I-Bus/Phoenix consolidated all production of the applied computing products to its facility in Tangmere, United Kingdom, and reduced worldwide personnel. As a result of this plan, the Company recorded additional restructuring charges of $0.9 million during the quarter ended September 2002. The unpaid restructuring balance of $0.4 million at December 31, 2002 is expected to be paid during the first quarter of 2003.

During 1999 and 2000 the Company had undertaken various actions to consolidate its facilities and reduce its cost structure. As a result, the Company recorded restructuring $2.3 million in charges in the year ended December 31, 2000. These charges include severance costs related to a reduction in workforce, which impacted all segments and classes of employees, and the closure and combination of certain facilities.

Amortization of goodwill was $1.2 million and $0.6 million in 2001 and 2000 respectively. In connection with the adoption of FAS 142, the amortization of goodwill was discontinued beginning with fiscal 2002.

Fixed asset impairments were $2.3 million in 2002 and $0.9 million in 2000. Impairment charges recorded in 2002 are related to fixed assets associated with the I-Bus Computing Systems business that were abandoned and computers and computer systems infrastructure directly related to supporting I-Bus Computing Systems business. The impairment also includes fixed assets associated with transformer and harness production for the power systems group. Production of transformers and harnesses has been outsourced. Impairment charges recorded in 2000 are related to the write-off of leasehold improvements and other fixed assets that were abandoned due to the consolidation of factories.

Goodwill impairments were $5.3 million in 2002 and $4.8 million in 2000. Impairment charges recorded in 2002 are related to disposition of the I-Bus Computing Systems business. Goodwill impairment charges recorded in 2000 are related to goodwill originally recorded in conjunction with the acquisition of Phoenix Power. Maxwell Technologies acquired Phoenix Power in March 1998 for $4 million. The terms of the agreement provided for additional contingent purchase price based upon the financial performance of Phoenix Power following the acquisition through February 28, 2000. In January 2000, the Company paid additional consideration of $5 million, which was recorded as additional goodwill. This additional consideration was based on a projection made by the Company in December 1999 that Phoenix Power would provide at lease $1.6 million in adjusted pre-tax income for the 12-month period ended February 2000. Subsequent reviews of actual results revealed that the adjusted pre-tax income was closer to $0.5 million, which was below the threshold for any additional consideration per the acquisition agreement. However, the agreement did not provide for a return of the additional consideration. Based on these facts and revised lower full year projections, we requested and received a third party appraisal, which determined that an impairment existed and, accordingly, the Company reduced the goodwill by $4.8 million.

Investment impairment of $0.5 million recorded in 2001 relates to Maxwell’s ownership of approximately 1% of a privately held company involved in support services in the areas of information technology, system and software integration and engineering and technical services under contract with various government agencies. Upon review of its annual financial statements and discussions with its CFO, we were informed that the company had a negative net worth and had decided to restructure its operations to discontinue its information technology and software integration and engineering businesses and focus only on government contracting. Based on these facts and the uncertainty surrounding its ability to return to profitability, we concluded that the investment was impaired and we fully reserved for the investment.

Amortizations of other intangibles was $0.5 million in 2002 and relates to the amortization of customer backlog acquired in conjunction with the acquisition of Montena Components and the amortization of ultracapacitor intellectual property that was recorded in conjunction with the merger of the Electronic Components Group, a majority owned subsidiary, into Maxwell through the purchase of shares not owned by the Company.

In conjunction with I-Bus Computing System’s acquisition of Gateworks Corporation in 2000, we recorded a charge of $0.5 million for the write-off of in-process technology.

Minority interest in net loss of subsidiaries was $0.2 million, $0.7 million and $0.2 million for the years ended December 31, 2002, 2001 and 2000, respectively. During the first quarter of 2002, the Company acquired all of the outstanding minority interests, including stock options, of its majority-owned subsidiaries, except for PurePulse Technologies (see Discontinued Operations below), in exchange for shares and options in Maxwell.

Interest (income) expense, net was $(42,000), $0.6 million and $1.2 million for the years ended December 31, 2002,

2001 and 2000, respectively. The Company used proceeds from the sale of businesses to pay down debt and the excess was invested in high quality short-term marketable investments.

Income (Loss) From Continuing Operations Before Taxes

Income (loss) from continuing operations before taxes was $(35.5) million, $14.8 million and $(22.6) million in 2002, 2001 and 2000, respectively. For comparative purposes, the following discussion of segment earnings (losses) exclude restructuring charges, other deductions, net and (gain)/loss on sale of businesses.

Maxwell High Reliability losses were $6.2 million in 2002 compared to $11.5 million in 2001. The change was due to an improved product mix and significant cost reductions. The acquisition of Montena Components contributed $0.6 million to the year-to-year change. In 2001 the loss increased by $4.5 million to $11.5 million from $7 million in 2000. The increase was due to unfavorable product mix as high margin sales of microelectronic products decreased and low margin, build-to-print power systems recorded a significant increase.

Outlook for 2003: We expect to achieve full year profitability for this segment due to the full year impact of the acquisition of Montena Components, the consolidation of factories in San Diego and expected growth in our BOOSTCAP ultracapacitor revenues. The Winding Equipment segment, which was part of our acquisition of Montena Components, is expected to produce full year positive earnings.

I-Bus Computing Systems, which was disposed of in September 2002, recorded losses of $11 million for the nine-month period compared to $10 million for the full year 2001 and $0.8 million for 2000. This business was significantly impacted by the economic downturn in general and the deterioration in the telecommunications sector. Existing OEM contracts that started to expire in 2000 and early 2001 were not replaced. Uncertainty as to future prospects led to the decision to sell this business.

Sierra and TeknaSeal, which were sold in June 2001 and September 2002, respectively, generated combined earnings of $1 million, $2 million and $0.3 million in 2002, 2001 and 2000, respectively. These component businesses, although profitable, served niche markets with limited growth potential. Our assessment was that we could maximize value to Maxwell through a sale rather than through continuing their operations.

Provision (Credit) For Income Taxes

For the year ended December 2002, our tax credit of $0.1 million included a foreign expense of $0.1 million. The tax provision recorded by Montena Components was offset by a refund of U.S. taxes paid in 2001 of $0.2 million. The valuation allowance increased by 12.9 million. We had net deferred tax assets before our valuation allowance of approximately $31.3 million at December 31, 2002, which relate primarily to net operating loss carryforwards and tax credits.

The 2001 tax provision reflects a reduction in deferred tax assets used to offset taxable income and an increase in the valuation allowance of $18.3 million to fully reserve for our deferred tax assets. During the fourth quarter of 2001 a valuation allowance of $13.5 million was recorded to fully reserve cumulative deferred tax assets recorded through December 31, 2001. The valuation allowance was established as realizability of the deferred tax assets was no longer assessed by management as being more likely than not.

The credit for income taxes for the year ended December 31, 2000 reflected our expected world-wide tax rate for that year. The effective tax rate was reduced by the fact that no tax credit was provided for the $4.8 million charge recorded to reduce the carrying value of goodwill since that amount will never be deductible for tax purposes.

Discontinued Operations

Discontinued operations are comprised of our Government Systems and PurePulse subsidiaries, as well as certain other smaller businesses divested in 2000. In connection with the Company’s decision in 2000 to focus the future of the Company on the Electronic Components Group and I-Bus/Phoenix, the Company sold its high voltage wound film capacitors and high voltage power supplies business and its time card and job cost accounting software business. In addition, the Company offered for sale its defense contracting business and decided to seek strategic alternatives for its PurePulse Technologies, Inc. subsidiary. Accordingly, both the defense contracting business and PurePulse, each of which was previously classified as a separate segment, and the high voltage wound film

capacitors and high voltage power supplies business and its time card and job cost accounting software business, have been classified as discontinued operations for financial reporting purposes.

The loss from discontinued operations was $4.8 million in the year ended December 31, 2002, compared with a loss of $4.7 million for the year ended December 31, 2001 and $26,000 for the year ended December 31, 2000.

In September 2002, our PurePulse subsidiary suspended operations and we recorded non-cash charges of approximately $1.7 million and cash charges of approximately $0.5 million for severance and other charges. PurePulse had been designing and developing systems that generate extremely intense, broad-spectrum, pulsed light to purify water and inactivate viruses and other pathogens that contaminate vaccines and products sourced from human or animal tissues, such as plasma derivatives, transfusion blood components and biopharmaceuticals. Although PurePulse attracted $5 million of equity capital from Millipore and Maxwell in March 2002, the venture capital and other equity markets deteriorated since that time and PurePulse was not able to raise additional capital to fund its operations.

The loss from discontinued operations was $4.7 million in the year ended December 31, 2001, compared to a loss of $26,000 for the year ended December 31, 2000. In March 2001, we sold the Government Systems Division for cash and recorded a gain of $1.1 million, net of $2.7 million provision mainly related to ongoing lease obligations. As of December 31, 2002, remaining lease obligations, which expire in April 2006, were $2.0 million and the related provision was $0.8 million.

Loss from operations of these discontinued businesses was $5.8 million in the year ended December 31, 2001, compared to $2.9 million for the year ended December 31, 2000. Included in the loss for 2001 is a charge to the tax provision of $2.5 million for recording a valuation allowance.

In February 2000, we sold the high voltage wound film capacitors and high voltage power supplies businesses for cash of $3.5 million, approximately the book value of the net assets sold as of that date. In addition, the buyer assumed certain liabilities of the businesses, including a long-term lease for the facility the businesses occupied, which extended through 2006 with annual rent of approximately $0.5 million. In November 2000, we sold our time card and job cost accounting software business for cash of $2.5 million and shares of common stock of the buyer with an immaterial value. In the fourth quarter of 2000, we also received cash of approximately $0.7 million related to our equity investment in an unconsolidated entity, which was classified as a discontinued operation.

Liquidity and Capital Resources

Cash used by operating activities in the year ended December 31, 2002, was approximately $9.0 million, as compared to $17.3 million in the year ended December 2001. In 2002, the use of cash primarily was attributable to operating losses, including restructuring related cash expenses for our continuing operations, which for most of 2002 included I-Bus Computing Systems. Cash used in discontinued operations, which included PurePulse and residual leases and other obligations of divested businesses, in the year ended December 31, 2002 was $4.1 million, as compared to $9.7 million in the year ended December 31, 2001. Capital expenditures for the years ended December 31, 2002 and 2001 were $1.8 million and $6.2 million, respectively. Cash of $3.0 million was used in the Company’s third fiscal quarter as part of the purchase price for Montena Components. Capital expenditures for 2003 is not expected to exceed $2.8 million, which is approximately equal to our annual depreciation and amortization charges.

During 2001 and 2002, the Company financed operating losses with term debt, as described under the heading “New Bank Credit Agreement” below, and the sale of non-strategic businesses. In the year ended December 31, 2001, we received $46.9 million and $20.7 million of cash in connection with, respectively, the sale of our Sierra and Government Systems businesses. These funds were used to pay down debt of $22.8 million and to fund continuing and discontinued operations. On the first day of our fourth fiscal quarter of 2002, we sold TeknaSeal for approximately $5.1 million net cash to Maxwell, of which $1 million is held in an escrow account and will be paid upon TeknaSeal achieving certain revenue benchmarks in 2003. We used a portion of these proceeds to prepay $2.8 million of our bank term loan, which reduced the outstanding term loan to $3.0 million.

Maxwell Technologies, SA requires advances from customers for certain product lines and issues bank guarantees that give the customer the right to receive back the advance if the product is not delivered by a specific date. As of the end of December 2002 we had issued guarantees of $0.3 million related to these product arrangements, most of which we expect to ship to customers in the first quarter of 2003.

During the quarter ended September 2002, we suspended the operations of PurePulse, sold I-Bus Computing Systems and started consolidating our power systems business and corporate headquarters into our leased facility in San Diego, which contains our ultracapacitor and microelectronic high reliability business. We also decided to offer for sale our 85,000 sq ft owned facility that housed I-Bus Computing Systems North American operations and administration. These actions, combined with the acquisition of Montena, are consistent with our strategy to focus on high value, high reliability power and microelectronic products and to structure the Company’s operations to be self-supporting on product revenues in the near future.

At present, we expect that future cash flows from operations combined with our existing cash balance, will be adequate to fund our capital equipment and working capital requirements and operating losses for more than the next twelve months. We also expect within the next twelve months to complete the sale of our owned facility in San Diego, which we expect will add significantly to our cash reserves.

Although we believe we have adequate cash on hand and future cash flows to meet our cash requirements, a decrease in revenues would cause continued losses and negative cash flows from operations. Therefore, the Company may need to seek additional financing in the future. Although we cannot predict with any certainty as to if or when we might need additional financing, we believe such financing would not be required for the next twelve months. If the Company needs additional financing, there can be no assurance that such financing will be available on acceptable terms or at all. In addition, if the Company does not generate sufficient cash flow from operations in line with its current forecasts, the Company may have to initiate measures to raise cash through asset sales, additional debt or equity issuances and/or curtail operations. Failure to achieve expected cash flows or, if necessary, to obtain additional debt or equity investments would have a material adverse effect on the Company.

Bank Credit Agreement

Our Maxwell Europe subsidiary, previously named Maxwell Technologies, SA, has a bank credit agreement with two Swiss banks. Borrowings under the credit agreement bear interest at the bank’s prime rate plus 1.0%. Under the credit agreement, we also are eligible to borrow fixed term loans at LIBOR rate plus 2.5% with repayment terms extending beyond one month from the date of funding. The interest rate was 6.5% at December 31, 2002. Borrowings under the credit agreement are secured by the assets of Maxwell Europe and there are no loan covenants. As of December 31, 2002, there were no amounts outstanding under the credit agreement, $0.3 million assigned to letters of guarantee and an available borrowing balance of $3.3 million.

In February 2001, we entered into a Loan and Security Agreement with Comerica Bank-California. The Loan and Security Agreement, as amended, consists of a term loan secured by a deed of trust as well as certain other collateral. The term loan bears interest, at our option, at the bank’s reference rate plus .5%, or cost of funds plus 2.25%. The interest rate was 4.75% at December 31, 2002. The principal is amortized monthly over 20 years with the balance due December 31, 2004. We may prepay the term loan at any time. We prepaid $2.8 million of the term loan on November 13, 2002 and currently have an outstanding principal balance of $3.0 million.

The Loan and Security Agreement , as amended, contains covenants restricting our ability to, among other things:

• Sell or dispose of any part of our business, other than sales in the ordinary course of business, where sales proceeds exceed $2 million.

• Engage in any business other than the businesses currently engaged in.

• Merge or consolidate or acquire any other businesses unless we use our own equity and meet the financial covenants on a combined pro-forma basis.

• Incur any other debt except for up to $5 million incurred by foreign subsidiaries and up to $2 million of other debt.

• Make any investments except investments in certain marketable debt securities guaranteed by the United States or any federal or state agency, certain commercial paper, certificates of deposit and bank money market accounts, investments in foreign subsidiaries not to exceed $2 million and up to $2 million of other investments.

• Pay dividends.

• Incur liens except for liens securing amounts under the Loan and Security Agreement.

The Loan and Security Agreement , as amended, also requires us to maintain a minimum tangible net worth of $24 million.

As of the filing date of this Form 10-K we are in compliance with all covenants.

Minority Equity Interests in Subsidiaries and Subsidiary Option Programs

In January 2002, we adopted a plan to complete merger transactions between Maxwell and our Electronic Components Group subsidiary and our I-Bus/Phoenix subsidiary whereby all of the minority shareholdings and options in such subsidiaries would be converted to shares and options of Maxwell. On April 15, 2002, these merger transactions resulted in the issuance of 565,000 common shares of Maxwell and options to purchase 520,000 common shares of Maxwell. In February 2002, PacifiCorp Energy Ventures, Inc., the largest minority shareholder in the Electronic Components Group, exchanged its preferred shares of the Electronic Components Group for 518,000 common shares of Maxwell pursuant to its right under the original investment agreement.

PurePulse, which is classified as discontinued operations, has minority equity investors. These investors are former strategic partners, former employees who were issued shares when PurePulse originally was incorporated and former employees who have exercised stock options in that entity. As of December 2002, minority investors owned approximately 19% of the outstanding stock of PurePulse.

Critical Accounting Policies

The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the U.S., which requires the Company to make estimates and assumptions. The Company believes that of its significant accounting policies, the following may involve a higher degree of judgment and complexity and, as such, management assumptions and conclusions in these areas may significantly impact the results of operations of the Company.

Revenue Recognition

For the current year, substantially all of our revenue is derived from the sale of manufactured products directly to customers. In general, revenue is recognized at the time the product is shipped unless specific terms require otherwise. In general, we do not offer discounts and there is no right of return. However in prior years certain continuing and discontinued segments recorded revenue from both long-term and short-term fixed price contracts and cost plus contracts with the U.S. Government directly or through a prime contractor. Those revenues, including estimated profits, were recognized as costs were incurred and included provisions for any anticipated losses. These contracts are subject to rate audits and other audits, which could result in additional losses in excess of estimated provisions.

Accounts Receivable

We establish and maintain customer credit limits based on credit checks, analyses of credit-worthiness and payment history. Accounts receivable consist primarily of amounts due to us from our normal business activities. We maintain an allowance for doubtful accounts to reflect the expected bad debts based on past collection history and specific risks identified in the portfolio.

Excess and Obsolete Inventory

We value inventories at the lower of cost or market. In assessing the ultimate realization of inventories, we make judgments as to future demand requirements and compare that with current and committed inventory levels. The markets for the Company’s products are extremely competitive and are characterized by rapid technological change, new product development, product obsolescence and evolving industry standards. In addition price competition is intense and significant price erosion generally occurs over the life of a product. We have recorded significant charges for reserves in recent periods due to changes in market conditions. It is possible that changes in

reserves may be required due to changing market conditions, or that judgments as to ultimate realization may be incorrect.

Assets Held for Sale and Remaining Lease Obligations

The building formerly occupied by I-Bus/Phoenix, Inc., which is classified as held for sale, is carried at historical cost. The Company believes that, based on analysis prepared by the listing agent, the fair value is in excess of the carrying value. Changes in market conditions or other factors may ultimately result in realizing less than the carrying value.

Also, the Company has estimated the remaining liability associated with remaining lease obligations recorded in Discontinued Operations (see discussion of Discontinued Operations). In making these estimates, we assessed commercial real estate markets and made estimates as to how and when we will be able to either sub-lease, terminate or buy out our remaining lease obligations. Commercial real estate markets have been depressed due to poor economic conditions and spending reductions by businesses and government agencies and there can be no guarantee that we will be able to conclude these lease obligations for the amounts that we have accrued.

Loss in the Sale of the I-Bus Computing Systems Business

The Company fully reserved for the $7 million note received in exchange for the I-Bus Computing Systems business due to the uncertainty as to its collectability. Future collections would result in recognizing gains.

Long-Lived Assets and Goodwill

Long-lived assets such as property, plant and equipment and other intangible assets are reviewed for impairment whenever events and changes in business circumstances indicate the carrying value of the long-lived asset may not be recoverable. If the Company determines that the carrying value of the long-lived asset may not be recoverable, a permanent impairment charge is recorded for the amount by which the carrying value of the long-lived asset exceeds its fair value. Management believes that the estimates of fair value are reasonable; however changes in business circumstances or estimates of cash flows and fair value could materially impact reported results.

In assessing the recoverability of goodwill, which is completed annually, we make assumptions regarding future cash flows and other factors to determine the fair value. In addition, we periodically have independent appraisals of the business segments performed and compare the fair value to the carrying value. If these estimates or their related assumptions change in the future, we may be required to record impairment charges. Goodwill associated with the I-Bus Computing Systems was written off in conjunction with the disposition of that business. The remaining goodwill is mainly attributable to the acquisition of Montena Components, which was completed in July 2002. Our analysis, which was completed early in the fourth quarter of

Item 1.

Business

Item 2.

Properties

Item 5.

Market for Registrant’s Common Equity and Related Stockholder Matters

5 Farad to 100 Farad Small Cell Ultracapacitors

Power Systems Products

Winding Equipment

High Voltage Capacitors

Winding Equipment

Suppliers

High Voltage Capacitors

Winding Equipment

Significant Customers

Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters

High

Low

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Business Segments

Sales

Segment Sales – 2002 vs. 2001

Segment Sales – 2001 vs. 2000

Total Costs and Expenses

Acquisitions, Divestitures, Restructuring and Other

Provision (Credit) For Income Taxes

Discontinued Operations

Liquidity and Capital Resources

Bank Credit Agreement

Critical Accounting Policies

Revenue Recognition

Accounts Receivable

Excess and Obsolete Inventory

Assets Held for Sale and Remaining Lease Obligations

Long-Lived Assets and Goodwill