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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2004

OR

For the transition period from                      to                     

Commission file number 1-15477

MAXWELL TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (858) 503-3300

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $0.10 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  x    NO  ¨

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.    x

Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Act). YES  x    NO  ¨

As of June 30, 2004 the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of Common Stock held by non-affiliates of the registrant based on the closing price of the Common Stock on the Nasdaq National Market was $77,061,569.

The number of shares of the registrant’s Common Stock outstanding as of March 9, 2005 was 15,738,289 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement for the 2005 Annual Meeting of Stockholders to be held on May 5, 2005 are incorporated by reference into Parts II and III of this Annual Report on Form 10-K.

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MAXWELL TECHNOLOGIES, INC.

INDEX TO ANNUAL REPORT ON FORM 10-K

For the fiscal year ended December 31, 2004

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements contained in this document and incorporated by reference herein discuss our plans and strategies for our business or make other 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, and other expressions of management’s belief or opinion that reflect its current understanding or belief with respect to such matters. The words “anticipates,” “believes,” “estimates,” “expects,” “plans,” “intends,” “may,” “could,” “will,” “continue,” “seek,” “should,” “would” and similar expressions are intended to identify these forward-looking statements, but are not the exclusive means of identifying them. These forward-looking statements reflect the current views of our management; however, various risks, uncertainties and contingencies could cause our actual results, performance or achievements to differ materially from those expressed in, or implied by, these statements, including the following:

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

For a discussion of important risks of an investment in our securities, including factors that could cause actual results to differ materially from results referred to in the forward-looking statements, see “Risk Factors” beginning on page 16 of this document. We do not have any obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

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PART I

Item 1. Business

Introduction

We develop, manufacture and market highly reliable, cost-effective energy storage and power delivery solutions. Our solutions are designed and manufactured to provide failure-free, maintenance-free, performance over the life of the applications into which they are integrated. By satisfying the stringent requirements of such high-value applications, we believe that our products will be able to command higher profit margins than commodity products. We have two manufacturing locations (San Diego, California and Rossens, Switzerland) and focus on the following three lines of high-reliability products:

In keeping with this strategic focus on high-value, high-margin product lines, over the past several years we have exited several non-strategic, low-margin businesses. These efforts culminated in the sale of our Winding Equipment product line in December 2003, and the phase-out of low-margin magnetics-based power systems products, which was completed in the first quarter of 2004. As a result of these actions and other divestitures from 2002 through 2004, we have reduced operating expenses, improved efficiency and intensified our focus on our core high-reliability product lines.

General Overview

Each of our high-reliability electronic component product lines addresses a distinct industry or, in the case of our ultracapacitor products, a group of distinct industry segments.

Ultracapacitors

Ultracapacitors offer innovative, cost-effective energy storage and power delivery solutions for a wide range of electronic applications by bringing together in a single component both energy storage characteristics generally found in batteries and power delivery characteristics generally found in electrolytic capacitors. For example, although batteries store far more electrical energy than ultracapacitors, they cannot deliver that energy as rapidly and efficiently as an ultracapacitor. Conversely, although electrolytic capacitors can deliver bursts of high power very rapidly, they cannot sustain that power delivery even for a full second because they have extremely limited energy storage capacity. Also, unlike batteries, which produce electrical energy through a chemical reaction that depletes their energy generation capability within a few thousand charge/discharge cycles, ultracapacitors’ energy storage and power delivery mechanisms involve no chemical reaction, so they can be charged and discharged hundreds of thousands of times with minimal performance degradation. This ability to store energy, deliver bursts of power and perform reliably for years without maintenance makes ultracapacitors an attractive option for a wide range of power-hungry devices and systems.

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Ultracapacitors have been designed into and are ramping to commercial production volumes in industrial electronics applications, including wind turbines and automated meter reading systems and other devices that incorporate wireless transmitters. Potential end-users in the telecommunications and cable television industries currently are testing and evaluating our multi-cell POWERCACHE^® ultracapacitor-based systems to replace batteries as the short-term bridge power element of uninterruptible power supply (UPS) back-up power systems. Based on potential volumes, we believe that the transportation industry ultimately represents the largest market opportunity for ultracapacitors. These applications include distributed power nodes to support electronic subsystems including door switches, power steering and brakes and electric air-conditioning, as well as braking energy recapture and torque-assist systems for hybrid-electric buses, trucks and autos and electric rail vehicles.

High-Voltage Capacitors

High-voltage grading and coupling capacitors are used mainly in the electric utility industry. These devices prevent high-voltage arcing that can damage switches, circuit breakers, step-down transformers and other equipment responsible for the transport, distribution and measurement of high-voltage electrical energy in electric utility infrastructure. The market for these products consists of expansion and upgrading of existing infrastructure and the installation of new infrastructure in developing countries. Such installations are capital-intensive and frequently are subject to regulation, availability of government funding and general economic conditions. For example, while North America has the world’s largest installed base of electric utility infrastructure, and has begun to experience more frequent power interruptions and supply problems, utility deregulation, government budget deficits, and other factors have depressed capital spending in what normally would be expected to be a very large market for utility infrastructure components. However, projects to meet growing demand for electrical energy in developing countries, such as the Three Gorges Dam in China, continue to drive global demand for high-voltage capacitors.

Radiation-Mitigated Microelectronics

Radiation-mitigated microelectronic products are used almost exclusively in the space and satellite industry. Because satellites and spacecraft are extremely expensive to manufacture and launch and space missions often span years or even decades, and because it is impractical or impossible to repair or replace malfunctioning parts, the industry demands electronic components that are virtually failure-free. As satellites and spacecraft routinely encounter ionizing radiation from solar flares and other natural sources, these components must be able to withstand such radiation and continue to perform reliably. For that reason, until recently, suppliers of components for space applications used only special radiation-hardened silicon in the manufacture of such components. However, since the space market is relatively small and the process of producing “rad-hard” silicon is very expensive, only a few government-funded wafer fabrication facilities are capable of producing this material. In addition, because it takes several years to produce a rad-hard version of a new semiconductor, components using rad-hard silicon typically are several generations behind their current commercial counterparts in terms of density, processing power and functionality.

To address the performance gap between rad-hard and commercial silicon and provide components with both increased functionality and much higher processing power, a few specialty components suppliers have developed shielding, packaging, and other novel radiation mitigation techniques that allow sensitive commercial semiconductors to withstand space radiation effects and perform as reliably as rad-hard parts. Although this market is limited in size, the value proposition for high-performance, radiation-tolerant components enables these specialty suppliers to generate profit margins significantly higher than those for commodity electronic components.

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Business Strategy

Our primary objective is to make ultracapacitors a standard and often preferred energy storage and power delivery option for a wide variety of applications. To accomplish this, we focus on:

Providing a standard energy storage and power delivery option by:

Becoming a leading ultracapacitor supplier by:

In addition to our market creation and commercialization strategy for ultracapacitors, we seek to expand revenue and market opportunities for our high-voltage capacitors and radiation-mitigated microelectronic products. While the latter are niche businesses with highly specialized applications, they are based on high-margin products for which we are a technology leader. Going forward, we plan to maintain and expand this competitive position by leveraging our technological expertise to develop new products that not only meet the demands of our current markets, but address additional applications as well. For example, our microelectronic group recently introduced a new single-board computer for the space and satellite market. This product, which leverages our expertise in reliability and radiation-mitigation, provides access to a new market opportunity by addressing an application that we did not previously serve. Likewise, in 2004, our high-voltage capacitor business introduced and delivered the first of a new line of capacitive voltage divider products.

Products and Applications

Our products incorporate our expertise and proprietary power and microelectronics technology at both the component and system level for specialized, high-value applications for which customers require ultra-high reliability.

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Ultracapacitors

Ultracapacitors, also known as supercapacitors, store energy electrostatically by polarizing an organic salt solution within a sealed package. As no chemical reaction is involved in their energy storage mechanism, this mechanism is highly reversible, allowing ultracapacitors to be rapidly charged and discharged hundreds of thousands of times without noticeable performance degradation even in very high peak power applications.

Compared with electrolytic capacitors, which have very little energy storage capacity and discharge power too rapidly to be suitable for many power delivery applications, ultracapacitors have much greater energy storage capacity and can discharge power over time periods ranging from fractions of a second to several minutes.

Unlike conventional rechargeable batteries, ultracapacitors discharge and recharge in as little as fractions of a second. They operate reliably through hundreds of thousands to millions of discharge/recharge cycles with minimal degradation of performance, compared with only up to a few thousand cycles for conventional batteries. Although ultracapacitors store only about one-tenth as much electrical energy as a conventional battery, they can deliver stored energy as electric power 100 times more rapidly.

We link our ultracapacitor cells together in packs and modules to satisfy higher energy storage and power delivery requirements, and both individual cells and multi-cell packs and modules can be charged from any primary energy source, such as a battery, generator, fuel cell, solar panel or electrical outlet. Virtually any device or system whose peak power demands are greater than its average power requirement is a candidate for an ultracapacitor-based energy storage and power delivery solution.

Our ultracapacitor products have significant advantages over batteries, including:

Any device or system that requires electrical energy storage and repeated discharges of variable amounts of power represents a potential application for ultracapacitors. With no moving parts and no chemical reactions, ultracapacitors provide a simple, solid state-like, highly reliable solution to buffer short-term mismatches between power available and power required.

New power-hungry electronic products, such as wireless communication devices, increasing use of electric power in vehicles, and growing demand for highly reliable, maintenance-free, back-up power are creating significant markets for new and improved energy storage and power delivery solutions. In many applications, power demand varies widely from moment to moment, with peak power demand typically being much greater than the average power requirement. For example, automobiles require much more power to accelerate than to maintain a constant speed, and forklifts require more power to lift a heavy pallet than to move about within a warehouse.

Engineers historically have addressed such peak power requirements by over-sizing the engine, battery or other primary energy source to satisfy all of a system’s power demands, including demands that occur infrequently and may last only a few seconds or less. Sizing the primary power source to meet transient peak

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power requirements, rather than average power requirements, is costly and inefficient. Primary energy sources can be designed to be smaller, lighter and less costly if they are coupled with specialized power components, such as ultracapacitors, that can deliver or absorb brief bursts of high power on demand for periods of time ranging from fractions of a second to several minutes.

The following diagram depicts the separation of a primary energy storage source from a peak power delivery component. Highly reliable components that enable this separation permit new designs to optimize the size, efficiency and cost of the entire electrical power system.

Peak Power Application Model

Although conventional batteries are the most widely used component for both primary energy sourcing and peak power delivery, ultracapacitors, advanced batteries and flywheels now enable system designers to separate and optimize these functions. Based in part on ultracapacitors’ rapidly declining cost, high performance and “life-of-the-application” durability, we believe that our products are positioned to become a preferred solution for many energy storage and power delivery applications.

We offer our BOOSTCAP^® ultracapacitors in several form factors, ranging from postage stamp size 5-farad small cells to cylindrical 2,600-farad large cells approximately two inches in diameter and six inches long. We are supplying our BOOSTCAP^® ultracapacitors in volumes and at price points that are opening many market opportunities for us.

Our small ultracapacitor cells have been designed into consumer electronic devices, industrial electronics such as actuators, remote transmitting devices, high-intensity scanners, computer memory boards and transportation applications such as subway car alarm systems and electric actuators that replace mechanical latches in aircraft, train and automobile doors. Many products into which our small cell ultracapacitors have been designed now are in commercial production. Our large cell ultracapacitors have been designed into industrial applications such as wind turbines and UPS systems and transportation applications such as hybrid buses, trucks and autos, electric rail systems and capacitive starting systems for diesel trucks and locomotives. We received our first commercial production order to supply ultracapacitors for hybrid gasoline-electric transit buses in February 2004, and we have since received several additional orders for transit bus drive trains. We announced our first commercial supply agreement to provide ultracapacitors for wind energy applications in October 2004, and the volume of shipments to wind turbine system manufacturers is increasing rapidly. Other large cell design-ins are progressing through the field test and evaluation phase.

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The chart below describes a number of applications for our BOOSTCAP^® ultracapacitors that are now in commercial production or are in the field-testing or prototyping and evaluation phase.

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Applications such as bus, truck and auto drive trains, electric rail systems and UPS systems require integrated modules consisting of up to more than 1,000 ultracapacitor cells. To facilitate adoption of ultracapacitors for these larger systems, we are aligning our internal capabilities with those of third parties who possess the systems integration and power and thermal management capabilities to provide fully integrated systems and modules.

We have also developed integration technologies to accelerate customer adoption of multi-cell ultracapacitor packs, modules and systems. These include proprietary electrical balancing, thermal management systems and interconnect technologies. We have applied, and are continuing to apply, for patents for many of these technologies.

High-Voltage Capacitors

Electric utility grids have switches, circuit breakers, step-down transformers and measurement instruments that transport, distribute and measure high-voltage electricity. High-voltage capacitors are used to protect these systems from high-voltage arcing. These applications require extremely high reliability and durability, with failure rates of less than a few percent over operational lifetimes measured in decades.

Through our acquisition in 2002 of Montena Components Ltd., now known as Maxwell Technologies SA, and its CONDIS^® line of high-voltage capacitor products, Maxwell has more than 20 years of experience in this industry, and is the world’s largest producer of such products for use in utility infrastructure. Engineers with specific expertise in high-voltage systems develop, design and test our high-voltage capacitor products in our development and production facility in Rossens, Switzerland. Our high-voltage capacitors are produced through a proprietary, automated, winding and assembly process to ensure consistent quality and reliability. We upgraded our high-voltage capacitor production facility in 2004 to double its output capacity and significantly shorten order-to-delivery intervals. We sell our high-voltage capacitor products to large systems integrators, such as ABB Ltd., which install and service electrical utility infrastructure around the world.

Radiation-Mitigated Microelectronic Products

Manufacturers of commercial and military satellites and other spacecraft require microelectronic components and sub-systems that meet specific functional requirements and can withstand exposure to radiation encountered in space, including gamma rays and hot electrons and protons. In the past, microelectronic components and systems for these special applications used only specifically fabricated radiation-hardened silicon. However, the process of designing and producing radiation-hardened silicon is lengthy and expensive, and there are only a few specialty semiconductor fabricators, so supplies of radiation-hardened silicon are limited. Commercial silicon provides much higher functionality and costs significantly less than radiation-hardened silicon. As a result, demand for components made with the latest commercial silicon, protected by

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shielding and other radiation mitigation techniques, is growing. Producing components and systems incorporating radiation-mitigated commercial silicon requires expertise in power electronics, circuit design, silicon selection, radiation shielding and extensive expertise in quality assurance testing and validation.

We design, manufacture and market radiation-mitigated microelectronic products, including power modules, memory modules and single-board computers, for the space and satellite markets. Using highly adaptable, proprietary, packaging and shielding and other radiation mitigation techniques, we custom design products that allow satellite and spacecraft manufacturers to use powerful, commercial silicon protected with the level of radiation shielding required for reliable performance in the specific orbit or environment in which they are to be deployed.

Manufacturing

We have consolidated all of our manufacturing operations into two production facilities located in San Diego, California, and Rossens, Switzerland. Over the past four years, we have made substantial capital investments to build and outfit production facilities incorporating the latest available mechanization and automation techniques and processes. We have trained our manufacturing personnel in advanced operational techniques, including demand-based manufacturing. We have also added advanced information technology infrastructure and have implemented new business processes and systems to increase our manufacturing capacity and improve efficiency, planning 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. With the completion of upgrades undertaken and completed in 2004, and others currently underway, we believe that our manufacturing facilities plus capital expenditures of approximately $3.7 million will give us sufficient capacity to meet 2005 demand for all of our current product lines. As new products are developed, we will install pilot manufacturing lines to produce them, but we intend to limit capital expenditures for any such new lines and upgrades of existing lines to match the rate of depreciation on existing capital plant.

Acceptance of our ultracapacitor products and high-voltage capacitor products depends in part on compliance and certification with a number of U.S. and foreign standards for electronic components and systems. Among the entities that promulgate such standards are Underwriters Laboratories, Canadian Standards Association and Committee European. We incorporate compliance with such standards into our quality assurance protocols in building and testing these products. We employ rigorous quality management systems and processes that promote continuous improvement and the highest possible product quality. Both of our production facilities comply with ISO 9001-2000 requirements for all of our products.

Ultracapacitors

In 2001, we installed an automated assembly line for our 5-farad and 10-farad small cell ultracapacitors in our San Diego production facility. This line can produce approximately 40,000 to 50,000 small cells per 24-hour production day. Current production is approximately 10,000 to 20,000 small cells per day, based on a 12-hour production day.

We produce our large cell ultracapacitors on pilot production lines in both our San Diego and Rossens, Switzerland facilities. By the second half of 2005, we expect to complete our first high-volume, semi-automated manufacturing line for our 350-farad ultracapacitors in our Swiss facility. We have also redesigned our large cell products to facilitate automation and to incorporate lower-cost materials. In addition to incorporating significantly lower-cost materials, the new designs reduce both the number of parts in a finished cell and the number of manufacturing process steps to produce them. Our Swiss facility has been certified to the rigorous, auto industry-specific, ISO/TS 1649 standards, confirming the company’s competence as an automotive supplier, and our San Diego facility has initiated steps to achieve that certification.

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In February 2003, we formed an ultracapacitor manufacturing and marketing alliance with Yeong-Long Technologies Co., Ltd., or YEC. YEC is a $200 million revenue per annum manufacturer of electrolytic capacitors headquartered in Taichung, Taiwan, with manufacturing and sales operations in mainland China. We entered into this alliance to accelerate commercialization of our proprietary BOOSTCAP^® ultracapacitors in China, and to help position us as a global supplier of ultracapacitors with production facilities in North America and Europe, and access to facilities in Asia. This alliance allows YEC to produce and sell our ultracapacitor products in China and entitles us to receive a royalty on such sales in China. It also provides for YEC to develop products in new form factors and gives us access to YEC’s manufacturing capacity for our distribution outside China.

High-Voltage Capacitors

We produce our high-voltage grading and coupling capacitors in our Rossens, Switzerland facility. We believe we are the only high-voltage capacitor producer that manufactures its products with automated winding, stacking and assembly processes. This enables us to produce consistent, high quality and highly reliable products, and gives us sufficient capacity to satisfy growing global customer demand. Using advanced demand-based manufacturing techniques, we upgraded the assembly portion of the process to a “cell-based,” “just-in-time” design in 2004, doubling our production capacity without additional direct labor, and significantly shortening order-to-delivery intervals. This upgrade also enabled us to expand our market penetration into capacitive voltage divider products, which we believe could materially increase the size of the market we currently serve.

Radiation-Mitigated Microelectronics Products

We produce our radiation-mitigated microelectronics products in our San Diego production facility. We have reengineered our production processes for radiation-mitigated microelectronics, resulting in dramatic reductions in cycle time and a significant increase in yield. Customer audits have confirmed our belief that we have “top-tier” manufacturing capabilities for highly reliable, radiation-mitigated power modules, memory modules and single-board computers. In 2004, this facility earned QML-Q and QML-V certification by the Department of Defense procurement agency. There are only 15 QML-Q and -V certified microelectronics production facilities in the world.

Our radiation-mitigated microelectronics production operations include die characterization, packaging, electrical, environmental and life testing. During 2002 and 2003, manufacturing cycle times were reduced and operator productivity increased, such that our current facility is capable of doubling production volumes without the need for additional direct labor or capital. We believe that we have ample capacity to meet foreseeable demand in the space and satellite markets.

Suppliers

We generally purchase components and materials, such as electronic components, dielectric materials, ceramic materials and metal enclosures from a number of suppliers. For certain products, such as our radiation-mitigated microelectronic products and our high-voltage capacitors, we rely on a limited number of suppliers or a single supplier. Although we believe there are alternative sources for some of the components and materials that we currently obtain from a single source, there can be no assurance that we will be able to identify and qualify alternative suppliers in a timely manner. Therefore, in critical component areas, we “bank,” or store, critical high value materials, especially silicon die. We are working to reduce material cost and our dependence on sole and limited source suppliers through an extensive global sourcing effort, with a particular emphasis on sourcing from low-cost countries.

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Marketing and Sales

We market and sell all of our components and systems products through both direct and indirect sales organizations in North America, Europe and Asia for integration by OEM customers into a wide range of electronic systems and products. Because the introduction of products based on 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 of our products can take months or even years.

Our principal marketing strategy is to cultivate long-term 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 and environmental needs. As time-to-market often is the primary consideration in our customers’ decisions to use our components, the initial sale and design-in process typically evolves into ongoing account management to ensure on-time delivery, responsive technical support and problem solving.

For each of our three product lines, we conduct discrete marketing programs intended to position and promote each product line. These include trade shows, seminars, advertising, product publicity, distribution of product literature and Internet websites. We employ marketing communications specialists and outside consultants 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.

We have an alliance with YEC to manufacture and market our proprietary BOOSTCAP^® ultracapacitor products in China. Through this alliance, we seek to expand our ultracapacitor product line and increase sales in China.

Competition

Each of our product lines has competitors, many of whom have longer operating histories, significantly greater financial, technical, marketing and other resources, greater name recognition and larger installed customer bases than we have. In some of the target markets for our emerging technologies, we face competition both from products utilizing well-established existing technologies and from other novel or emerging technologies.

Ultracapacitors

Our ultracapacitor products have two types of competitors: other ultracapacitor suppliers and purveyors of energy storage and power delivery products based on other technologies. Although a number of companies are developing ultracapacitor technology, we currently have three principal competitors in ultracapacitor or supercapacitor products: Panasonic, a division of Matsushita Electric Industrial Co., Ltd., in Japan, EPCOS AG in Germany, and Ness Corporation in Korea. The key competitive factors in the ultracapacitor market are price, performance (energy stored and power delivered per unit volume), durability and reliability, form factor, operational lifetime and overall breadth of product offerings. We believe that our products compete favorably with respect to all of these competitive factors.

Ultracapacitors also compete with products based on other technologies, including advanced batteries in power quality and peak power applications, and flywheels and batteries in back-up energy storage applications. We believe that ultracapacitors’ high durability, long life, wide temperature range, high performance and value proposition give them a competitive advantage over these alternative choices in many applications. In addition, integration of ultracapacitors with some of these alternative solutions may provide an optimized solution for the customer that neither can provide by itself.

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High-Voltage Capacitors

Maxwell, through its acquisition in 2002 of Montena (now known as Maxwell Technologies SA) and its CONDIS^® line of high-voltage capacitor products, is the world’s largest producer of high-voltage capacitors for use in electric utility infrastructure. 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 supplier of highly reliable high-voltage capacitors, and with respect to our expertise in high-voltage systems design. Over the last ten years, our largest customer, ABB Ltd., has evolved from producing its grading and coupling capacitors internally to outsourcing substantially all of its needs to us.

Radiation-Mitigated Microelectronic Products

Our radiation-mitigated 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 compete with commercial integrated circuit suppliers with product lines that have inherent radiation tolerance characteristics, such as National Semiconductor Corporation, Analog Devices Inc. and Temic Instruments B.V. (in Europe). Our proprietary radiation-mitigation technologies enable us to provide flexible, high function, competitively priced, radiation mitigation solutions utilizing the most advanced commercial electronic circuits and processors. In addition, we compete with component product offerings from high reliability packaging houses such as Austin Semiconductor, Inc., White Microelectronics, Inc. and Teledyne Microelectronics, a unit of Teledyne Technologies, Inc.

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, 2004, our research and development expenditures totaled approximately $5.5 million, compared with $5.8 million and $8.4 million in the years ended December 31, 2003 and December 31, 2002, respectively. The large decrease from 2002 to 2003 reflects the elimination of R&D expense associated with several non-core business lines that we divested. In general, we focus our research and product development activities on:

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

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Intellectual Property

We continue to place an increased emphasis on inventing new technologies, proprietary processes and innovative designs that significantly increase the value and uniqueness of our product portfolio, and on obtaining patents to provide the broadest possible protection for those products and related technologies. Our ultimate success will depend in part on our ability to protect existing patents, secure additional patent protection and develop new processes and designs not covered by the patents of third parties. As of December 31, 2004, Maxwell and its subsidiaries held 51 issued patents and had 44 pending patent applications and numerous provisional applications. Of the issued patents, 17 relate to our ultracapacitor products and technology and 12 relate to our microelectronics products and technology. Our subsidiary, PurePulse Technologies, Inc. (“PurePulse”), which suspended operations in 2002, holds the remaining 22 issued patents. Our issued patents have various expiration dates ranging from 2014 to 2024.

Our pending patent applications and any future patent applications may not be allowed. We routinely seek to protect our new developments and technologies by applying for patents in the U.S. and corresponding foreign patents in the principal countries of Europe and Asia. At present, with some exceptions in the microcode architectures of our radiation-mitigated microelectronics product line, we do not rely on licenses from any third parties to produce or commercialize our products.

The existing patent portfolios and pending patent applications covering technologies associated with our ultracapacitor and microelectronic products relate primarily to:

Ultracapacitors

Microelectronics

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Historically, our high-voltage capacitor products have been based on our know-how and trade secrets rather than on patents. We filed our first patent application covering our high-voltage capacitor technology in 2003, and we will continue to pursue patent protection in addition to trade secret protection of certain aspects of our products’ design and production.

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

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 our proprietary information and, subject to certain exceptions, to assign to us all rights in any proprietary information or technology made or contributed by the employee during his or her employment with us. In addition, we regularly enter into nondisclosure agreements with third parties, such as potential product development partners and customers.

Financial Information About Geographic Areas

Backlog

Backlog for Maxwell’s three continuing core product lines was approximately $10.7 million as of December 31, 2004, compared with $10.2 million for those product lines as of December 31, 2003. Backlog consists of firm orders for products that will be delivered within 12 months. Because we have dramatically reduced production cycle times, our customers are less likely to commit firm purchase orders as far in advance of their production needs as they did in the past.

Significant Customers

Sales of high-voltage capacitors to various business units within the ABB group of companies amounted to approximately $11.5 million, or 36%, of our total revenue for the year ended December 31, 2004. We have long term supply agreements with ABB Ltd., the largest of which was renewed in April 2004 and expires in April 2007.

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Government Regulation

Due to 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 workplace safety and protection of the environment. These include the use, generation, manufacture, storage, air emission, effluent discharge, handling and disposal of certain materials and wastes. In the course of our historical operations, materials or wastes may have spilled or been released from properties owned or leased by us or on or under other locations where these materials and wastes have been taken for disposal. These properties and the materials and wastes spilled, released, or disposed thereon are subject to environmental laws that may impose strict liability, without regard to fault or the legality of the original conduct, for remediation of contamination resulting from such releases. Under such laws and regulations, we could be required to remediate previously spilled, released, or disposed substances or wastes or to make capital improvements to prevent future contamination. Failure to comply with such laws and regulations also could result in the assessment of substantial administrative, civil and criminal penalties and even the issuance of injunctions restricting or prohibiting our activities. It is also possible that implementation of stricter environmental laws and regulations in the future could result in additional costs or liabilities to us as well as the industry in general. While we believe we are in substantial compliance with existing environmental laws and regulations, we cannot be certain that we will not incur substantial costs in the future.

In addition, certain of our microelectronics products are subject to International Traffic in Arms export regulations when they are delivered to customers outside of the U.S. We routinely obtain export licenses for such product shipments outside the U.S.

Legal Proceedings

From time to time we are involved in litigation arising out of our operations. We maintain liability insurance, including product liability coverage, in amounts we believe to be adequate. We have been named as a defendant in a suit filed on March 4, 2004 in the Superior Court of the State of California for the County of San Luis Obispo. This suit, Edmonds vs. I-Bus/Phoenix, Inc., was filed by the plaintiff on his behalf, alleging damages relating to the repurchase of I-Bus/Phoenix, Inc. shares. While the Company’s legal counsel cannot express an opinion on this matter, management believes that any liability of the Company that may arise out of or with respect to this matter will not materially adversely affect the financial position, results of operations or cash flows of the Company.

Employees

As of December 31, 2004, we had 222 employees, consisting of 110 full-time employees, one part-time employee and one temporary employee in the U.S., and 78 full-time employees, 13 part-time employees and 19 temporary employees in Switzerland. None of our U.S. employees are members of a labor union. We believe that approximately 20% of our employees in Switzerland are members of a labor union. Swiss law prohibits employers from inquiring into the union status of employees. We consider our relations with our employees to be good.

Facilities

Our headquarters and principal research, manufacturing and marketing facilities occupy approximately 45,000 square feet in San Diego, California, under a renewable lease that expires in July 2007. In addition, we lease research, manufacturing and marketing facilities occupying 68,620 square feet in Rossens, Switzerland, under a renewable lease that expires in June 2009.

We have the capacity to meet increases to our forecasted production requirements and, therefore, we believe our facilities are adequate to meet our needs for the foreseeable future.

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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 potentially adverse developments, some of which are described below, materialize and cannot be resolved successfully. In any such case, the market price of our common stock could decline and you may lose all or part of your investment in 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 adverse impacts that could result in a decline in the price of our common stock.

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 common stock.

We have incurred net losses in our last six fiscal years. We cannot assure you that we will become profitable in the foreseeable future, if ever. Even if we do achieve profitability, 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 but not limited to the following:

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 we may significantly reduce the prices of our products and services in a particular quarter or quarters. Presently, we have made a strategic decision to accept certain orders to sell products to a limited number of customers at prices below our manufacturing costs. The impact of the foregoing may cause our operating results to be below the expectations of public market analysts and investors, which may result in a decrease in the market value of our common stock.

We may not be able to continue development of our products or market our products successfully, and thus may not be able to achieve or maintain profitability in the future.

Historically, we relied in part upon government contracts relating to our defense contracting business 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 our 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 demonstrate 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

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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:

We may not be able to obtain sufficient capital to meet potential customer demand or corporate needs, which could require us to change our business strategy and result in decreased profitability and a loss of customers.

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

There can be no assurance that any 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 growth, which could result in decreased revenues, profits and a loss of customers.

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We have a shelf registration statement on Form S-3 on file with the Securities and Exchange Commission. Approximately $5.5 million of it remains available to us for raising capital. If additional shares are issued under the shelf registration statement immediate dilution of our current stockholders may occur.

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 manufacturing of our products or improve our manufacturing processes, we may be unable to increase sales and market share for our products and could also lose existing customers. We have limited experience in manufacturing our products in high volume and, therefore, it may be difficult for us to achieve the following results:

It may also be difficult for us to solve management, technological, engineering and other problems which may arise in connection with our manufacturing processes. These problems may include production volumes and yields, quality assurance, adequate and timely supply of high quality 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 transportation and industrial applications may not gain widespread commercial acceptance, which will adversely impact our revenues and growth opportunities, and our overall business prospects.

We have designed our large cell ultracapacitor products primarily for use in transportation and industrial applications. Currently, most of the major automotive companies are pursuing initiatives to develop alternative power sources for cars and trucks for hybrid drive train power and to augment the current 12-volt electrical system. We believe our ultracapacitors provide an innovative alternative power solution for both of these applications, and we are currently in discussions with several major automotive companies and their suppliers with regard to designing our ultracapacitors into their future products. However, the historic per unit cost of ultracapacitors has prevented ultracapacitors from gaining widespread commercial acceptance. In addition, there are other competing technologies such as advanced batteries, compressed gas and hydrolytic fluids and competing ultracapacitors. We believe that the long-term success of our ultracapacitors will be determined by our ability to reduce the cost of production, 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 up rated 12 and 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, which will adversely impact our revenues and growth opportunities, and our overall business prospects.

If we are not able to produce large quantities of our large cell ultracapacitors in the near future at the currently projected per unit cost, our large cell ultracapacitors may not be a commercially viable alternative to

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traditional or other alternative energy storage and power delivery devices. Although we have been selling a BOOSTCAP^® large cell ultracapacitor designed for transportation and industrial 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 ultracapacitors 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 in reducing our cost of production and establishing the capability to produce large quantities of ultracapacitors at a reduced cost, we may not be able to generate commercial acceptance of, and sufficient revenue from, this product to recover our significant investment in the development and manufacturing scale-up of this product and our overall business prospects will be significantly impaired.

Our product lines may be subject to increased or intense competition, and this may adversely affect our ability to maintain our gross margins. If our competitors develop and commercialize products faster than we do, or commercialize products that are superior to our products, our commercial opportunities will be reduced or eliminated.

The extent to which any of our products achieve market acceptance will depend on competitive factors, many of which are beyond our control. Competition in our markets is intense and has been accentuated by the rapid pace of technological development. Our competitors include large fully-integrated electronics companies. We may not be able to develop, fund or invest in one or more of our product lines to the same degree as our competitors do, or we may not be able to do so in a timely manner or at all. Many of these entities have substantially greater research and development capabilities and financial, manufacturing, technological, marketing and sales resources than we do, as well as more experience in research and development, product testing, manufacturing, marketing and sales. These organizations also compete with us to:

Our competitors may succeed in developing and commercializing products earlier than we do. Our competitors may also develop products or technologies that are superior to those we are developing, and render our product candidates or technology obsolete or non-competitive. If we cannot successfully compete with new or existing products, our sales and revenue would suffer and we may not ever become profitable.

If our OEM customers fail to purchase our components or to sell sufficient quantities of their products incorporating our components, or if our OEM customers’ sales timing and volume fluctuates, it could prevent us from achieving our sales and market share goals.

Sales to a relatively small number of OEM customers, as opposed to direct retail sales to customers, make up virtually all of our revenues. Our ability to make sales to OEM customers depends on our ability to compete effectively, primarily on price, delivery and quality. 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 customers’ sales timing and volume fluctuate, it could prevent us from achieving our sales targets and negatively impact our market share. 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.

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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 a sales opportunity that may not reappear for some time.

We might be faced with product liability or warranty claims, either directly or indirectly through our customers, and we have limited historical experience with some of our products as to our potential liability.

We offer our customers a warranty for our products. Any defects that may occur in our products could, in turn, lead to defects in our customers’ products that incorporate our products. The occurrence of defects in our products could give rise to warranty claims against us or to liability for damages caused by such defects to our customers or to the customers of our customers. Such defects could also lead to liability for consequential damages, or product liability claims. Defects in our products could, moreover, impair the market’s acceptance of our products. Any of these events could have a material adverse effect on our business and financial condition. We have limited historical experience with some of our products in evaluating the potential liability that could be created by claims under our warranty. If the claims made under such warranty exceed expected levels against which we have reserved, our results of operations and financial condition could be materially adversely affected.

Unfavorable economic conditions in the U.S. and abroad may adversely affect our OEM customers and prevent us from achieving sales growth.

Many of our new products are components designed to be integrated into new products and systems to be introduced to the marketplace by our OEM customers. Unfavorable economic conditions in 2003 and 2004, for example, slowed capital spending on U.S. electric utility infrastructure and delayed the introduction of certain new products by our OEM customers. A repeat of such unfavorable economic conditions may adversely affect our ability to market and sell our new products in the future.

A prolonged economic downturn could materially harm our business.

Any negative trends in the general economy, including trends resulting from actual or threatened military action by the United States and threats of terrorist attacks in the United States and abroad, could cause a decrease in capital spending in many of the markets we serve. In particular, a downward cycle affecting the technology, automotive and industrial, and military and aerospace markets would likely result in a reduction in demand for our products. In addition, if our customers’ own markets and financial performance decline, we may not be able to collect outstanding amounts due to us. Any of these circumstances could harm our consolidated financial position, results of operations and cash flows.

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 protecting 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 infringement, misappropriation or other misuse 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 the laws of the U.S. In addition, we face the possibility that third parties might “reverse engineer” our products to discover how they work and introduce competing products, or that third parties might independently develop products and intellectual property similar to ours.

We have increased our emphasis on protecting our technologies and products through patents. Our success depends on maintaining our patents, adding to them where appropriate, and developing products and applications

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without infringing the patent and proprietary rights of others. The following risks, among others, are involved in protecting our patents:

If our patents are invalidated or if it is determined that we, or the licensor of the patent, do 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 on 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 on our proprietary rights without litigation. If we are subject to such claims, or if we are forced to bring such claims, we could face time-consuming, costly litigation that may result in product shipment delays and possible damage payments or injunctions that could prevent us from making, using or selling infringing products. We may also be required to enter into royalty or licensing agreements on unfavorable terms 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 may have difficulty in protecting our intellectual property rights in the People’s Republic of China (PRC).

YEC is licensed to use our patented ultracapacitor technology to manufacture and market unltracapacitor products in the PRC. Patent and other intellectual property rights receive substantially less protections in the PRC than is available in the United States. We cannot assure you that we will be able to protect our proprietary rights in the PRC or elsewhere. The unauthorized use of our technology by others, particularly in the PRC where labor costs are low, could have a material adverse effect on our business, financial condition and results of operation.

Our ability to adequately license our technology may affect our success.

Our growth and success will be dependent to a substantial extent on our reputation. Since we anticipate licensing our technology to others, our reputation may be affected by the performance of the companies to which we license our technology. Our licenses may grant exclusivity with respect to certain uses or geographic areas. As a result, we will be wholly dependent on the success of the licensee for success with respect to any exclusive use or geographical area. We cannot assure you that we will be successful in granting our licenses to those who are likely to succeed. In addition, license agreements with foreign companies may be subject to additional risks, such as exchange rate fluctuations, political instability or weaknesses in the local economy. Certain provisions of the license agreements that benefit us may be subject to restrictions in foreign laws that limit our ability to enforce those contractual provisions. In addition, it may be more difficult to register and protect our proprietary rights in certain foreign countries. Our failure to obtain suitable licensees of our technology or the failure of our licensees to achieve our manufacturing or quality control standards or otherwise meet our expectations could have a material adverse effect on our business, financial condition and results of operations.

Our ability to enter into successful alliances or other strategic arrangements may affect our success.

Our alliance with YEC is with a foreign partner and we anticipate that future alliances may be with foreign partners or entities. As a result, such future alliances may be subject to the political climate and economies of the foreign countries where such partners reside and operate. We cannot assure you that our alliance partners or other partners will provide us with the support we anticipate, that any of the alliances or other relationships will be

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successful in developing our technology for use with their intended products, or that any of the alliances or other relationships will be successful in manufacturing and marketing their technologies for such products once developed. Any of our international operations will also be subject to certain external business risks such as exchange rate fluctuations, political instability and a significant weakening of a local economy in which a foreign entity with which we have an affiliation operates or is located. Certain provisions of the alliance agreements that are for our benefit may be subject to restrictions in foreign laws that limit our ability to enforce those contractual provisions. Failure of these alliances to be successful could have a material adverse effect on our business and prospects.

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 increase sales.

We derive a significant portion of our revenues from sales to customers located outside the U.S. 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 increase international sales.

We have substantial operations in Switzerland. Since we are relatively inexperienced in managing our international operations, we may be unable to effectively operate and expand 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.

International currency fluctuations could affect future reported product sales and operating expenses and harm or impact our ability to collect receivables or pay debts.

As a result of our international operations and related revenue generated outside of the U.S., the dollar amount of our revenue, expenses and debt may be materially affected by fluctuations in foreign currency exchange rates.

Assets or liabilities of our consolidated subsidiary that are not denominated in its functional currency are subject to effects of currency fluctuations, which may affect our reported earnings.

Government audits of two of our businesses sold or discontinued in 2001 could result in charges to our earnings and have a negative effect on our cash position. Further, a government audit of a contract entered into in 1995 by our Microelectronics business is in progress. We are unable to determine if additional audits of our current operating segments, divested businesses or discontinued operations will occur.

A contract, not assumed by the acquirers of our former defense contract business, entered into in 1990 and completed in the late 1990s is currently being audited by the Defense Department’s auditing services. We have submitted documentation supporting approximately $550,000 of costs charged to the contract. We believe that such costs were properly charged.

The Internal Revenue Service (IRS) has assessed us with a penalty of approximately $262,000 for failure to file Form W-2s for a business sold in 2001. The acquiring company of our former business did write the IRS stating that they would be responsible for the filing of 2001 Form W-2s. We have submitted this documentation to the IRS.

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There can be no assurance that the Defense Department’s auditing services or the IRS will accept the documentation submitted and that the matters will be resolved in our favor.

The Defense Department’s auditing service is auditing a contract entered into in 1995 and completed in 1999 by a company purchased by our Microelectronics group. The Company has requested a release of liability from the prime contractor. There is no assurance that such a release will be obtained and that the Company will not incur some liability.

Our credit agreements contain various restrictions and covenants that limit management’s discretion in the operation of our business and could limit our ability to grow and compete.

The credit agreements governing our bank credit facilities contain various provisions that limit our ability to:

These provisions restrict management’s ability to operate our business in accordance with management’s discretion and could limit our ability to grow and compete. Our credit agreements also require us to maintain our compliance with certain financial covenants and ratios. If we fail to comply with any of such financial covenants or ratios, or otherwise default under our credit agreements, the lenders under such agreements could:

In the event that amounts due under our credit agreements are declared immediately payable, we may not have, or be able to obtain, sufficient funds to make such accelerated payments.

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

Since many of our products employ 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 qualified 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 in a highly competitive employment market. Our employees may terminate their employment with us at any time.

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

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 the advantages of our products over the products

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offered by our competitors, and we must be able to demonstrate the value of new technology in order to sell new products to existing and new customers. The highly technical nature of the products we offer requires that we attract and retain qualified 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 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 adverse effect on our business and results of operations, and damage customer relationships. Upon occasion, we have experienced difficulty in obtaining timely delivery of supplies from outside suppliers, which has adversely affected our delivery time to our customers. There can be no assurance that such supply problems will not recur.

Our backlog is limited and may not reflect future business activity.

Our order backlog for prior years includes businesses that were divested and therefore year-to-year comparisons are difficult to make. Additionally, our current backlog primarily represents orders for the next three months but does include some future orders and as a result, is not an indicator of future business activity. Due to the possibility of customer changes in delivery schedules, potential delays in product shipments, difficulties in obtaining parts from suppliers, production limitations and the possible inability to recognize revenue under accounting requirements, our backlog at any point in time may not be representative of sales in any future period.

Our business and operations would suffer in the event of system failures.

Despite the implementation of security measures, redundancy and backup our internal information technology networking systems are vulnerable to damages from computer viruses, unauthorized access, energy blackouts, natural disasters, terrorism, war and telecommunication failures. Additionally, from time to time, we install new or upgraded business management systems. To the extent such systems fail or are not properly implemented, we may experience material disruption to our business including our ability to report operating results on a timely basis.

Changes in financial accounting standards related to stock option expenses are expected to have a significant adverse effect on our reported results.

The Financial Accounting Standards Board (FASB) recently issued a revised standard that requires that we record compensation expense in our statement of operations for employee stock options using the fair value method. The adoption of the new standard is expected to have a significant adverse effect on our reported earnings, although it will not affect our cash flows, and may adversely impact our ability in the future to provide accurate guidance on future financial results due to the variability of the factors used to establish the value of stock options.

Future changes in financial accounting standards or practices may cause adverse unexpected revenue or expense fluctuations and affect our reported results of operations.

A change in accounting standards or practices can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. New accounting

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pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct business.

Compliance with changing regulation of corporate governance and public disclosure may result in additional expenses.

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and NASDAQ National Market rules, are creating significant additional expenses and uncertainty for public companies. We are committed to maintaining high standards of corporate governance and public disclosure. As a result, our efforts to comply with evolving laws, regulations and standards have resulted in, and are likely to continue to result in, significantly increased general and administrative expenses and diversion of management time to such compliance activities. Our recent efforts to comply with section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations have required a significant effort of the company and its available resources, and resulted in significant cost to us.

Anti-takeover provisions in our certificate of incorporation and bylaws could prevent certain transactions and could make a takeover more difficult.

Some provisions in our certificate of incorporation and bylaws 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.

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.

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AVAILABLE INFORMATION

We file or furnish annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission, or 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 free of charge 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 or furnish to the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

Item 2. Properties

We have ongoing operations in San Diego, California and Rossens, Switzerland. In San Diego, we currently lease approximately 45,000 square feet of administrative, research and development, manufacturing and sales space. The San Diego lease expires in July 2007. In Rossens, we currently lease approximately 68,620 square feet of manufacturing, sales and administrative space. The Rossens lease expires in June 2009.

Item 3. Legal Proceedings

Our subsidiary I-Bus/Phoenix, Inc. has been named as a defendant in a suit filed on March 4, 2004 in the Superior Court of the State of California for the County of San Luis Obispo. This suit, Edmonds vs. I-Bus/Phoenix, Inc., was filed by the plaintiff on his behalf and alleges damages concerning the repurchase of I-Bus/Phoenix, Inc. shares. While the Company’s legal counsel cannot express an opinion on this matter, management believes that any liability of the Company that may arise out of or with respect to this matter will have no significant adverse effect on the financial position, results of operations or cash flows of the Company.

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

No matters were submitted to stockholders during the fourth quarter of 2004.

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PART II

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.

As of March 9, 2005, there were 477 holders of record of our common stock. We believe that the number of beneficial owners of our common stock substantially exceeds this number.

Dividend Policy

We have never declared or paid cash dividends on our capital 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 cash dividends on our capital stock in the foreseeable future. In addition, under our bank credit agreements, neither we nor any of our subsidiaries may, directly or indirectly, pay any cash dividends to our stockholders.

Recent Sales of Unregistered Securities

None.

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Item 6. Selected Financial Data

The selected consolidated financial data presented below are for each fiscal year in the five-year period ended December 31, 2004. This data is derived from the Company’s audited consolidated financial statements. During the year ended December 31, 2004, we completed the discontinuance of our Winding Equipment business segment, which we acquired in 2002. Therefore, the financial statements for fiscal 2004, 2003 and 2002 include the reclassification of the Winding Equipment business to discontinued operations.

The financial information for the year ended December 31, 2002 has been restated for the impact of adjustments discussed in Note 1 of the consolidated financial statements.

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

The following discussion of our financial condition and results of operations for the years ended December 31, 2004, 2003 and 2002 should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this Annual Report. In addition, the discussion and the historical information contain forward-looking statements that are subject to risks and uncertainties, including estimates based on our judgment in determining the allowance for inventory reserves, bad debt allowance, allowance for deferred tax assets and tax expenses in the future. Our estimation of liquidity for fiscal year 2005 may be significantly different than our actual results. Negative changes in revenues will affect our estimation in cost of sales, research and development, selling, general and administrative and other aspects of our business.

Executive Summary

We begin Management’s Discussion and Analysis of Financial Condition and Results of Operations with an overview of our business and strategic plan. Subsequently, we provide a summary of some of the highlights from the recently completed fiscal year, followed by a discussion of the different aspects of our business. We then proceed, on page 32, to discuss our results of operations for the year ended December 31, 2004 compared with the year ended December 31, 2003, and for the year ended December 31, 2003 compared with the year ended December 31, 2002. Thereafter, beginning on page 39, we provide an analysis of changes in our balance sheet and cash flows, and discuss our capital requirements and financing activities in the section entitled “Liquidity and Capital Resources.” Beginning on page 41, we discuss our critical accounting policies, the impact of inflation on our business and new accounting pronouncements.

Overview

Maxwell Technologies, Inc. is a Delaware corporation originally incorporated in 1965 under the name “Maxwell Laboratories, Inc.” In 1996, we changed our name to Maxwell Technologies, Inc. Presently headquartered in San Diego, California, we are a developer and manufacturer of innovative, cost-effective energy storage and power delivery solutions.

Maxwell operates as one business segment called High Reliability, which has two manufacturing locations (San Diego, California and Rossens, Switzerland) and is comprised of three product lines:

We aim to design and manufacture our products to perform reliably for the life of the products and systems into which they are integrated. We seek to achieve high reliability through the application of proprietary technologies and rigorously controlled design, development, manufacturing and test processes. This high reliability strategy emphasizes the development and marketing of products that enable us to achieve higher profit margins than commodity electronic components and systems.

During the year ended December 31, 2004, we completed the discontinuance of our Winding Equipment product line segment, which was sold in December 2003, with the shipment of the final product order that we were obligated to fulfill. Therefore, the financial statements for fiscal 2004, 2003 and 2002 include the reclassification of the Winding Equipment product line segment to discontinued operations.

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2004 Highlights

We reported a net loss for fiscal 2004 of $9.1 million, or $0.62 per diluted share, versus a net loss of $6.3 million, or $0.45 per diluted share for fiscal 2003. The increased loss was primarily a result of the discontinuation of ultracapacitor sales for digital camera-based product applications, reserves recorded against our small-cell BOOSTCAP^® inventories and for ultracapacitor orders received that were priced below our production cost, costs incurred related to our compliance activities pursuant to section 404 of the Sarbanes-Oxley Act of 2002 and various non-recurring gains of approximately $4.8 million recorded in 2003.

During fiscal 2004, we continued to focus on developing strategic alliances, introducing new products, and reducing product costs and operating expenses. Some of these efforts are described below:

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RESULTS OF OPERATIONS

Year Ended December 31, 2004 Compared with Year Ended December 31, 2003

Revenue

Revenue for the year ended December 31, 2004 was $32.2 million, compared with $35.2 million for the year ended December 31, 2003. This represents a decrease of $3.0 million, or 8%, from the prior year. In the first quarter of 2004, we recorded the final $1.0 million payment in license fees received from Yeong-Long Technologies, Inc. (“YEC”) in exchange for the right to manufacture our BOOSTCAP^® ultracapacitors in China. The license fee payment is shown as a separate line item in our Consolidated Statements of Operations. Revenues for the year ended December 31, 2003 included $4.0 million in license fees received from YEC. High Reliability product revenues for both fiscal 2004 and 2003 were approximately $31.2 million.

Gross Profit

For 2004, gross profit was approximately $6.9 million, or 21% of revenue, compared with $6.6 million, or 19% of revenue, for the prior year. Product gross profit, excluding YEC license fees, was approximately $5.9 million, or 19% of product revenue, for 2004, compared with $2.6 million, or 8% of product revenue, for 2003. Product gross profit in 2004 has improved dramatically (approximately $3.3 million, or 126%) compared with the prior year due to our focus on core product lines, the phase-out of low-margin product lines and improved manufacturing efficiencies.

The improvement in product gross profit is partially offset by reserves recorded of approximately $500,000 in the first quarter of 2004, approximately $440,000 in the third quarter of 2004 and approximately $1.4 million in the fourth quarter of 2004 for ultracapacitor orders received that were priced below our production costs. The orders placed in the third and fourth quarters of 2004 were part of a larger supply agreement. Additional reserves may be required against future orders placed under this agreement or similar agreements depending on the degree to which we are able to reduce our product costs at the time the orders are placed. We also recorded reserves of approximately $450,000 in the third quarter and approximately $730,000 in the fourth quarter of 2004 for excess and obsolete inventories.

Total Operating Expenses

Operating Expenses—2004 vs. 2003

(Dollars in Thousands)

For the year ended December 31, 2004, operating expenses were $15.9 million compared with $12.9 million for the same period in 2003. This represents an increase of $3.0 million, or 23%. Operating expenses for 2004 were approximately 51% of product revenue compared with 41% of product revenue for 2003.

The 2003 operating expenses included gains of approximately $2.2 million for pension curtailment and settlement gains, $1.4 million on sale of property and equipment and $1.2 million on sales of businesses. Adjusted for these gains, actual operating expenses for fiscal 2003 were $17.7 million.

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Selling, General & Administrative (SG&A) Expense

SG&A expenses were $10.2 million for 2004, compared with $11.4 million for 2003. This represents a decrease of $1.2 million, or 11%. SG&A expenses were 32% and 33% of revenue for 2004 and 2003, respectively. During 2003, we recorded approximately $800,000 in charges related to reserves against loans made to a former subsidiary and accruals for severance to the former Chairman of the Company. Reductions in the labor force in the fourth quarter of 2003 also contributed to the overall decrease in 2004. The savings resulting from the reductions in labor force were partially offset by increased costs of approximately $1.0 million associated with our Sarbanes-Oxley compliance activities.

Research & Development (R&D) Expense

R&D expenses were $5.5 million for 2004 compared with $5.8 million for 2003. This represents a decrease of approximately $300,000, or 5%. R&D expense was 17% of revenue for both 2004 and 2003. Our R&D expenses will vary slightly from year to year due to non-headcount expenses relating to materials and outside services. Our R&D efforts are mostly focused on our single-board computer and ultracapacitor electrode and packaging technologies.

Loss From Continuing Operations Before Income Taxes

The loss from continuing operations before income taxes for 2004 increased to $9.1 million, or 28% of revenue, from $6.3 million, or 18%, of revenue for 2003. The loss from continuing operations before income taxes for 2003 excluding the impact of $4.8 million in gains discussed above in Total Operating Expenses would have been $11.1 million.

Provision (Benefit) For Income Taxes

For 2004, we recorded a $712,000 provision compared with a benefit of $96,000 during 2003. The provision booked in 2004 relates primarily to the change in tax rates applicable to the net deferred tax liabilities for our Swiss subsidiary. The Swiss subsidiary has a tax holiday which expires in 2005 and therefore existing tax liabilities will be realized at the higher non-tax holiday rate. The benefit recorded in 2003 relates to losses incurred in our Swiss subsidiary that we expect to offset against future taxable income.

Discontinued Operations

In December 2003, Maxwell Technologies, SA (our Swiss subsidiary formerly known as Montena Components Ltd.) sold all of the fixed assets, substantially all inventory, and all warranty and employee agreement obligations of its Winding Equipment business, located in Matran, Switzerland, to Metar SA, a new company formed by the former CEO of Montena Components and a Metar employee. The business was sold for $324,000, and we recognized a loss on disposal, net of tax, of $529,000. The new Metar company completed during January through June 2004 certain work in progress related to customer orders received by Maxwell Technologies, SA before the date of sale. We concluded our continuing involvement in the Winding Equipment business in the second quarter of 2004 with the shipment of the final Metar product order that we were obligated to fulfill. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets, the results of operations related to the Winding Equipment business which was recorded as continuing operations through the first quarter of 2004 have been reclassified as discontinued operations for fiscal 2004, 2003 and 2002. The Winding Equipment product line included in discontinued operations had sales of $1.0 million and cost of sales of $205,000 during 2004, which are reflected in income from discontinued operations.

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Year Ended December 31, 2003 Compared with Year Ended December 31, 2002

Total Revenue

Total revenue for the year ended December 31, 2003 was $35.2 million including $4.0 million in license fees received from YEC in exchange for a right to manufacture our BOOSTCAP^® ultracapacitors in China. The license fee is a one-time event and is shown as a separate line item in our Consolidated Statements of Operations. Product revenue (which excludes the YEC licensee fee) for the year ended December 31, 2003 was $31.2 million compared with $54.4 million for the year ended December 31, 2002, which was a reduction of approximately $23.2 million, or 43%. The reduction was attributed mainly to our I-Bus Computing Systems business, which was sold in the third quarter of 2002 and, therefore, did not generate any revenue for the year ended December 31, 2003. Increases in revenue from our flagship product, BOOSTCAP^® ultracapacitors, was offset by a reduction in revenue from microelectronic products.

High Reliability

For the year ended December 31, 2003, revenue from our High Reliability business segment was $35.2 million compared with $40.1 million for the year ended December 31, 2002. This represents a decrease of approximately $4.9 million, or 12%. Most of the decrease in revenue was from reduced sales of radiation-mitigated microelectronics products due to the downturn in the telecommunication industry and from the power systems products, as we phased-out our low-margin transformer business.

Winding Equipment

For the year ended December 31, 2003, revenue from our Winding Equipment product line segment was $9.9 million compared with $3.6 million for the year ended December 31, 2002. This represents an increase of approximately $6.3 million, or 176%. For the year ended December 31, 2002, revenue from this segment only covers the six-month period from our acquisition of Montena in July 2002 through year end December 31, 2002. We determined that our Winding Equipment business segment was not adding value to the Company in terms of margin contribution, technological advances, improvement in market share or contributing to improvements in economies of scale. The Winding Equipment segment, which was sold in December 2003, and which was recorded as continuing operations through the first quarter fiscal year 2004, has now been reclassified as discontinued operations.

I-Bus Computing Systems

Our I-Bus Computing Systems business was sold in September 2002 and did not generate any revenue in the year ended December 31, 2003. For the year ended December 31, 2002, revenue from our I-Bus Computing Systems business was approximately $11.0 million.

TeknaSeal

For the year ended December 31, 2002, revenue from the TeknaSeal glass-to-metal seals business was $3.3 million. The TeknaSeal glass-to-metal seals business was sold in September 2002. No revenue was generated for the year ended December 31, 2003.

Cost of Sales

For the year ended December 31, 2003, our cost of sales was $28.6 million compared with $48.0 million for the year ended December 31, 2002. This represents a decrease of $19.5 million, or 41%. This decrease was attributable primarily to our disposition and phase-out activities in 2002.

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Total Operating Expenses

Operating Expenses—2003 vs. 2002

(Dollars in Thousands)

Selling, General & Administrative (SG&A) Expense

SG&A expense for the year ended December 31, 2003 was $11.4 million compared with $17.6 million for the year ended December 31, 2002. The decrease of approximately $6.1 million, or 35%, was primarily due to a reduction in personnel and overhead as a result of our disposition and phase-out activities during 2002 and 2003. SG&A expense was approximately 33% and 32% of revenue for the years ended December 31, 2003 and 2002, respectively.

Research & Development (R&D) Expense

R&D expense for the year ended December 31, 2003 was $5.8 million compared with $8.4 million for the year ended December 31, 2002. The decrease of approximately $2.5 million, or 30%, was partly due to our decision to streamline product lines and focus on our core High Reliability business segment products. R&D as a percent of sales was 17% and 15% for the years ended December 31, 2003 and 2002, respectively.

Loss From Continuing Operations Before Income Taxes

Loss from continuing operations before income taxes for the year ended December 31, 2003 was $6.3 million compared with $37.3 million for the year ended December 31, 2002, an improvement of $30.9 million, or 83%. The decrease in losses was primarily attributable to the disposition and phase-out of operations, which were unprofitable. The loss from continuing operations for the year ended December 31, 2003 includes $695,000 in income from the sale of our TeknaSeal glass-to-metal seals business, which is reflected in “(Gain) loss on sale of businesses” in 2003.

Loss from continuing operations before income taxes for the year ended December 31, 2003 includes a pension curtailment and settlement gain of $2.2 million. Under Swiss law, the pension plan for our Swiss employees must be managed by an entity that is legally separate from the Company. However, according to SFAS No. 87, we are required to recognize the gain or loss of the pension fund on our balance sheet and income statement. Regardless of the fact that the pension plan is over funded, we are obligated to continue contributing to it at a rate mandated by Swiss law. As a result, the defined benefit accounting treatment may create a distorted picture of our balance sheet and financial results for the year ended December 31, 2003 and in future periods. Loss from continuing operations before income taxes without the pension benefit would have been $8.5 million.

Benefit For Income Taxes

Our tax benefit for the year ended December 31, 2003 was $96,000 compared with $114,000 for the year ended December 31, 2002, a reduction of $18,000, or 16%. The benefit consists primarily of foreign income tax benefit recorded by our subsidiary, Maxwell Technologies SA. The valuation allowance increased in the year

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ended December 31, 2003 by $3.2 million from the prior year and we had net deferred tax assets before our valuation allowance of approximately $34.2 million at December 31, 2003.

Acquisitions, Restructuring, Divestitures, Discontinued Operations and Other Events

Acquisitions

In July 2002, we acquired Montena Components Ltd., a provider of ultracapacitors and high-voltage capacitors to OEM customers and automated winding equipment used to produce capacitors and lithium batteries, for approximately $3.0 million in cash and 2.25 million shares of Maxwell common stock. This acquisition brought us an additional high reliability power business focused on ultracapacitors and high-voltage capacitors and additional design and production capabilities that enhanced our profile as a reliable, global supplier. (See “—Discontinued Operations” below for a discussion of our disposition of the Winding Equipment business, which we acquired through our acquisition of Montena.)

Restructuring

Restructuring charges were $1.6 million for the year ended December 31, 2002. In 2002, the restructuring charges were primarily attributable to restructuring of our I-Bus/Phoenix, Inc. business 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. We responded to the poor market conditions for computing systems and other capital goods by restructuring I-Bus/Phoenix. In June 2002, we began implementing the restructuring plan and recorded restructuring charges of $700,000. In addition, we also determined that certain components in inventory had been adversely impacted. Accordingly, we recorded an inventory charge of approximately $3.0 million for certain excess and obsolete raw material components and finished goods. This charge was included in cost of sales. During the third quarter of 2002, we 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 in its facility in Tangmere, United Kingdom, and reduced personnel worldwide. As a result of these actions, we recorded additional restructuring charges of $900,000 during the quarter ended September 30, 2002. The unpaid restructuring balance of $400,000 at December 31, 2002 was paid in 2003.

Divestitures

In December 2003, we sold our former I-Bus manufacturing and administrative facility in San Diego. The facility was previously classified as Assets Held for Sale at its book value of $7.4 million. Proceeds from the sale of the facility were $9.0 million, resulting in a gain of $1.2 million after payment of a loan balance with Comerica Bank and closing costs of $387,000, which was recorded in gain on sale of property and equipment.

In June 2003, we decided to discontinue marketing and supporting our electronic components tester business and recorded charges in cost of sales of $444,000 primarily attributable to excess inventory and equipment, $393,000 primarily attributable to warranty buy-outs, and $259,000 primarily attributable to expected future warranty returns in the quarters ended June 30, 2003, September 30, 2003 and December 31, 2003, respectively. Sales for our electronic components tester business were immaterial in all periods presented.

In September 2002, we sold the I-Bus/Phoenix, Inc. business for $7.0 million in debt and certain other considerations. 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. During 2003, we received final settlement payments of $475,000 from the new I- Bus Corporation, which was a partial recovery of the $7.0 million note. The recovery is reflected in “(Gain)/loss on sale of businesses” in the consolidated statements of operations.

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In September 2002, we also sold our non-core TeknaSeal glass-to-metal seals business for $5.5 million in cash, of which $1.0 million was held in an escrow account and subsequently released to us over the succeeding four calendar quarters. Approximately $400,000 of the $5.5 million proceeds was paid to certain former employees of TeknaSeal. We recorded a net gain of $200,000 in the fourth quarter of 2002 and recorded additional gains of $695,000 for the year ended December 31, 2003.

Discontinued Operations

In December 2003, Maxwell Technologies SA (our Swiss subsidiary formerly known as Montena Components Ltd.) sold all of the fixed assets, substantially all inventory, and all warranty and employee agreement obligations of its Winding Equipment business, located in Matran, Switzerland, to Metar SA, a new company formed by the former CEO of Montena Components and a Metar employee. The business was sold for $324,000, and we recognized a loss on disposal, net of tax, of $529,000. The new Metar company completed during January through June 2004 certain work in progress related to customer orders received by Maxwell Technologies, SA before the date of sale. We concluded our continuing involvement in the Winding Equipment business in the second quarter of 2004 with the shipment of the final Metar product order that we were obligated to fulfill. In accordance with SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets, the results of operations related to the Winding Equipment business which was recorded as continuing operations through the first quarter of 2004 have been reclassified as discontinued operations for fiscal 2004, 2003 and 2002. The Winding Equipment business included in discontinued operations had sales of $1.0 million and cost of sales of $205,000 during 2004, which are reflected in income from discontinued operations.

In September 2002, PurePulse 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 raised $5 million of equity capital from Millipore and Maxwell 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 March 2001, we sold our Government Systems business for $20.7 million and recorded a gain of $1.1 million, net of a $2.7 million provision mainly related to ongoing lease obligations. As of December 31, 2004 and 2003, the remaining lease obligation, which expires in April 2006, is $650,000 with a reserve provision of $608,000, and $1.1 million with a reserve provision of $600,000, respectively.

Other Events

In 2004 and 2003, we made an assessment of the Company’s goodwill and intangible assets and determined that there was no impairment. Accordingly, no goodwill impairments were recognized for the years ended December 31, 2004 and 2003. Goodwill impairments were $5.3 million for the year ended December 31, 2002.

Amortization of other intangibles was $76,000, $76,000 and $483,000 for the years ended December 31, 2004, 2003 and 2002, respectively, and relates to the amortization of developed core technology and customer backlog acquired in conjunction with the acquisition of Montena 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 after the purchase of all shares not already owned by us.

Interest income, net was $46,000, $13,000 and $42,000 for the years ended December 31, 2004, 2003 and 2002, respectively. We used proceeds from the sales of businesses and assets in 2002 to pay down debt and the excess was invested in high quality short-term marketable investments.

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An investment impairment of $500,000 was recorded in 2001 related 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 chief financial officer, 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. We received $209,000 from the sale of the privately held company of which $26,000 had previously been recorded by us as investment. In 2003, we recovered $183,000 of the $500,000 recorded as impaired in 2001 and reflected the recovery as a (gain) loss on sale of business.

Minority interest in income of consolidated subsidiaries was $200,000 for the year ended December 31, 2002. During 2002, we acquired all of the outstanding minority interests, including stock options, of our majority-owned subsidiaries, except for PurePulse (see “—Discontinued Operations” above), in exchange for shares and options in Maxwell.

Fixed asset impairments were $2.3 million for the year ended December 31, 2002. Impairment charges recorded in 2002 were 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 the I-Bus/Phoenix business. The impairment also included fixed assets associated with transformer and harness production for the I-Bus/Phoenix power systems group. Production of transformers and harnesses subsequently was outsourced.

Restatement of Consolidated Financial Statements for the year ended December 31, 2002

We have restated our consolidated financial statements to reflect adjustments to the Company’s Consolidated Financial Statements for the year ended December 31, 2002 as previously reported on Form 10-K. The adjustments giving rise to our need to restate the financial statements for the year ended December 31, 2002 relate to the stock-based compensation arising from our April 2002 repurchase of the remaining minority interests and merger of our I-Bus/Phoenix and Electronic Components Group subsidiaries.

In connection with these transactions, we exchanged all outstanding vested and unvested options to purchase shares of common stock of these subsidiaries for options to acquire shares of Maxwell. As a result and as more fully described in Note 7 to our consolidated financial statements, stock-based compensation expense totaling approximately $1.9 million was incurred in connection with the exchange of vested subsidiary stock options based on the difference between the fair market value of our common stock on the respective merger date and the exercise price of the modified stock option.

We assessed the impact of this error on our historical financial statements and concluded that we were required to restate our financial statements. As a result, the Company restated its Consolidated Financial Statements for the year ended December 31, 2002, the principal effect of which was to increase net loss by approximately $1.9 million. The correction had no impact on net stockholders’ equity or cash flows used in continuing operations.

Additional detail with respect to the impact of the restatement on our results of operations is reported in Note 1 to our Consolidated Financial Statements.

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Liquidity and Capital Resources

Changes in Cash Flow

For the year ended December 31, 2004, cash used in operating activities was $9.1 million compared with $4.3 million for the year ended December 31, 2003 and $8.9 million for the year ended December 31, 2002. The use of cash for the years ended December 31, 2004 and 2003 was primarily attributed to operating losses from continuing operations.

Capital expenditures for the years ended December 31, 2004, 2003 and 2002 were $3.0 million, $2.4 million and $1.8 million, respectively. In 2002, cash of $3.0 million was used in the Company’s third quarter as part of the purchase price for Montena. Capital expenditures for 2005 are expected to be approximately $3.7 million, which is approximately equal to our annual depreciation and amortization charges.

Our restructuring plan that started in 1999 was completed in early 2004, and we started realizing the benefit of our restructuring effort during 2004. All indicators such as productivity, lower production cost and new product introductions have increased. The reduction of overhead and increased productivity should continue to improve our gross margins and reduce our operating expenses as a percentage of revenues in 2005. In February 2004, we secured a $3.0 million line of credit from a U.S. bank, which was renewed in March 2005, that is available for working capital needs limited by the amount of eligible assets; the line has not been used to date. We also have a line of credit for approximately $1.8 million from a Swiss bank for working capital in Switzerland. The line was fully used as of December 31, 2004 and 2003. We also have approximately a $1.0 million term loan available from a Swiss bank for capital equipment purchases, all of which was used as of December 31, 2004. We had approximately $10.7 million in cash and cash equivalents and approximately $2.1 million in short-term investments at the end of December 2004. We have a shelf registration statement on Form S-3 on file with the Securities and Exchange Commission. We raised approximately $10.1 million in November 2004 from the sale of shares of common stock that were registered pursuant to the shelf registration statement. Approximately $5.5 million of the shelf registration statement remains available to us for raising capital. We believe the liquidity provided by the existing cash and cash equivalents and investments in marketable securities, borrowings available under our lines of credit and availability on Form S-3, will provide sufficient capital to fund our capital equipment and working capital requirements and potential operating losses for more than the next 12 months. Failure to achieve 2005 expected cash flows from operating activities or to obtain additional debt or equity investments, if necessary and if available, would have a material adverse effect on us.

Net accounts receivable increased to $6.9 million as of December 31, 2004 from $5.9 million at December 31, 2003. The primary reasons for the increase was due to longer credit terms to larger customers and slow payment from one large customer.

Net inventory balance increased to $8.1 million as of December 31, 2004 from $7.3 million as of December 2003. This increase is due to an increase in the Ultracapacitor business. Inventory reserves as of December 31, 2004, were $4.0 million compared with $3.2 million as of December 31, 2003.

Accounts payable and accrued liabilities as of December 31, 2004 were $7.3 million compared with $8.2 million as of December 31, 2003. The primary reason for the reduction was a decrease in SG&A expenses. Short-term borrowing, including the current portion of our term loan, increased to $2.0 million as of December 31, 2004 from $1.9 million as of December 31, 2003. Net liabilities of discontinued operations as of December 31, 2004 and 2003 was $1.0 million and $1.5 million, respectively.

Short-term and Long-term Borrowings

Short-term Borrowings

Maxwell’s European subsidiary, Maxwell Technologies SA, has a 2.0 million Swiss Franc, or approximately $1.8 million, bank credit agreement with a Swiss bank which renews annually. Borrowings under

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the credit agreement bear interest at LIBOR plus 1.75% with repayment terms extending beyond one month from the date of funding. The assets of Maxwell Technologies SA secure borrowings under the credit agreement. As of December 31, 2004, the full amount of the credit line was drawn. The interest rate on the funds borrowed at December 31, 2004 was 2.48%.

Approximately $334,000 of letters of guarantee were outstanding as of December 31, 2004 primarily related to customer deposits.

In February 2004, we secured a $3.0 million credit line from a U.S. bank for working capital purposes, subject to a one-year repayment period. In March 2005 the credit line was renewed on substantially the same terms as the prior credit line. The line has not been used to date. This line is secured by accounts receivable and assets of the Company and bears interest at the bank’s prime rate plus 1.75%, but subject to a minimum interest rate of 5.75%. The agreement requires us to maintain a minimum tangible net worth of $20.5 million plus 50% of any consideration from future equity and debt transactions plus 50% of net income in each fiscal quarter after the date of the agreement. At December 31, 2004, the Company was required to maintain 85% of their banking activities and investment balances with its bank which provides the credit line. At December 31, 2004 the Company had reduced its investment balance at its bank to less than 70% of the Company’s total investment value. On March 7, 2005 the credit line was amended to require that only 50% of the Company’s total investment balance be maintained at the bank. The Company is currently in compliance with all covenants and anticipates that it will be during the term of the credit line.

Long-term Borrowings

Maxwell Technologies SA has a term loan with a maximum draw of 1.15 million Swiss Francs, or approximately $1.0 million. The full amount of the term loan was outstanding as of December 31, 2004, of which $813,000 is classified as long-term debt. Borrowings under the term loan are secured by the equipment being purchased. This credit agreement bears interest at the Swiss inter-bank borrowing rate plus 2.0%. The term loan can be borrowed in quarterly advances up to the maximum limit and repaid over one to five years. The weighted average interest rate on the funds borrowed at December 31, 2004 was 3.76%.

Maxwell SA had a loan from the Montena SA pension plan for 300,000 Swiss Francs, or approximately $265,000, that was paid off during 2004.

Stock Sale

In November 2004, the Company raised approximately $10.1 million after deduction of expenses and fees through the sale of approximately 1.2 million shares of common stock to institutional investors. The Company sold the shares directly to the investors in a negotiated transaction in which no underwriters were used for placement. The shares had previously been registered under the Securities Act of 1933, as amended, pursuant to a shelf registration statement filed on Form S-3 with the Securities and Exchange Commission in September 2004. Approximately $5.5 million of securities are available for future issuance under this registration statement as of December 31, 2004.

Government Audits

The Company is the subject of government audits of two businesses sold or discontinued in 2001. A contract, not assumed by the acquirers of the Company’s former defense contract business, entered into in 1990 and completed in the late 1990s is currently being audited by the Defense Department’s auditing agency. The Company believes that such costs were properly charged.

The Internal Revenue Service (IRS) has assessed the Company with a penalty of approximately $262,000 for failure to file Form W-2s for a business sold in 2001. The acquiring company of our former business did write the IRS stating that they would be responsible for the filing of 2001 Form W-2s. The Company has submitted this documentation to the IRS.

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The Defense Department’s auditing service is auditing a contract entered into by our Microelectronics group as a subcontractor in 1995 and completed in 1999. The Company has requested a release of liability from the prime contractor. There is no assurance that such a release will be obtained or that the Company will not incur some liability.

While management does not anticipate an unfavorable settlement of these matters, unfavorable audit results for all or any combination of these audits would result in an adverse and potentially significant impact on the Company’s cash flow.

Minority Equity Interests in Subsidiaries and Subsidiary Option Programs

PurePulse, which suspended operations in 2002 and 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 31, 2004 and 2003, minority investors owned approximately 18% of the outstanding stock of PurePulse.

Contractual Obligations

Critical Accounting Policies

This discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which are prepared in accordance with accounting principles generally accepted in the United States of America, which we refer to as U.S. GAAP. We have used certain assumptions and judgments in the preparation of these financial statements, which assumptions and estimates may potentially affect the reported amounts of assets and liabilities and the disclosure of contingencies as well as reported amounts of revenues and expenses. 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 fiscal year ended December 31, 2004, substantially all of our revenue was derived from the sale of manufactured products directly to customers and licensing fees received for the right to manufacture our proprietary BOOSTCAP^® ultracapacitors. Product revenue is recognized at the time the product is shipped and title passes to the customer unless specific terms require otherwise. In general no discounts are offered and there

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is no right of return. License fee revenues are recognized when the performance requirements have been met, the fee is fixed or determinable, and collection of fees is probable. In prior years, certain continuing and discontinued segments involved revenues 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 at the time the costs were incurred and included provisions for any anticipated losses. These contracts are subject to rate audits and other audits, which could result in the reduction of revenue in excess of estimated provisions. In turn, this could increase losses for the periods in which any such reduction occurs.

Production Costs

In anticipation of an increase in our production capacity, expected efficiencies from economies of scale, and a new production line expected to reduce future costs, we have accepted ultracapacitor orders that were priced below our current production costs. These orders are scheduled for shipments at various times through the third quarter of 2005. We have estimated production costs for each quarter of 2005 in order to determine the estimated loss to fulfill these commitments at December 31, 2004. These estimates include taking into account the installation, commencing in early 2005, of a new ultracapacitor production line in our facility located in Rossens, Switzerland. The new production line will create production efficiencies, thereby reducing production costs. Production efficiencies will be gained as each process of the line is implemented and as production volume increases. Actual production costs during 2005 may differ from our estimates of these efficiencies and could result in an adverse impact on our results of operations.

Accounts Receivable

We establish and maintain customer credit limits based on references, financial information, 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 anticipated bad debts based on past collection history and any specific risks identified in the portfolio. We determine our bad debt reserve based on an analysis we make to measure our reserve requirements and we establish specific reserves when we recognize the inability of our customer to pay its obligation. If we become aware of increasing negative changes in the financial condition of our customers, or if economic conditions change adversely, we may have to increase the allowance. An increase in such allowances would adversely impact our financial condition and results of operations.

Remaining Lease Obligation from Discontinued Operations

We have provided an estimate of the liability of PurePulse associated with a remaining lease obligation, which has been recorded in discontinued operations. In making this estimate, we considered factors such as the commercial real estate market, including our estimate as to how and when we will be able to sub-lease, terminate or buy out the remaining lease obligation. There can be no guarantee that we will be able to conclude this lease obligation for the amount that we have accrued, which could require additional charges.

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 to reflect changes in market conditions. We believe that future events are subject to change and revisions in estimates may have a significant adverse impact on the balance sheet and statement of operations.

Long-Lived Assets and Other Intangible Assets

Long-lived assets such as property and equipment and other intangible assets are reviewed for impairment whenever events and changes in business circumstances indicate that the carrying value of the long-lived asset

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may not be recoverable in accordance with SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets.” The most significant assumptions in the analysis of impairment involve estimates of future undiscounted cash flows. We use cash flow assumptions that are consistent with our business plans and consider other relevant information. If we determine that the carrying value of the long-lived asset or asset group may not be recoverable, a permanent impairment charge is recorded for the amount by which the carrying value of the long-lived assets exceeds its fair market value. If there are changes in business circumstances or in the key assumptions used in estimating undiscounted cash flows, we may be required to recognize an impairment charge to reduce the carrying value of our long-lived assets.

Goodwill

We account for goodwill in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.” This standard requires that goodwill no longer be amortized but is subject to an annual impairment test and when an event occurs or circumstances change such that it is reasonably possible that an impairment may exist. The first step consists of estimating the fair value of each reporting unit and comparing those estimated fair values with the carrying values of the reporting units, which includes the allocated goodwill. If the fair value is less than the carrying value, a second step is performed to compute the amount of the impairment by determining an implied fair value of goodwill. The implied fair value of goodwill is the residual fair value derived by deducting the fair value of a reporting unit’s assets and liabilities from its estimated fair value, which was calculated in step one. The impairment charge represents the excess of the carrying amount of the reporting units’ goodwill over the implied fair value of their goodwill. We have determined the fair value of our reporting units based on a discounted cash flow model using revenue and profit forecasts.

In assessing the implied fair value of goodwill, we have made assumptions regarding estimates of future cash flows and other operating factors. The most significant assumptions in the analysis of impairment involve estimates of revenue and expense forecasts of the reporting unit. If there are changes in business circumstances or in the key assumptions used in estimating the fair value of the reporting unit, we may be required to recognize an impairment charge to reduce the carrying value of our goodwill. We cannot say with certainty that we may not incur charges for impairment of goodwill in the future if the fair value of Maxwell Technologies and Maxwell SA decrease due to market conditions, revisions in our assumptions or other unanticipated circumstances. Any additional impairment charges will adversely affect our results of operations.

Valuation Allowance for Deferred Tax Assets

A valuation allowance is provided for deferred tax assets if it is more likely than not that these items will either expire before we are able to realize their benefit, or that future deductibility is uncertain. In general, companies that have had a recent history of operating losses are faced with a difficult burden of proof as to their ability to generate sufficient future income in order to realize the benefit of the deferred tax assets. We determined that it was appropriate to record a valuation allowance as of December 31, 2004 against our deferred tax assets based on the recent history of losses to amounts that are expected to be more likely than not realizable. The deferred tax assets are still available for us to use in the future to offset taxable income, which would result in the recognition of a tax benefit and a reduction to the Company’s effective tax rate.

Impact of Inflation

We believe that inflation has not had a material impact on our results of operations for any of our fiscal years in the three-year period ended December 31, 2004. However, there can be no assurance that future inflation would not have an adverse impact on our operating results and financial condition.

New Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004), Share-Based payment, or SFAS 123R, which is a revision of SFAS 123, Accounting for Stock-Based Compensation, or SFAS 123. SFAS 123R requires all share-based payments to employees, including grants of

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employee stock options, to be recognized in the financial statements based on their fair values and does not allow the previously permitted pro forma disclosure as an alternative to financial statement recognition. SFAS 123R supercedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, or APB 25, and related interpretations and amends SFAS No. 95, Statement of Cash Flows. SFAS 123R is scheduled to be effective beginning in the third quarter of fiscal 2005. SFAS 123R allows for either prospective recognition of compensation expense or retroactive recognition, which may date back to the original issuance of SFAS 123 or only to interim periods in the year of adoption. The Company is currently evaluating these transition methods.

The impact of adoption of SFAS 123R cannot be predicted at this time because that will depend on the method of adoption elected, the fair value and number of share-based payments granted in the future. However, had the Company adopted SFAS 123R in prior periods, the magnitude of the impact of that standard would have approximated the impact of SFAS 123 assuming the application of the Black-Scholes model as described in the disclosure of pro forma net loss and pro forma loss per share in Note 1 of the Notes to Consolidated Financial Statements. SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption.

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs an amendment of ARB No. 43, Chapter 4,” requiring companies to treat idle facility costs, abnormal handling costs, freight and wasted materials as current period charges rather than as a portion of inventory costs. The effective date is annual periods beginning after June 15, 2005. The Company has evaluated SFAS 151 and management believes it will not have an impact on the Company’s results of operations or financial position.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

We face exposure to financial market risks, including adverse movements in foreign currency exchange rates and changes in interest rates. These exposures may change over time and could have a material adverse impact on our financial results. We have not entered into or invested in any instruments that are subject to market risk, except as follows:

Foreign Currency Risk

Our primary foreign currency exposure is related to our subsidiary in Switzerland. Maxwell Technologies SA has Euro and local currency (Swiss Franc) revenue and local currency operating expenses and loans. Changes in these currency exchange rates impact the U.S. dollar amount of revenue, expenses and debt. We do not hedge our currency exposures.

Interest Rate Risk

At December 31, 2004, we had approximately $2.8 million or 3.15 million Swiss Franc denominated-debt, of which $813,000 is classified as long-term debt. The carrying value of these borrowings approximates fair value due to the short maturity dates of these instruments. We do not anticipate significant interest rate swings in the near future; however, the exchange loss or gain may affect the consolidated balance sheet or the statement of operations. A 10% increase in the interest rate on our debt would not have a material effect on our related interest expense.

We invest excess cash in debt instruments of the U.S. Government and its agencies, high-quality corporate issuers and money market accounts. The primary objective of our investment activities is to preserve principal while maximizing yields without significantly increasing risk. Current policies do not allow the use of interest rate derivative instruments to manage exposure to interest rate changes. As of December 31, 2004, third parties manage approximately $8.0 million of the investment portfolio under guidelines approved by the Company’s Board of Directors. The balance of our cash is invested in money market accounts with banks. A 10% increase in the interest rate on our marketable securities would not have a material effect on our interest income.

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Item 8. Financial Statements and Supplementary Data

Our consolidated financial statements and notes thereto appear on pages 45 to 78 of this Annual Report on Form 10-K.

MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors

Maxwell Technologies, Inc.

San Diego, California

We have audited the consolidated balance sheet of Maxwell Technologies, Inc. as of December 31, 2004, and the related consolidated statements of operations, stockholders’ equity and comprehensive loss and cash flows for the year then ended. Our audit also included the 2004 financial statement schedule listed at Item 15. These financial statements and the schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Maxwell Technologies, Inc. as of December 31, 2004, and the results of its operations and its cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Maxwell Technologies, Inc.’s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Our report dated March 15, 2005 expressed an unqualified opinion on management’s assessment of the effectiveness of Maxwell Technologies, Inc.’s internal control over financial reporting and an opinion that Maxwell Technologies, Inc. had not maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

/s/    MCGLADREY & PULLEN, LLP

San Diego, California

March 15, 2005

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

Maxwell Technologies, Inc.

We have audited the accompanying consolidated balance sheet of Maxwell Technologies, Inc. and subsidiaries (the “Company”) as of December 31, 2003, and the related consolidated statements of operations, shareholders’ equity and comprehensive loss, and cash flows for the year then ended. Our audit also included the 2003 financial statement schedule listed at Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit.

We conducted our audit in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Maxwell Technologies, Inc. and subsidiaries as of December 31, 2003, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

As discussed in Note 1 to the consolidated financial statements, effective January 1, 2003, the Company changed its method of accounting for its Swiss pension plan to conform with Statement of Financial Accounting Standards No. 87, as amended.

/s/ DELOITTE & TOUCHE LLP

San Diego, California

March 29, 2004

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Maxwell Technologies, Inc.

We have audited the accompanying consolidated statements of operations, stockholders’ equity, and cash flows of Maxwell Technologies, Inc. and subsidiaries for the year ended December 31, 2002. Our audit also included the financial statement schedule listed at Item 15(a)(2). These consolidated financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of their operations and their cash flows of Maxwell Technologies, Inc. and subsidiaries for the year ended December 31, 2002, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

/s/    ERNST & YOUNG LLP

San Diego, California

February 7, 2003,

except for the 3 paragraphs under the

caption “Restatement of Consolidated Financial Statements

for the Year Ended December 31, 2002”

in Note 1 and the 3rd paragraph in Note 7 as

to which the date is

March 15, 2005

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MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)