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

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

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

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

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

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

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

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

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

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

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

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

For a discussion of important risks associated with an investment in our securities, including factors that could cause actual results to differ materially from expectations referred to in the forward-looking statements, see Risk Factors in Part II, Item 1A of this document or as disclosed in Part I, Item 1A, of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2007. We do not have any obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Executive Summary

We begin Management's Discussion and Analysis of Financial Condition and Results of Operations with an overview of our business. Subsequently, we provide a summary of some of the highlights from the nine months ended September 30, 2008, followed by a discussion of the different aspects of our business. We then proceed to discuss our results of operations for the three and nine months ended September 30, 2008 compared with the periods in 2007. This is followed by an analysis of changes in our balance sheet

and cash flows and discussion of our capital requirements and financing activities in the section entitled "Liquidity and Capital Resources." We then review our critical accounting policies and new accounting pronouncements along with the impact of inflation on our business.

Overview

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

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

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

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

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

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

Highlights of the Nine Months Ended September 30, 2008

We reported revenue of $21.7 million and a net loss of $5.7 million, or $0.27 per diluted share, for the three months ended September 30, 2008; compared with revenue of $14.2 million and a net loss of $2.6 million, or $0.13 per diluted share, for the three months ended September 30, 2007. We reported revenue of $58.7 million and a net loss of $16.2 million, or $0.79 per share for the nine months ended September 30, 2008; compared with revenue of $40.4 million and a net loss of $14.6 million, or $0.82 per share for the nine months ended September 30, 2007.

During the nine months ended September 30, 2008, we continued to focus on developing strategic alliances, introduced new products, increased production capacity to meet anticipated future demand, reduced product costs, funded capital improvements, augmented the board of directors and improved production processes. Some of these efforts are described below:

• In January we announced that Continental AG, one of the world's leading automotive electronics suppliers, had selected Maxwell's BOOSTCAP® ultracapacitors as the energy storage element of an electrical system stabilization Continental is developing for a major automaker.

• In February we announced that our BOOSTCAP® ultracapacitor production facility in San Diego, California has been certified to the auto industry-specific, International Organization for Standardization (ISO) TS 16949 standard, confirming the company's competence as an automotive supplier. Maxwell's ultracapacitor plant in Rossens, Switzerland, earned ISO/TS certification in 2004, and our contract manufacturing operation in Shenzhen, China, was certified in 2006.

• In March we announced that our Swiss subsidiary was honored as Supplier of the Year for the third time by Siemens Power Transmission & Distribution for our high voltage capacitors. According to Siemens, this award recognizes the supplier that best demonstrates ongoing commitments to lowering operational costs, innovation in product quality and delivery performance, technical support and manufacturing expertise. Maxwell received high ratings in technological innovation, supply capabilities, and overall quality in supplying CONDIS® high voltage capacitor products.

• In April we announced a development collaboration through which Maxwell will produce lithium-ion battery electrodes for testing and evaluation by Johnson Controls-Saft Advanced Power Solutions. The electrodes for lithium-ion batteries

• In May two new members were appointed to our board of directors: Yon Yoon Jorden, who has served as chief financial officer for four publicly traded companies, adding extensive experience in corporate finance and strategy to the board and Roger L. Howsmon, a seasoned corporate executive with extensive international marketing and business development experience, adding strong contacts in the transportation industry.

• In June our common stock was added to the Russell 3000 and 2000 indexes. These indexes include 3000 and 2000 securities, respectively, based on market capitalization. The Russell indexes are constructed to provide comprehensive and unbiased broad market and small-cap barometers and are completely reconstituted annually.

• In July we announced that Vossloh Kiepe GmbH, a leading producer of heavy vehicle drive systems, has selected our 125-volt BOOSTCAP® ultracapacitor modules for braking energy recuperation and torque assist in emission-free electric buses it is producing in collaboration with Van Hool NV for the Milan, Italy, municipal transit system. Shipments began in the third quarter, with 300 125-volt BOOSTCAP® heavy duty transportation modules to be delivered by the end of the year.

• In August we announced the promotion of Larry Longden to the new position of vice president & general manager of the company's Microelectronics product group.

• In September we announced that Plug Power, Inc., a leading developer of hydrogen fuel cell-based power systems for electric lift trucks, has selected Maxwell's BOOSTCAP® ultracapacitors to enhance performance and energy management in its line of GenDrive™ power units. Plug Power placed a purchase order for Maxwell's BOOSTCAP MC2600 2,600-farad ultracapacitor cells to be delivered during the third and fourth quarters.

• In September we announced that LTi REEnergy GmbH (LTi), one of the world's leading producers of electro-mechanical wind turbine blade pitch control systems, selected Maxwell's BOOSTCAP® ultracapacitors to supply backup power for LTi's PitchMaster ® blade pitch control system.

Results of Operations and Financial Condition:

Three Months Ended September 30, 2008 Compared with Three Months Ended
September 30, 2007

The following table presents unaudited selected consolidated financial data (in
thousands, except per share amounts):



                                                          Three Months Ended
                                                             September 30,
                                                           2008          2007
       Revenue                                          $   21,747     $ 14,218
       Revenue increase from the prior year's quarter           53 %          1 %
       Gross profit as a percentage of revenue                  30 %         24 %
       SG&A as percentage of revenue                            27 %         29 %
       R&D expense as percentage of revenue                     18 %         19 %
       Loss from operations                             $   (3,565 )   $ (3,483 )
       Net loss                                         $   (5,707 )   $ (2,611 )
       Basic and diluted net loss per share             $    (0.27 )   $  (0.13 )

Net loss was $5.7 million, or $0.27 per share, in the third quarter of fiscal 2008, compared with $2.6 million, or $0.13 per share, in the same period one year ago. The $3.1 million increase in net loss from the same period prior year is primarily due to increases in cost of sales of $4.4 million, an increase of operating expenses of $3.2 million, and an increase in the loss of embedded derivatives and warrants of $3.1 million. These were offset in part by the revenue increase of $7.5 million. As a percentage of revenue, gross profit increased and SG&A expenses and R&D expenses decreased for the three months ended September 30, 2008 primarily due to the 53% increase in revenue in the current quarter compared with the same quarter of last year.

Revenue

Revenue in the third quarter of fiscal 2008 increased 53% to $21.7 million, compared with $14.2 million in the same period one year ago. Product revenue increased 55% or $7.6 million and license fee and service revenue decreased 17% or $84,000.

Based on the quarterly weighted-average of the foreign exchange rate of the Swiss Franc to the U.S. dollar, the value of the Swiss Franc increased 12% to $0.9370 per U.S. dollar for the quarter ended September 30, 2008, up from $0.8337 per U.S. dollar for the same period one year ago. The revenues generated during the three months ended September 30, 2008 from foreign operations increased $1.6 million due to the increase in foreign exchange rate.

Revenue mix by product line for the three months ended September 30, 2008 and 2007:

                                             Three Months Ended
                                                September 30,
                                             2008           2007
                 Ultracapacitors                 35 %           35 %
                 High-Voltage Capacitors         46 %           43 %
                 Microelectronics                19 %           22 %

                 Total                          100 %          100 %

Gross Profit

Gross profit in the third quarter of fiscal 2008 increased $3.2 million or 95% compared with the same period one year ago. As a percentage of revenue, gross profit increased to 30% compared with 24% in the same period one year ago. Higher gross profit resulted from an increase in the volume of sales of $1.8 million and an increase of $1.4 million due to higher average selling prices and/or net reduction of costs of product.

Gross profit increased $3.2 million primarily as a result of reductions in cost due to offshore manufacturing, increased volume of sales and improved sales mix. The increase in gross profit was burdened by unfavorable foreign currency exchange rates on purchases of raw materials of $389,000, increases in freight expenses of $387,000, and an increase in warranty and rework expense of $212,000 which had a negative impact on our gross profit.

Selling, General & Administrative (SG&A) Expense

Selling, general and administrative (SG&A) expenses were 27% of revenue for the third quarter of fiscal 2008, compared with 29% from the same period one year ago, while total expense increased by $1.8 million, or 45%, from the prior year's quarter. This increase in absolute dollars was driven by increases of:
$326,000 of commissions paid on the higher sales of our high voltage capacitors compared with the third quarter of 2007, $326,000 in stock-based compensation expense, $317,000 in personnel cost, $219,000 related to an increase in the exchange rate, $174,000 in travel expenses, $153,000 of bad debt expense, and $90,000 of expenses associated with our new office in Germany. The increase in personnel and recruiting costs are due to an increase of headcount which is reflective of the increase of sales.

Research & Development (R&D) Expense

Research and development (R&D) expenses were $4 million for the third quarter of fiscal 2008 compared with $2.6 million for the same period in 2007, an increase of $1.4 million or 52%. However, as a percentage of revenues, R&D expense was 18% for the third quarter of fiscal 2008 and is comparable to 19% for the same period in 2007. The increase of $1.4 million was primarily driven by increases of: $495,000 of personnel cost, $446,000 of design and development costs, $235,000 of costs related to the application of patents internationally, and $109,000 of facilities expenses; were offset in party by a decrease of $124,000 in costs to support service fees. The increase in personnel costs is related an increase in headcount and is reflective of the increase in our revenue as well as a decrease in work previously outsourced. Our R&D spending continues to represent a significant percentage of revenue and is focused mainly on BOOSTCAP ® product development and Microelectronics single board computer product development.

Provision for Income Taxes

We recorded an income tax provision of $11,000 for the third quarter of fiscal 2008 compared with an income tax provision of $266,000 for the same period in 2007. This provision is for our Swiss subsidiary's operations. Unremitted earnings of foreign subsidiaries have been included in the consolidated financial statements without giving effect to the United States taxes that may be payable on distribution to the United States because it is not anticipated such earnings will be remitted to the United States. If remitted, the additional United States taxes paid would not be material.

Nine Months Ended September 30, 2008 Compared with Nine Months Ended
September 30, 2007

The following table presents unaudited selected consolidated financial data (in
thousands, except per share amounts):



                                                       Nine Months Ended
                                                         September 30,
                                                      2008          2007
          Revenue                                   $  58,698     $  40,396
          Revenue increase from the prior year             45 %           4 %
          Gross profit as a percentage of revenue          29 %          23 %
          SG&A as percentage of revenue                    29 %          35 %
          R&D expense as percentage of revenue             18 %          21 %
          Loss from operations                      $ (10,982 )   $ (13,498 )
          Net loss                                  $ (16,241 )   $ (14,627 )
          Basic and diluted net loss per share      $   (0.79 )   $   (0.82 )

Net loss was $16.2 million, or $0.79 per share, for the nine months ended September 30, 2008, compared with $14.6 million, or $0.82 per share, in the same period one year ago. The increase in our net loss from the same period prior year of $1.6 million, or 11% is primarily due to increases in: cost of sales of $10.5 million, operating expenses of $5.3 million and the loss on embedded derivatives and warrants of $4.2 million, offset in part by an increase in revenues of $18.3 million.

Revenue

For the nine months ended September 30, 2008 revenue increased 45% to $58.7 million, compared with $40.4 million in the same period one year ago. Product revenue increased 46% or $18.1 million and license fee and service revenue increased 12% or $161,000.

Based on the year to date weighted-average foreign exchange rate of the Swiss Franc to the U.S. dollar, the value of the Swiss Franc increased 16% to $0.9507 per U.S. dollar for the nine months ended September 30, 2008, up from $0.8207 per U.S. dollar for the same period one year ago. The revenues generated during the nine months ended September 30, 2008 from foreign operations increased $5.5 million due to the increase in foreign exchange rate.

Revenue mix by product line for the first nine months of 2008 and 2007:

                                              Nine Months Ended
                                                September 30,
                                             2008          2007
                  Ultracapacitors                34 %          30 %
                  High-Voltage Capacitors        48 %          47 %
                  Microelectronics               18 %          23 %

                  Total                         100 %         100 %

Gross Profit

Gross profit in the nine months ended September 30, 2008 increased $7.8 million or 83% compared with the same period one year ago. As a percentage of revenue, gross profit increased to 29% compared with 23% in the same period one year ago. The increase of gross profit is derived from two areas: $4.3 million from increased volume and $3.5 million from increased pricing and/or the net reduction of costs of product.

Gross profit increased $7.8 million primarily by reductions in cost due to offshore manufacturing and improved sales mix. The increase in gross profit was burdened by increases in freight expenses of $1.3 million, additional costs of $794,000 related to our quarterly standard cost adjustments and a strategic pricing impact of $221,000 which had a negative impact on our gross profit.

Selling, General & Administrative (SG&A) Expense

Selling, general and administrative (SG&A) expenses were 29% of revenue for the nine months ended September 30, 2008, which is down from 35% from the same period one year ago, while total expense increased by $3 million, or 21%, from the same prior year period. The decrease as a percentage of revenue was due primarily to the increase in revenues. This increase in absolute dollars was driven by increases of: $1.2 million in personnel costs, $676,000 of commissions paid on the higher sales of our high voltage capacitors compared with the same period in 2007, $610,000 related to an increase in exchange rates, $374,000 in travel expenses, $340,000 of bad debt expenses, $169,000 for recruiting, $126,000 of expenses associated with our new office in Germany, and $125,000 in director fees and expenses related to an increased number of directors on the board and the expense of an every other year meeting that is held at our Rossens, Switzerland office. These increases were offset in part by decreases of: $699,000 of stock-based compensation expense, $367,000 in audit fees, and $128,000 of advertising expense. The increase in personnel and recruiting costs are due to an increase of headcount which is reflective of the increase of sales.

Research & Development (R&D) Expense

Research and development (R&D) expenses were $10.8 million for the nine months ended September 30, 2008 compared with $8.5 million for the same period in 2007, an increase of $2.3 million or 26%. However, as a percentage of revenues, R&D expense decreased to 18% for the first nine months of fiscal 2008 from 21% for the same period in 2007, primarily as a result of the increase in

revenues. The increase of $2.3 million was driven by increases of: $827,000 of personnel cost, $327,000 in facilities expenses, $275,000 of costs related to the application of patents internationally, $152,000 in design and development costs, $134,000 in costs to support service fees, $112,000 in expense related to an increase in exchange rates, and $110,000 in stock-based compensation expense. The increase in personnel costs is reflective of the increase in our revenue. Our R&D spending continues to represent a significant percentage of revenue and is focused mainly on BOOSTCAP®product development and Microelectronics single board computer product development.

Provision for Income Taxes

We recorded an income tax provision of $512,000 for the nine months ended September 30, 2008 compared with an income tax provision of $108,000 for the same period in 2007. This provision is for our Swiss subsidiary's operations. Unremitted earnings of foreign subsidiaries have been included in the consolidated financial statements without giving effect to the United States taxes that may be payable on distribution to the United States because it is not anticipated such earnings will be remitted to the United States. If remitted, the additional United States taxes paid would not be material.

Liquidity and Capital Resources

Changes in Cash Flow

Our net cash used in operating activities was $6.5 million for the nine months ended September 30, 2008, which primarily resulted from a net loss of $16.2 million and net working capital outflows of $869,000. These were offset by net non-cash charges of $10.6 million. This was an improvement from prior year net cash used in operating activities of $12.9 million for the nine months ended September 30, 2007, which primarily resulted from a net loss of $14.6 million and net working capital outflows of $4.4 million offset by net non-cash charges of $6.1 million.

The net cash provided by investing activities was $1.3 million for the nine months ended September 30, 2008, which primarily resulted from the maturities of marketable securities of $8.1 million. This was offset by capital expenditures of $5.3 million, restrictions on investments of $825,000, purchases of marketable securities of $501,000 and purchase of intangible asset of $152,000. The net cash used in investing activities was $417,000 for the nine months ended September 30, 2007, which primarily resulted from capital expenditures of $3.7 million. This was offset by maturities of marketable securities of $3.2 million, and proceeds from the sale of equipment of $21,000. Through the nine months ended September 30, 2008 we had purchased $5.4 million in capital equipment. Our total capital expenditures are expected to be approximately $9.0 million for our 2008 fiscal year, which will be invested primarily in production equipment to increase capacity for the higher customer demand of High-Voltage and BOOSTCAP ® products.

The net cash provided by financing activities for the nine months ended September 30, 2008 was $4 million, which primarily resulted from net proceeds from the issuance of common stock of $4.5 million and proceeds from long-term and short-term borrowing of $4.3 million. These were offset by principal payments on long-term and short-term debt of $4.7 million. The net cash provided . . .