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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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(Mark One)



|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarter ended June 30, 2007

OR



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

For the transition period from to  to

Commission file number 1-15477



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MAXWELL TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 95-2390133                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|9244 Balboa Avenue San Diego, California                       |  | 92123                               
|(Address of principal executive offices)                       |  | (Zip Code)                          

(858) 503-3300

(Registrants telephone number, including area code)



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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 whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of
accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (check one):

Large accelerated
filer ̈Accelerated
filer  x                Non-accelerated filer ̈

Indicate by check mark whether the registrant is a shell Company (as defined in Rule 12b-2 of the
Act).  YES ̈NO  x

The number of shares of the registrants Common Stock outstanding as of August 3, 2007 is 18,843,972 shares.



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##### Table of Contents

TABLE OF CONTENTS

MAXWELL TECHNOLOGIES, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

For the quarter ended June 30,
2007



|                               |  |                                                                                                     |  |     
|------------------------------ |  | --------------------------------------------------------------------------------------------------- |  | ----
|                               |  |                                                                                                     |  | Page
|PART I  Financial Information |  |                                                                                                    
|                               |  |                                                                                                    
|Item 1.                        |  | Financial Statements (Unaudited):                                                                   |  | 3   
|                               |  |                                                                                                    
|                               |  | Condensed Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006                     |  | 4   
|                               |  |                                                                                                    
|                               |  | Condensed Consolidated Statements of Operations  Three and Six Months Ended June 30, 2007 and 2006 |  | 5   
|                               |  |                                                                                                    
|                               |  | Condensed Consolidated Statements of Cash Flows  Six Months Ended June 30, 2007 and 2006           |  | 6   
|                               |  |                                                                                                    
|                               |  | Notes to Condensed Consolidated Financial Statements                                                |  | 7   
|                               |  |                                                                                                    
|Item 2.                        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations               |  | 18  
|                               |  |                                                                                                    
|Item 3.                        |  | Quantitative and Qualitative Disclosures About Market Risk                                          |  | 27  
|                               |  |                                                                                                    
|Item 4.                        |  | Controls and Procedures                                                                             |  | 27  
|                               | 
|PART II  Other Information    |  |                                                                                                    
|                               |  |                                                                                                    
|Item 1.                        |  | Legal Proceedings                                                                                   |  | 28  
|                               |  |                                                                                                    
|Item 1A.                       |  | Risk Factors                                                                                        |  | 28  
|                               |  |                                                                                                    
|Item 2.                        |  | Unregistered Sales of Equity Securities and Use of Proceeds                                         |  | 28  
|                               |  |                                                                                                    
|Item 3.                        |  | Defaults Upon Senior Securities                                                                     |  | 28  
|                               |  |                                                                                                    
|Item 4.                        |  | Submission of Matters to a Vote of Security Holders                                                 |  | 28  
|                               |  |                                                                                                    
|Item 5.                        |  | Other Information                                                                                   |  | 29  
|                               |  |                                                                                                    
|Item 6.                        |  | Exhibits                                                                                            |  | 29  
|                               | 
|Signatures                     |  | 30                                                                                                 



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##### Table of Contents

PART I  Financial Information

Item 1. Financial Statements

The following condensed consolidated balance sheet as of December 31,
2006, which has been derived from audited financial statements and the unaudited interim condensed consolidated financial statements, consisting of the condensed consolidated balance sheet as of June 30, 2007, the condensed consolidated
statements of operations for the three and six month periods ending June 30, 2007 and 2006, and the condensed consolidated statements of cash flows for the six month periods ended June 30, 2007 and 2006, have been prepared in accordance
with the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading.

The following condensed balance sheet as of December 31, 2006, which has been derived from audited financial statements does not include all of the information and footnotes included in the Companys Annual
Report on Form 10-K for the year ended December 31, 2006. It is suggested that these condensed financial statements be read in conjunction with the financial statements and the notes thereto included in the Companys Annual Report on Form
10-K for the fiscal year ended December 31, 2006.

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported period. In the opinion of management, these unaudited statements contain all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation
for the periods presented as required by Regulation S-X, Rule 10-01 in these unaudited statements.

Actual results could differ from those
estimates and operating results for the three and six month periods ended June 30, 2007 and are not necessarily indicative of the results that may be expected for any subsequent period or for the year ending December 31, 2007.



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MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

(Unaudited)



|                                                                                                                                                                        |  |              |          |   |                  |   |          |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | -------- | - | ---------------- | - | -------- | -
|                                                                                                                                                                        |  | June 30,2007 |          |   | December 31,2006 |  
|Assets                                                                                                                                                                  |  |              |          |   |                  |   |          |  
|Current assets:                                                                                                                                                         |  |              |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                                                                               |  | $            | 12,585   |   |                  | $ | 8,159    |  
|Investments in marketable securities                                                                                                                                    |  |              | 698      |   |                  |   | 3,228    |  
|Trade and other accounts receivable, net                                                                                                                                |  |              | 10,204   |   |                  |   | 9,749    |  
|Inventories, net                                                                                                                                                        |  |              | 15,770   |   |                  |   | 14,894   |  
|Prepaid expenses and other current assets                                                                                                                               |  |              | 1,611    |   |                  |   | 1,596    |  
|                                                                                                                                                                        |  |              |          |   |                  |   |          |  
|Total current assets                                                                                                                                                    |  |              | 40,868   |   |                  |   | 37,626   |  
|Property and equipment, net                                                                                                                                             |  |              | 14,659   |   |                  |   | 13,621   |  
|Other intangible assets, net                                                                                                                                            |  |              | 2,589    |   |                  |   | 1,395    |  
|Goodwill                                                                                                                                                                |  |              | 19,661   |   |                  |   | 19,786   |  
|Prepaid pension asset                                                                                                                                                   |  |              | 10,617   |   |                  |   | 10,371   |  
|Restricted cash                                                                                                                                                         |  |              | 8,000    |   |                  |   | 8,000    |  
|Other non-current assets                                                                                                                                                |  |              | 640      |   |                  |   | 870      |  
|                                                                                                                                                                        |  |              |          |   |                  |   |          |  
|                                                                                                                                                                        |  | $            | 97,034   |   |                  | $ | 91,669   |  
|                                                                                                                                                                        |  |              |          |   |                  |   |          |  
|Liabilities and Stockholders Equity                                                                                                                                    |  |              |          |   |                  |   |          |  
|Current liabilities:                                                                                                                                                    |  |              |          |   |                  |   |          |  
|Accounts payable and accrued liabilities                                                                                                                                |  | $            | 8,834    |   |                  | $ | 9,383    |  
|Accrued warranty                                                                                                                                                        |  |              | 735      |   |                  |   | 795      |  
|Accrued employee compensation                                                                                                                                           |  |              | 2,778    |   |                  |   | 2,543    |  
|Short-term borrowings and current portion of long-term debt                                                                                                             |  |              | 12,963   |   |                  |   | 5,688    |  
|Deferred tax liability                                                                                                                                                  |  |              | 392      |   |                  |   | 392      |  
|Net liabilities of discontinued operations                                                                                                                              |  |              |         |   |                  |   | 63       |  
|                                                                                                                                                                        |  |              |          |   |                  |   |          |  
|Total current liabilities                                                                                                                                               |  |              | 25,702   |   |                  |   | 18,864   |  
|Deferred tax liability                                                                                                                                                  |  |              | 2,156    |   |                  |   | 2,545    |  
|Convertible debentures and long-term debt, excluding current portion                                                                                                    |  |              | 18,550   |   |                  |   | 22,527   |  
|Stock warrants                                                                                                                                                          |  |              | 1,930    |   |                  |   | 1,850    |  
|Other long-term liabilities                                                                                                                                             |  |              | 417      |   |                  |   |         |  
|Commitments and contingencies                                                                                                                                           |  |              |          |   |                  |   |          |  
|Stockholders equity:                                                                                                                                                   |  |              |          |   |                  |   |          |  
|Common stock, $0.10 par value per share, 40,000 shares authorized; 18,701 and 17,261 shares issued and outstanding at June 30, 2007 and
December 31, 2006, respectively |  |              | 1,858    |   |                  |   | 1,726    |  
|Additional paid-in capital                                                                                                                                              |  |              | 155,607  |   |                  |   | 141,294  |  
|Accumulated deficit                                                                                                                                                     |  |              | (116,371 | ) |                  |   | (104,361 | )
|Accumulated other comprehensive income                                                                                                                                  |  |              | 7,185    |   |                  |   | 7,224    |  
|                                                                                                                                                                        |  |              |          |   |                  |   |          |  
|Total stockholders equity                                                                                                                                              |  |              | 48,279   |   |                  |   | 45,883   |  
|                                                                                                                                                                        |  |              |          |   |                  |   |          |  
|                                                                                                                                                                        |  | $            | 97,034   |   |                  | $ | 91,669   |  
|                                                                                                                                                                        |  |              |          |   |                  |   |          |  

See accompanying notes to condensed consolidated financial statements.



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MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(Unaudited)



|                                                              |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|------------------------------------------------------------- |  | -------------------------- | ------ | - | ------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                              |  | Three Months EndedJune 30, |        |   | Six Months EndedJune 30, |  
|                                                              |  | 2007                       |        |   | 2006                     |   |        | 2007 |  |   | 2006    |  
|Revenues:                                                     |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Products                                                      |  | $                          | 13,341 |   |                          | $ | 12,148 |      |  | $ | 25,625  |   |  | $ | 24,119  |  
|License fee                                                   |  |                            | 281    |   |                          |   | 615    |      |  |   | 553     |   |  |   | 615     |  
|                                                              |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Total revenues                                                |  |                            | 13,622 |   |                          |   | 12,763 |      |  |   | 26,178  |   |  |   | 24,734  |  
|Cost of sales                                                 |  |                            | 10,930 |   |                          |   | 10,402 |      |  |   | 20,073  |   |  |   | 18,861  |  
|                                                              |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Gross profit                                                  |  |                            | 2,692  |   |                          |   | 2,361  |      |  |   | 6,105   |   |  |   | 5,873   |  
|Operating expenses:                                           |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Selling, general and administrative                           |  |                            | 5,018  |   |                          |   | 3,912  |      |  |   | 10,073  |   |  |   | 8,175   |  
|Research and development                                      |  |                            | 3,094  |   |                          |   | 2,384  |      |  |   | 5,911   |   |  |   | 4,590   |  
|Amortization of other intangibles                             |  |                            | 65     |   |                          |   | 19     |      |  |   | 84      |   |  |   | 38      |  
|Loss (gain) on disposal of property and equipment             |  |                            | 11     |   |                          |   |       |      |  |   | 52      |   |  |   | (66     | )
|                                                              |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Total operating expenses                                      |  |                            | 8,188  |   |                          |   | 6,315  |      |  |   | 16,120  |   |  |   | 12,737  |  
|                                                              |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Loss from operations                                          |  |                            | (5,496 | ) |                          |   | (3,954 | )    |  |   | (10,015 | ) |  |   | (6,864  | )
|Interest expense net                                          |  |                            | (310   | ) |                          |   | (65    | )    |  |   | (629    | ) |  |   | (71     | )
|Amortization of debt discount and prepaid costs               |  |                            | (904   | ) |                          |   | (904   | )    |  |   | (1,808  | ) |  |   | (1,808  | )
|Gain (loss) on embedded derivatives and warrants              |  |                            | (1,426 | ) |                          |   | 400    |      |  |   | 73      |   |  |   | (3,100  | )
|Other income (loss), net                                      |  |                            | 109    |   |                          |   | (67    | )    |  |   | 205     |   |  |   | (98     | )
|                                                              |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Loss from continuing operations before income taxes           |  |                            | (8,027 | ) |                          |   | (4,590 | )    |  |   | (12,174 | ) |  |   | (11,941 | )
|Income tax (benefit) provision                                |  |                            | (59    | ) |                          |   | (11    | )    |  |   | (158    | ) |  |   | 164     |  
|                                                              |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Loss from continuing operations                               |  |                            | (7,968 | ) |                          |   | (4,579 | )    |  |   | (12,016 | ) |  |   | (12,105 | )
|Income from discontinued operations, net of tax               |  |                            |       |   |                          |   | 258    |      |  |   |        |   |  |   | 333     |  
|                                                              |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Net loss                                                      |  | $                          | (7,968 | ) |                          | $ | (4,321 | )    |  | $ | (12,016 | ) |  | $ | (11,772 | )
|                                                              |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Basic and diluted net loss per share:                         |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Loss from continuing operations                               |  | $                          | (0.45  | ) |                          | $ | (0.27  | )    |  | $ | (0.69   | ) |  | $ | (0.72   | )
|Income from discontinued operations, net of tax               |  |                            |       |   |                          |   | 0.02   |      |  |   |        |   |  |   | 0.02    |  
|                                                              |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Net loss per share                                            |  | $                          | (0.45  | ) |                          | $ | (0.25  | )    |  | $ | (0.69   | ) |  | $ | (0.70   | )
|                                                              |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Shares used in computing basic and diluted net loss per share |  |                            | 17,710 |   |                          |   | 16,831 |      |  |   | 17,399  |   |  |   | 16,741  |  
|                                                              |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  

See accompanying notes to condensed consolidated financial statements.



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MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)



|                                                                            |  |                          |         |   |                |   |         |  
|--------------------------------------------------------------------------- |  | ------------------------ | ------- | - | -------------- | - | ------- | -
|                                                                            |  | Six Months EndedJune 30, |        
|                                                                            |  | 2007                     |         |   | 2006 (Revised) |  
|Operating activities:                                                       |  |                          |         |   |                |   |         |  
|Net loss                                                                    |  | $                        | (12,016 | ) |                | $ | (11,772 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                          |         |   |                |   |         |  
|Depreciation                                                                |  |                          | 2,063   |   |                |   | 1,863   |  
|Amortization                                                                |  |                          | 151     |   |                |   | 103     |  
|Amortization of debt discount and prepaid fees                              |  |                          | 1,808   |   |                |   | 1,807   |  
|Loss (gain) on embedded derivative liabilities                              |  |                          | (73     | ) |                |   | 3,100   |  
|Pension benefit                                                             |  |                          | (22     | ) |                |   | (396    | )
|Stock based compensation                                                    |  |                          | 2,032   |   |                |   | 1,629   |  
|Loss (gain) on sale of property and equipment                               |  |                          | 52      |   |                |   | (66     | )
|Provision for losses on accounts receivable                                 |  |                          | 70      |   |                |   | 107     |  
|Changes in operating assets and liabilities:                                |  |                          |         |   |                |   |         |  
|Trade and other accounts receivable                                         |  |                          | (571    | ) |                |   | (2,398  | )
|Inventories                                                                 |  |                          | (908    | ) |                |   | (4,444  | )
|Prepaid expenses and other assets                                           |  |                          | (1,373  | ) |                |   | (860    | )
|Deferred income taxes                                                       |  |                          | (389    | ) |                |   |        |  
|Accounts payable and accrued liabilities                                    |  |                          | (646    | ) |                |   | 3,368   |  
|Accrued employee compensation                                               |  |                          | 242     |   |                |   | 296     |  
|Other long-term liabilities                                                 |  |                          | 419     |   |                |   |        |  
|Net liabilities of discontinued operations                                  |  |                          |        |   |                |   | (422    | )
|                                                                            |  |                          |         |   |                |   |         |  
|Net cash used in operating activities                                       |  |                          | (9,161  | ) |                |   | (8,085  | )
|                                                                            |  |                          |         |   |                |   |         |  
|Investing activities:                                                       |  |                          |         |   |                |   |         |  
|Purchases of property and equipment                                         |  |                          | (3,232  | ) |                |   | (3,114  | )
|Proceeds from sale of property and equipment                                |  |                          | 21      |   |                |   | 66      |  
|Redemptions of marketable securities                                        |  |                          | 2,530   |   |                |   | 2,208   |  
|Purchases of marketable securities                                          |  |                          |        |   |                |   | (7,030  | )
|                                                                            |  |                          |         |   |                |   |         |  
|Net cash used in investing activities                                       |  |                          | (681    | ) |                |   | (7,870  | )
|                                                                            |  |                          |         |   |                |   |         |  
|Financing activities:                                                       |  |                          |         |   |                |   |         |  
|Principal payments on long-term debt and short-term borrowings              |  |                          | (1,384  | ) |                |   | (3,370  | )
|Proceeds from long-term and short-term borrowings                           |  |                          | 3,308   |   |                |   | 3,180   |  
|Retirement of shares                                                        |  |                          | (165    | ) |                |   | (368    | )
|Net proceeds from issuance of Company stock                                 |  |                          | 12,606  |   |                |   | 3,853   |  
|                                                                            |  |                          |         |   |                |   |         |  
|Net cash provided by financing activities                                   |  |                          | 14,365  |   |                |   | 3,295   |  
|                                                                            |  |                          |         |   |                |   |         |  
|Increase (decrease) in cash and cash equivalents                            |  |                          | 4,523   |   |                |   | (12,660 | )
|Effect of exchange rate changes on cash and cash equivalents                |  |                          | (97     | ) |                |   | 305     |  
|                                                                            |  |                          |         |   |                |   |         |  
|Increase (decrease) in cash and cash equivalents                            |  |                          | 4,426   |   |                |   | (12,355 | )
|Cash and cash equivalents, beginning of period                              |  |                          | 8,159   |   |                |   | 25,760  |  
|                                                                            |  |                          |         |   |                |   |         |  
|Cash and cash equivalents, end of period                                    |  | $                        | 12,585  |   |                | $ | 13,405  |  
|                                                                            |  |                          |         |   |                |   |         |  

See accompanying notes to condensed consolidated financial statements.



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##### Table of Contents

MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Unless
the context otherwise requires, all references 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.

Note 1  Description of Business and Summary of Significant Accounting Policies

Description of Business

Maxwell
Technologies, Inc. is a Delaware corporation and is headquartered in San Diego, California. Originally incorporated in 1965 under the name Maxwell Laboratories, Inc. in 1996, the Company changed its name to Maxwell Technologies, Inc.

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



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



| |  |  | 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 environmental radiation effects and perform reliably in space.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Companys products
are designed and manufactured to perform reliably for the life of the products and systems into which they are integrated. The Company achieves high reliability through the application of proprietary technologies and rigorously controlled design,
development, manufacturing and test processes.

Note 2  Summary of Significant Accounting Policies

Basis of Presentation

The condensed
consolidated financial statements include the accounts of Maxwell Technologies, Inc. and its subsidiaries. All significant intercompany transactions and account balances are eliminated in consolidation.

In the opinion of management of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting
only of normal recurring adjustments) necessary to present fairly the financial position, results of operations, and cash flows of Maxwell Technologies, Inc. for all periods presented. The results reported in these condensed consolidated financial
statements should not be regarded as necessarily indicative of results that may be expected for any subsequent period or for the entire year. These condensed consolidated financial statements should be read in conjunction with the consolidated
financial statements and the notes thereto included in the Companys latest annual report on Form 10-K. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with
accounting principles generally accepted in the United States (U.S. GAAP) have been condensed or omitted.

The preparation of financial
statements in conformity with U.S.GAAP requires management to make estimates and assumptions that affect reported amounts and related disclosures. Estimates have been prepared on the basis of the most current information available. These estimates
include assessing the collectability of accounts receivable, the usage and recoverability of inventories and long-lived assets and the incurrence of losses on warranty costs, the fair value of warrants and embedded conversion options related to
convertible debentures. The markets for most of 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. As a result of these issues noted and other factors, actual results could differ from the estimates used by management.



7



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##### Table of Contents

The Companys fiscal quarters end on the last day of the calendar month in
March, June, September, and December.

Cash and Cash Equivalents, Investments in Marketable Securities

The Company invests its excess cash in debt instruments of the U.S. Government and its agencies, bank certificates of deposit; commercial paper and
high-quality corporate issuers. All highly liquid instruments with an original maturity of three months or less from purchase are considered cash equivalents, and those with original maturities greater than three months on the date of purchase are
considered investments in marketable securities. The Companys investments in marketable securities are classified as available-for-sale and are reported at fair value, with unrealized gains and losses included in stockholders equity as a
separate component of accumulated other comprehensive income. Realized gains or losses and other-than-temporary declines in value, if any, on available-for-sale securities are reported in other income or expense as incurred. The Company recognized
no net realized gains in the six months ended June 30, 2007 or for the year ended December 31, 2006. The Company uses the specific identification method on sales of investments.

Maturities and gross unrealized gains on investments in marketable securities at June 30, 2007 and December 31, 2006 are as follows (in
thousands):



|                                                     |  |                    |       |                            |   |                    |  |   |      
|---------------------------------------------------- |  | ------------------ | ----- | -------------------------- | - | ------------------ |  | - | -----
|                                                     |  | GrossAmortizedCost |       | GrossUnrealizedGain (Loss) |   | EstimatedFairValue
|As of June 30, 2007:                                 |  |                    |       |                            |   |                    |  |   |      
|Corporate Debt Securities, Maturing within 1 year    |  | $                  | 698   |                            | $ |                   |  | $ | 698  
|                                                     |  |                    |       |                            |   |                    |  |   |      
|Total                                                |  | $                  | 698   |                            | $ |                   |  | $ | 698  
|                                                     |  |                    |       |                            |   |                    |  |   |      
|As of December 31, 2006:                             |  |                    |       |                            |   |                    |  |   |      
|Bank Certificates of Deposit, Maturing within 1 year |  | $                  | 550   |                            | $ |                   |  | $ | 550  
|Commercial Paper, Maturing within 1 year             |  |                    | 995   |                            |   |                   |  |   | 995  
|Corporate Debt Securities, Maturing within 1 year    |  |                    | 1,682 |                            |   | 1                  |  |   | 1,683
|                                                     |  |                    |       |                            |   |                    |  |   |      
|Total                                                |  | $                  | 3,227 |                            | $ | 1                  |  | $ | 3,228
|                                                     |  |                    |       |                            |   |                    |  |   |      

Revenue Recognition

We derive our revenue from the sale of manufactured products directly to customers. For certain long-term contracts revenue is recognized at the time costs are incurred and for licensing fees we recognize revenue from
the right to manufacture products based on our proprietary ultracapacitors design. Product revenue is recognized, according to the guidelines of SEC Staff Accounting Bulletin Numbers 101 Revenue Recognition in Financial Statements, and 104
Revenue Recognition, when title passes to the customer at either shipment from our facilities, or receipt at the customer facility, depending on shipping terms, provided collectability is reasonably assured. If a volume discount is offered,
revenue is recognized at the lowest price to the customers. This method has been consistently applied from period to period and there is no right of return. Revenue on fixed price government contracts is recognized at the time costs are incurred and
is calculated on a percentage of completion basis, in accordance with Statement of Position 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts and is limited by the funding of the prime contractor. 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. The Company recognizes revenue that relates to specific deliverables, in accordance with EITF 00-21, Accounting for Revenue Arrangements
with Multiple Deliverables. This revenue involves a contract that grants a license to manufacture and market products in Mainland China, using Maxwells proprietary large cell and multi-cell module technology under a separate brand. The
contract, obligates the manufacturer to source ultracapacitor electrode material from Maxwell, the agreement has no general right of return and allows for no refunds.



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Computation of Net Loss per Share

Basic loss per share is computed as net loss divided by the weighted average number of common shares outstanding for the period. Diluted loss per share is
calculated on the basis of the weighted average number of common shares outstanding plus the dilutive effect of outstanding stock options and restricted stock awards of the Company, assuming their exercise using the treasury stock
method.

The following table sets forth the computation of basic and diluted loss per share (in thousands, except per share data):



|                                                 |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|------------------------------------------------ |  | -------------------------- | ------ | - | ------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                 |  | Three Months EndedJune 30, |        |   | Six Months EndedJune 30, |  
|                                                 |  | 2007                       |        |   | 2006                     |   |        | 2007 |  |   | 2006    |  
|Numerator                                        |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Basic:                                           |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Loss from continuing operations                  |  | $                          | (7,968 | ) |                          | $ | (4,579 | )    |  | $ | (12,016 | ) |  | $ | (12,105 | )
|Income from discontinued operations, net of tax  |  |                            |       |   |                          |   | 258    |      |  |   |        |   |  |   | 333     |  
|                                                 |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Net loss                                         |  | $                          | (7,968 | ) |                          | $ | (4,321 | )    |  | $ | (12,016 | ) |  | $ | (11,772 | )
|                                                 |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Denominator                                      |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Basic:                                           |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Weighted average shares outstanding              |  |                            | 17,710 |   |                          |   | 16,831 |      |  |   | 17,399  |   |  |   | 16,741  |  
|Diluted:                                         |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Effect of dilutive securities:                   |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Common stock options and restricted stock awards |  |                            |       |   |                          |   |       |      |  |   |        |   |  |   |        |  
|                                                 |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Total weighted average common shares outstanding |  |                            | 17,710 |   |                          |   | 16,831 |      |  |   | 17,399  |   |  |   | 16,741  |  
|                                                 |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Basic and diluted net loss per share:            |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Loss from continuing operations                  |  | $                          | (0.45  | ) |                          | $ | (0.27  | )    |  | $ | (0.69   | ) |  | $ | (0.72   | )
|Income from discontinued operations, net of tax  |  |                            |       |   |                          |   | 0.02   |      |  |   |        |   |  |   | 0.02    |  
|                                                 |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Basic and diluted net loss per share             |  | $                          | (0.45  | ) |                          | $ | (0.25  | )    |  | $ | (0.69   | ) |  | $ | (0.70   | )
|                                                 |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  

For the three and six-month periods ended June 30, 2007 and 2006, incremental equivalent
shares under common stock options and restricted stock awards of 809,992 and 821,543 for 2007, and 1,139,460 and 1,147,568 for 2006, respectively, and the shares issuable on conversion of convertible debentures and the warrants for the three and six
month periods ended June 30, 2007 and 2006 have also been excluded in the computation of dilutive earnings per share as their impact would have been anti-dilutive.



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##### Table of Contents

Presentation of Cash Flows beginning with Net Loss.

The Company had presented the consolidated statement of cash flows beginning with loss from continuing operations rather than net loss. SFAS 95 Statement of Cash Flows prescribes the use of net loss. Effective
with the quarter ended June 30, 2007, the Company retroactively revised the consolidated statements of cash flows for the years ended December 31, 2004, 2005, 2006 and the three months ended March 31, 2006 and 2007 which are shown as
follows:

MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



|                                                                            |  |                                     |         |   |                                     |   |         |                                     |  |   |                                         |   |  |                                         |        |   |  |   |        |  
|--------------------------------------------------------------------------- |  | ----------------------------------- | ------- | - | ----------------------------------- | - | ------- | ----------------------------------- |  | - | --------------------------------------- | - |  | --------------------------------------- | ------ | - |  | - | ------ | -
|                                                                            |  | Year EndedDecember 31,2006(Revised) |         |   | Year EndedDecember 31,2005(Revised) |   |         | Year EndedDecember 31,2004(Revised) |  |   | Three MonthsendedMarch 31,2007(Revised) |   |  | Three MonthsendedMarch 31,2006(Revised) |       
|Operating activities:                                                       |  |                                     |         |   |                                     |   |         |                                     |  |   |                                         |   |  |                                         |        |   |  |   |        |  
|Net Loss                                                                    |  | $                                   | (16,495 | ) |                                     | $ | (6,294  | )                                   |  | $ | (9,075                                  | ) |  | $                                       | (4,048 | ) |  | $ | (7,451 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                                     |         |   |                                     |   |         |                                     |  |   |                                         |   |  |                                         |        |   |  |   |        |  
|Depreciation                                                                |  |                                     | 3,811   |   |                                     |   | 3,548   |                                     |  |   | 3,553                                   |   |  |                                         | 981    |   |  |   | 888    |  
|Amortization                                                                |  |                                     | 206     |   |                                     |   | 207     |                                     |  |   | 207                                     |   |  |                                         | 52     |   |  |   | 50     |  
|Amortization of debt discount and prepaid fees                              |  |                                     | 3,616   |   |                                     |   | 100     |                                     |  |   |                                        |   |  |                                         | 904    |   |  |   | 904    |  
|Loss (gain) on embedded derivative liabilities                              |  |                                     | (1,980  | ) |                                     |   | (800    | )                                   |  |   |                                        |   |  |                                         | (1,499 | ) |  |   | 3,500  |  
|Pension benefit (loss)                                                      |  |                                     | (1,460  | ) |                                     |   | (329    | )                                   |  |   | (352                                    | ) |  |                                         | 64     |   |  |   | (194   | )
|Stock based compensation                                                    |  |                                     | 2,710   |   |                                     |   | 361     |                                     |  |   |                                        |   |  |                                         | 1,177  |   |  |   | 936    |  
|Loss (gain) on sale of property and equipment                               |  |                                     | (80     | ) |                                     |   | 40      |                                     |  |   | 41                                      |   |  |                                         | 41     |   |  |   | (66    | )
|Shares issued for interest expense                                          |  |                                     | 778     |   |                                     |   |        |                                     |  |   |                                        |   |  |                                         |       |   |  |   |       |  
|Provision for losses on accounts receivable                                 |  |                                     | 89      |   |                                     |   | (96     | )                                   |  |   | 212                                     |   |  |                                         | 3      |   |  |   | 73     |  
|Changes in operating assets and liabilities:                                |  |                                     |         |   |                                     |   |         |                                     |  |   |                                         |   |  |                                         |        |   |  |   |        |  
|Trade and other accounts receivable                                         |  |                                     | (2,549  | ) |                                     |   | (489    | )                                   |  |   | (861                                    | ) |  |                                         | (885   | ) |  |   | (937   | )
|Inventories                                                                 |  |                                     | (4,708  | ) |                                     |   | (1,938  | )                                   |  |   | (519                                    | ) |  |                                         | (2,264 | ) |  |   | (1,124 | )
|Prepaid expenses and other assets                                           |  |                                     | (762    | ) |                                     |   | 109     |                                     |  |   | 468                                     |   |  |                                         | (349   | ) |  |   | (386   | )
|Deferred income taxes                                                       |  |                                     | 268     |   |                                     |   | (17     | )                                   |  |   | 597                                     |   |  |                                         | (388   | ) |  |   |       |  
|Accounts payable and accrued liabilities                                    |  |                                     | 2,452   |   |                                     |   | (18     | )                                   |  |   | (2,556                                  | ) |  |                                         | (1,460 | ) |  |   | 75     |  
|Accrued employee compensation                                               |  |                                     | (105    | ) |                                     |   | 1,085   |                                     |  |   | (104                                    | ) |  |                                         | (114   | ) |  |   | (104   | )
|Net liabilities of discontinued operations                                  |  |                                     | (464    | ) |                                     |   | (519    | )                                   |  |   | (449                                    | ) |  |                                         |       |   |  |   | (164   | )
|                                                                            |  |                                     |         |   |                                     |   |         |                                     |  |   |                                         |   |  |                                         |        |   |  |   |        |  
|Net cash used in operating activities                                       |  |                                     | (14,673 | ) |                                     |   | (5,050  | )                                   |  |   | (8,838                                  | ) |  |                                         | (7,785 | ) |  |   | (4,000 | )
|                                                                            |  |                                     |         |   |                                     |   |         |                                     |  |   |                                         |   |  |                                         |        |   |  |   |        |  
|Investing activities:                                                       |  |                                     |         |   |                                     |   |         |                                     |  |   |                                         |   |  |                                         |        |   |  |   |        |  
|Purchases of property and equipment                                         |  |                                     | (6,846  | ) |                                     |   | (3,809  | )                                   |  |   | (3,022                                  | ) |  |                                         | (1,723 | ) |  |   | (1,889 | )
|Proceeds from sale of property and equipment                                |  |                                     | 299     |   |                                     |   |        |                                     |  |   | 263                                     |   |  |                                         | 11     |   |  |   | 66     |  
|Redemptions of marketable securities                                        |  |                                     | 6,920   |   |                                     |   | 5,543   |                                     |  |   | 2,329                                   |   |  |                                         | 2,533  |   |  |   |       |  
|Purchases of marketable securities                                          |  |                                     | (9,451  | ) |                                     |   | (4,135  | )                                   |  |   | (1,974                                  | ) |  |                                         |       |   |  |   | (7,031 | )
|Restricted cash                                                             |  |                                     |        |   |                                     |   | (8,000  | )                                   |  |   |                                        |   |  |                                         |       |   |  |   |       |  
|                                                                            |  |                                     |         |   |                                     |   |         |                                     |  |   |                                         |   |  |                                         |        |   |  |   |        |  
|Net cash (used in) provided by investing activities                         |  |                                     | (9,078  | ) |                                     |   | (10,401 | )                                   |  |   | (2,404                                  | ) |  |                                         | 821    |   |  |   | (8,854 | )
|                                                                            |  |                                     |         |   |                                     |   |         |                                     |  |   |                                         |   |  |                                         |        |   |  |   |        |  
|Financing activities:                                                       |  |                                     |         |   |                                     |   |         |                                     |  |   |                                         |   |  |                                         |        |   |  |   |        |  
|Principal payments on long-term debt and short-term borrowings              |  |                                     | (4,973  | ) |                                     |   | (3,459  | )                                   |  |   | (1,816                                  | ) |  |                                         | (842   | ) |  |   | (1,523 | )
|Proceeds from long-term and short-term borrowings                           |  |                                     | 7,158   |   |                                     |   | 25,374  |                                     |  |   | 2,448                                   |   |  |                                         | 1,092  |   |  |   | 1,523  |  
|Stock warrants                                                              |  |                                     |        |   |                                     |   | 2,900   |                                     |  |   |                                        |   |  |                                         |       |   |  |   |       |  
|Deferred Borrowing Costs                                                    |  |                                     |        |   |                                     |   | (1,341  | )                                   |  |   |                                        |   |  |                                         |       |   |  |   |       |  
|Retirement of shares                                                        |  |                                     | (368    | ) |                                     |   |        |                                     |  |   |                                        |   |  |                                         | (165   | ) |  |   |       |  
|Shares issued for interest expense                                          |  |                                     |        |   |                                     |   |        |                                     |  |   |                                        |   |  |                                         |       |   |  |   |       |  
|Net proceeds from issuance of Company stock                                 |  |                                     | 4,277   |   |                                     |   | 7,110   |                                     |  |   | 11,310                                  |   |  |                                         | 225    |   |  |   | 3,140  |  
|                                                                            |  |                                     |         |   |                                     |   |         |                                     |  |   |                                         |   |  |                                         |        |   |  |   |        |  
|Net cash provided by financing activities                                   |  |                                     | 6,094   |   |                                     |   | 30,584  |                                     |  |   | 11,942                                  |   |  |                                         | 310    |   |  |   | 3,140  |  
|                                                                            |  |                                     |         |   |                                     |   |         |                                     |  |   |                                         |   |  |                                         |        |   |  |   |        |  
|Increase (decrease) in cash and cash equivalents                            |  |                                     | (17,657 | ) |                                     |   | 15,133  |                                     |  |   | 700                                     |   |  |                                         | (6,654 | ) |  |   | (9,714 | )
|Effect of exchange rate changes on cash and cash equivalents                |  |                                     | 56      |   |                                     |   | (113    | )                                   |  |   | 256                                     |   |  |                                         | (52    | ) |  |   | (26    | )
|                                                                            |  |                                     |         |   |                                     |   |         |                                     |  |   |                                         |   |  |                                         |        |   |  |   |        |  
|Increase (decrease) in cash and cash equivalents                            |  |                                     | (17,601 | ) |                                     |   | 15,020  |                                     |  |   | 956                                     |   |  |                                         | (6,706 | ) |  |   | (9,740 | )
|Cash and cash equivalents, beginning of period                              |  |                                     | 25,760  |   |                                     |   | 10,740  |                                     |  |   | 9,784                                   |   |  |                                         | 8,159  |   |  |   | 25,760 |  
|                                                                            |  |                                     |         |   |                                     |   |         |                                     |  |   |                                         |   |  |                                         |        |   |  |   |        |  
|Cash and cash equivalents, end of period                                    |  | $                                   | 8,159   |   |                                     | $ | 25,760  |                                     |  | $ | 10,740                                  |   |  | $                                       | 1,453  |   |  | $ | 16,020 |  
|                                                                            |  |                                     |         |   |                                     |   |         |                                     |  |   |                                         |   |  |                                         |        |   |  |   |        |  



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##### Table of Contents

The individual lines revised in the consolidated statements of cash flows for the six months ended June 30, 2006 the
three months ended March 31, 2007 and 2006 and the years ended December 31, 2004, 2005, 2006 and are shown below:

(in
thousands)



|                                                       |  |                                                |         |   |           |   |         |                                             |  |   |         |  
|------------------------------------------------------ |  | ---------------------------------------------- | ------- | - | --------- | - | ------- | ------------------------------------------- |  | - | ------- | -
|                                                       |  | Six Months EndedJune 30,
2006 as reported      |         |   | Revisions |   |         | Revised Six Months EndedJune 30, 2006       | 
|Operating activities:                                  |  |                                                |         |   |           |   |         |                                             |  |   |         |  
|Loss from continuing operations                        |  | $                                              | (12,105 | ) |           | $ | 12,105  |                                             |  | $ |        |  
|Net Loss                                               |  | $                                              |        |   |           | $ | (11,772 | )                                           |  | $ | (11,772 | )
|Net cash used in discontinued operations               |  | $                                              | (89     | ) |           | $ | 89      |                                             |  | $ |        |  
|Net liabilities of discontinued operations             |  | $                                              |        |   |           | $ | (422    | )                                           |  | $ | (422    | )
|                                                       |  |                                                |         |   |           |   |         |                                             |  |   |         |  
|                                                       |  |                                                |        
|                                                       |  | Three Months EndedMarch 31,
2007 as reported   |         |   | Revisions |   |         | Revised Three Months EndedMarch 31, 2007    | 
|Operating activities:                                  |  |                                                |         |   |           |   |         |                                             |  |   |         |  
|Loss from continuing operations                        |  | $                                              | (4,048  | ) |           | $ | 4,048   |                                             |  | $ |        |  
|Net Loss                                               |  | $                                              |        |   |           | $ | (4,048  | )                                           |  | $ | (4,048  | )
|Net cash used in discontinued operations               |  | $                                              |        |   |           | $ |        |                                             |  | $ |        |  
|Net liabilities of discontinued operations             |  | $                                              |        |   |           | $ |        |                                             |  | $ |        |  
|                                                       |  |                                                |         |   |           |   |         |                                             |  |   |         |  
|                                                       |  |                                                |        
|                                                       |  | Three Months EndedMarch 31,
2006 as reported   |         |   | Revisions |   |         | Revised Three Months EndedMarch 31, 2006    | 
|Operating activities:                                  |  |                                                |         |   |           |   |         |                                             |  |   |         |  
|Loss from continuing operations                        |  | $                                              | (7,526  | ) |           | $ | 7,526   |                                             |  | $ |        |  
|Net Loss                                               |  | $                                              |        |   |           | $ | (7,451  | )                                           |  | $ | (7,451  | )
|Net cash used in discontinued operations               |  | $                                              | (89     | ) |           | $ | 89      |                                             |  | $ |        |  
|Net liabilities of discontinued operations             |  | $                                              |        |   |           | $ | (164    | )                                           |  | $ | (164    | )
|                                                       |  |                                                |         |   |           |   |         |                                             |  |   |         |  
|                                                       |  |                                                |        
|                                                       |  | For the year endedDecember 31, 2006as reported |         |   | Revisions |   |         | Revised For the year endedDecember 31, 2006 | 
|Operating activities:                                  |  |                                                |         |   |           |   |         |                                             |  |   |         |  
|Loss from continuing operations                        |  | $                                              | (16,300 | ) |           | $ | 16,300  |                                             |  | $ |        |  
|Net Loss                                               |  | $                                              |        |   |           | $ | (16,495 | )                                           |  | $ | (16,495 | )
|Net cash used in discontinued operations               |  | $                                              | (659    | ) |           | $ | 659     |                                             |  | $ |        |  
|Net liabilities of discontinued operations             |  | $                                              |        |   |           | $ | (464    | )                                           |  | $ | (464    | )
|                                                       |  |                                                |         |   |           |   |         |                                             |  |   |         |  
|                                                       |  |                                                |        
|                                                       |  | For the year endedDecember 31, 2005as reported |         |   | Revisions |   |         | Revised For the year endedDecember 31, 2005 | 
|Operating activities:                                  |  |                                                |         |   |           |   |         |                                             |  |   |         |  
|Loss from continuing operations                        |  | $                                              | (6,254  | ) |           | $ | 6,254   |                                             |  | $ |        |  
|Net Loss                                               |  | $                                              |        |   |           | $ | (6,294  | )                                           |  | $ | (6,294  | )
|Net cash used in discontinued operations               |  | $                                              | (559    | ) |           | $ | 559     |                                             |  | $ |        |  
|Net liabilities of discontinued operations             |  | $                                              |        |   |           | $ | (519    | )                                           |  | $ | (519    | )
|                                                       |  |                                                |         |   |           |   |         |                                             |  |   |         |  
|                                                       |  |                                                |        
|                                                       |  | For the year endedDecember 31, 2004as reported |         |   | Revisions |   |         | Revised For the year endedDecember 31, 2004 | 
|Operating activities:                                  |  |                                                |         |   |           |   |         |                                             |  |   |         |  
|Loss from continuing operations                        |  | $                                              | (9,808  | ) |           | $ | 9,808   |                                             |  | $ |        |  
|Net Loss                                               |  | $                                              |        |   |           | $ | (9,075  | )                                           |  | $ | (9,075  | )
|Net cash provided by (used in) discontinued operations |  | $                                              | 284     |   |           | $ | (284    | )                                           |  | $ |        |  
|Net liabilities of discontinued operations             |  | $                                              |        |   |           | $ | (449    | )                                           |  | $ | (449    | )
|                                                       |  |                                                |         |   |           |   |         |                                             |  |   |         |  

Accounting for Uncertainty in Income Taxes

In July 2006, the FASB issued Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes. FIN 48 is an
interpretation of Statement of Financial Accounting Standards No. 109, which provides criteria for the recognition, measurement, presentation and disclosures of uncertain tax positions. A tax benefit from an uncertain tax position
may be recognized if it is more likely than not that the position is sustainable based solely on its technical merits. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. The Company adopted
FIN 48 on January 1, 2007.

At the adoption date of January 1, 2007, the Company had $3.17 million of unrecognized tax benefits.
Of the total unrecognized tax benefits at the adoption date, the entire amount of $3.17 million was recorded as a reduction to deferred tax assets, which caused a corresponding reduction in the Companys valuation allowance of $3.17 million. To
the extent such portion of unrecognized tax benefits is recognized at a time such valuation allowance no longer exists, the recognition would impact the Company effective tax rate.



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The Company does not anticipate that the amount of unrecognized tax benefits as of June 30, 2007
will significantly change within 12 months.

The Company recognizes interest and penalties as a component of income tax expense.

The Company is subject to taxation in the United States, federal and various states and Switzerland. The tax years 2000 to 2006 are
subject to examination by the major taxing jurisdictions in which the Company is subject to.

Pending Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157 Fair Value Measurements (SFAS 157). SFAS 157 provides a new single
authoritative definition of fair value and provides enhanced guidance for measuring the fair value of assets and liabilities and requires additional disclosures related to the extent to which companies measure assets and liabilities at fair value,
the information used to measure fair value, and the effect of fair value measurements on earnings. SFAS 157 is effective for the Company as of January 1, 2008. The Company is currently assessing the impact, if any, of SFAS 157 on its
consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial LiabilitiesIncluding an Amendment of FASB Statement No 115 (SFAS 159)which permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS 159 also includes an
amendment to SFAS 115, Accounting for Certain Investments in Debt and Equity Securities, which applies to all entities with available-for-sale and trading securities. This statement is effective as of the beginning of an entitys first
fiscal year that begins after November 15, 2007. The Company does not anticipate any material impact on its consolidated financial statements upon the adoption of this standard.

Note 3  Balance Sheet Details

Inventories

Inventories are stated at the lower of cost (on a first-in, first-out basis) or market. Finished goods and work-in-process inventory values include the
cost of raw materials, labor and manufacturing overhead. Inventory written down to market establishes a new cost basis and its value can not be subsequently increased based upon changes in underlying facts and circumstances. Inventory consist of the
following (in thousands):



|                                 |  |              |        |   |                  |   |        |  
|-------------------------------- |  | ------------ | ------ | - | ---------------- | - | ------ | -
|                                 |  | June 30,2007 |        |   | December 31,2006 |  
|Inventories:                     |  |              |        |   |                  |   |        |  
|Raw material and purchased parts |  | $            | 11,014 |   |                  | $ | 10,452 |  
|Work-in-process                  |  |              | 3,260  |   |                  |   | 3,518  |  
|Finished goods                   |  |              | 4,006  |   |                  |   | 3,709  |  
|Inventory reserve                |  |              | (2,510 | ) |                  |   | (2,785 | )
|                                 |  |              |        |   |                  |   |        |  
|Net Inventory                    |  | $            | 15,770 |   |                  | $ | 14,894 |  
|                                 |  |              |        |   |                  |   |        |  

Other Intangible Assets

Other Intangible Assets consisted of the following (in thousands):



|                          |  |                    |       |                         |   |        |                           |  |                  |     |  |   |      
|------------------------- |  | ------------------ | ----- | ----------------------- | - | ------ | ------------------------- |  | ---------------- | --- |  | - | -----
|                          |  | GrossCarryingValue |       | AccumulatedAmortization |   |        | ForeignCurrencyAdjustment |  | NetCarryingValue
|As of June 30, 2007:      |  |                    |       |                         |   |        |                           |  |                  |     |  |   |      
|Developed core technology |  | $                  | 1,100 |                         | $ | (630   | )                         |  | $                | 187 |  | $ | 657  
|Patents                   |  |                    | 2,338 |                         |   | (406   | )                         |  |                  |    |  |   | 1,932
|                          |  |                    |       |                         |   |        |                           |  |                  |     |  |   |      
|Total Intangible Assets   |  | $                  | 3,438 |                         | $ | (1,036 | )                         |  | $                | 187 |  | $ | 2,589
|                          |  |                    |       |                         |   |        |                           |  |                  |     |  |   |      

Goodwill

The change in the carrying amount of goodwill from December 31, 2006 to June 30, 2007 is as follows (in thousands):



|                                         |  |   |        |  
|---------------------------------------- |  | - | ------ | -
|Balance at December 31, 2006             |  | $ | 19,786 |  
|Foreign currency translation adjustments |  |   | (125   | )
|                                         |  |   |        |  
|Balance at June 30, 2007                 |  | $ | 19,661 |  
|                                         |  |   |        |  



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Warranty Reserve

The Company provides product warranties in conjunction with certain product sales. The majority of the Companys warranties are for one to two years in the normal course of business. The Company accrues for the
estimated warranty at the time of sale based on historical warranty expenses. The estimated warranty liability is calculated based on historical warranty expenses plus any known or expected warranty exposure.

The following table sets forth an analysis of the warranty reserve activity for the six months ended June 30, 2007 and year ended December 31,
2006, respectively (in thousands):



|                                         |  |              |      |   |                  |   |        |  
|---------------------------------------- |  | ------------ | ---- | - | ---------------- | - | ------ | -
|                                         |  | June 30,2007 |      |   | December 31,2006 |  
|Accrued Warranty:                        |  |              |      |   |                  |   |        |  
|Beginning balance                        |  | $            | 795  |   |                  | $ | 632    |  
|Product warranty expense on sales        |  |              | 152  |   |                  |   | 1,457  |  
|Change to prior warranty expense/accrual |  |              | (137 | ) |                  |   | (213   | )
|Settlement of warranties                 |  |              | (72  | ) |                  |   | (1,115 | )
|Currency exchange adjustment             |  |              | (3   | ) |                  |   | 34     |  
|                                         |  |              |      |   |                  |   |        |  
|Ending balance                           |  | $            | 735  |   |                  | $ | 795    |  
|                                         |  |              |      |   |                  |   |        |  

Stock sale and change in additional paid in capital

In November 2006 the Company filed an S-3 with the Securities and Exchange Commission to from time to time sell up to an aggregate of $125 million of the
Companys common stock, warrants or debt securities. During the six months ended June 30, 2007 the Companys additional paid in capital increased $14.3 million. The majority of this increase, $11.2 million, was from the sale of
1.15 million shares of common stock. The remainder of the increase was due to the sale of stock for the Companys ESPP, the exercise of stock options and share based expense.

Note 4  Stock-Based Compensation

The Company has two active share-based compensation plans as
of June 30, 2007; the 2004 Employee Stock Purchase Plan (the ESPP) and the 2005 Omnibus Equity Incentive Plan (the Incentive Plan) under which incentive stock options, non-qualified stock options and restricted stock
awards are granted.

Employee Stock Options and Employee Stock Purchase Plan

The fair value of the ESPP shares to be purchased at the end of the offering periods that begin January 1 and July 1 is calculated for a 15%
discount on the stock price; and by using the Black-Scholes valuation model for a call and put option attributes of the Company ESPP, resulted in a total value of $4.16 and $3.93 per share for the offering period beginning January 1, 2007 and
2006, respectively. Total compensation expense recognized for the ESPP for the six months ended June 30, 2007 and 2006 was $64,000 and $33,000 respectively.

Employee Stock Options Plan

The fair value of the warrants and embedded conversion option is estimated on the
balance sheet date using the Black-Scholes valuation model with the following assumptions:



|                                |  |                               |  |                              
|------------------------------- |  | ----------------------------- |  | -----------------------------
|                                |  | Six Months EndedJune 30, 2007 |  | Six Months EndedJune 30, 2006
|Expected dividends              |  |                              |  |                             
|Expected volatility             |  | 52.3%  49.8%                 |  | 54.7%  62.7%                
|Average risk-free interest rate |  | 4.7%  4.6%                   |  | 4.4%  5.0%                  
|Expected term/life (in years)   |  | 4.57                          |  | 5.1  6.2                    

The weighted-average grant date fair value of employee options granted during the three and six
months ended June 30, 2007 was $5.59 and $5.54 per share respectively while the weighted-average grant date fair value for the three and six



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months ended June 30 2006 was $9.84 and $8.80 per share respectively. The total intrinsic value of options exercised during the three and six months
ended June 30, 2007 was $1.0 million and $1.1 million respectively and for the three and six months ended June 30, 2006 was $847,000 and $3.4 million respectively.

As of June 30, 2007 there was $2.4 million of total unrecognized compensation cost related to nonvested stock options granted under the incentive
plan. The cost is expected to be recognized over a weighted average period of 2.4 years. Compensation cost for employee options recognized in the three and six months ended June 30, 2007 was $251,000 and $510,000 respectively while the expense
recognized for the three and six months ended June 30, 2006 was $201,000 and $534,000 respectively.

Restricted Stock Awards

For the three and six months ended June 30, 2007 the Company recognized an expense of $566,000 and $1.4 million, respectively,
while for the three and six months ended June 30 2006 the expense recognized was $466,000 and $1.0 million respectively for compensation expense for restricted stock awards. Under FASB No. 123 (revised) Share-Based Payment
(SFAS 123R) the Company determines the fair value at grant date and expenses that amount over the requisite service period. As prescribed under SFAS 123R the Company has reassessed the probability of achievement of milestones for each
restricted stock award that was active and not earned as of June 30, 2007 and determined appropriate share-based expense treatment under the SFAS 123R. The following table summarizes the activity under the restricted stock awards (in thousands,
except for per share amounts):



|                              |  |        |   |  |                                      |      
|----------------------------- |  | ------ | - |  | ------------------------------------ | -----
|Non-vested Shares             |  | Shares |   |  | WeightedAverage Grant-DateFair Value
|Non-vested at January 1, 2007 |  | 193    |   |  | $                                    | 13.67
|Granted                       |  | 148    |   |  |                                      | 11.26
|Vested                        |  | (53    | ) |  |                                      | 13.12
|Forfeited                     |  | (13    | ) |  |                                      | 10.31
|Non-vested at June 30, 2007   |  | 275    |   |  | $                                    | 12.64

The total grant-date fair value of restricted stock awards granted during the three and six months
ended June 30, 2007 was $1.7 million and for the three and six months ended June 2006 was $868,000 and $1.9 million, respectively. There were 8,000 and 53,000 shares vested during the three and six months ended June 30, 2007 with a grant
date fair value of $108,000 and $689,000, respectively. For the three and six months ended June 30, 2006 87,000 shares vested with a grant date fair value of $644,000. As of June 30, 2007 there was $1.2 million of total unrecognized
compensation cost related to non-vested restricted stock awards granted under the plan. The cost is expected to be recognized over a weighted average period of 0.4 years.

Compensation cost for restricted stock awards, employee stock options, ESPP and non-employee stock compensation included in Cost of sales; Selling, general and administrative; and Research and development is (in
thousands):



|                                     |  |                            |     |                          |   |      |  |      |       |  |   |      
|------------------------------------ |  | -------------------------- | --- | ------------------------ | - | ---- |  | ---- | ----- |  | - | -----
|                                     |  | Three Months EndedJune 30, |     | Six Months EndedJune 30,
|                                     |  | 2007                       |     | 2006                     |   | 2007 |  | 2006
|Stock-Based Compensation Costs:      |  |                            |     |                          |   |      |  |      |       |  |   |      
|Cost of sales                        |  | $                          | 63  |                          | $ | 50   |  | $    | 128   |  | $ | 107  
|Selling, general and administrative  |  |                            | 758 |                          |   | 605  |  |      | 1,823 |  |   | 1,391
|Research and development             |  |                            | 34  |                          |   | 38   |  |      | 81    |  |   | 131  
|                                     |  |                            |     |                          |   |      |  |      |       |  |   |      
|Total Stock-Based Compensation Costs |  | $                          | 855 |                          | $ | 693  |  | $    | 2,032 |  | $ | 1,629
|                                     |  |                            |     |                          |   |      |  |      |       |  |   |      

Note 5  Comprehensive Loss

The components of other comprehensive loss are as follows (in thousands):



|                                        |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|--------------------------------------- |  | -------------------------- | ------ | - | ------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                        |  | Three Months EndedJune 30, |        |   | Six Months EndedJune 30, |  
|                                        |  | 2007                       |        |   | 2006                     |   |        | 2007 |  |   | 2006    |  
|Net loss as reported                    |  | $                          | (7,968 | ) |                          | $ | (4,321 | )    |  | $ | (12,016 | ) |  | $ | (11,772 | )
|Foreign currency translation adjustment |  |                            | (305   | ) |                          |   | 1,149  |      |  |   | (261    | ) |  |   | 1,338   |  
|Pension plan adjustment                 |  |                            |       |   |                          |   |       |      |  |   | 224     |   |  |   |        |  
|Unrealized loss on securities           |  |                            |       |   |                          |   | (6     | )    |  |   | (2      | ) |  |   | (5      | )
|                                        |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Comprehensive loss                      |  | $                          | (8,273 | ) |                          | $ | (3,178 | )    |  | $ | (12,055 | ) |  | $ | (10,439 | )
|                                        |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  



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Note 6  Legal Proceedings

In October 2006, Maxwell filed a patent infringement lawsuit against Nesscap in the United States District Court for the Southern District of California seeking monetary damages and an injunction to stop
Nesscaps sales of infringing products. In April 2007 a U.S. district judge granted a preliminary injunction to prohibit Nesscaps sale of certain infringing ultracapacitor products in the United States. Subsequently, Nesscap filed an
appeal staying the injunction until the court ruled to uphold the injunction. Maxwell posted an injunction bond and currently Ness is prohibited from making, using, selling or offering to sell its prismatic ultracapacitors in the United States while
the litigation is pending.

In December 2006 Nesscap filed a lawsuit against Maxwell in United States District Court in the District of
Delaware claiming Maxwell has infringed Nesscaps patented intellectual property. At Maxwells request this lawsuit was moved to the same district court in San Diego where Maxwell filed its initial action.

The Company has capitalized legal expenses associated with this lawsuit as counsel believes a favorable outcome is probable. As of June 30, 2007 we
have capitalized a total of $1.4 million of legal costs and is included in other intangible assets in the condensed consolidated balance sheet.

Note 7
 Convertible Debentures

The Company issued a $25 million convertible debenture in 2005 and is accounting for the conversion
option in the Debentures and the associated warrants as derivative liabilities in accordance with SFAS 133, Accounting for Derivative Instruments and Hedging Activities, EITF 00-19, Accounting for Derivative Financial Instruments
Indexed to and Potentially Settled in a Companys Own Stock and EITF No. 05-2, The Meaning of Conventional Convertible Debt Instrument in Issue No. 00-19. The discount attributable to the issuance date aggregate fair
value of the conversion options, warrants and issuance costs totaling $9.2 million, is being amortized using the effective interest method over the term of the Debentures. For the three months ended June 30, 2007 and 2006 $904,000 and for the
six months ended June 30, 2007 and 2006 $1.8 million of the discount and prepaid fees was amortized and included in the condensed consolidated statement of operations.

At the issuance date, the Debentures were convertible by the holder at any time into 1,315,789 common shares at a price of $19.00 per share. The Company
also issued 394,737 warrants in connection with the issuance of the Debentures, these had an exercise price of $19.00 at the issuance date. The exercise price, number of convertible shares and warrants are subject to adjustment upon certain events,
such as the sale of equity securities by Maxwell at a price below the exercise price of $19.00 per share.

In May 2007 Maxwell sold a total
1.15 million shares of common stock at a price below $19.00 which caused an adjustment to the price and number of warrants and convertible debenture shares relating to the convertible debt. The price for the warrants and convertible shares were
adjusted to $18.47 along with an increase of warrants of 11,399 to 406,136 and increased convertible debenture shares by 37,999 to a total of 1,353,788 shares.

The holders and Maxwells conversion rights and the warrants were adjusted to their respective fair market values at June 30, 2007 using the adjusted price of $18.47 and adjusted number of convertible
shares and warrants. The change in fair value on revaluation of debenture conversion rights and warrant liabilities represents the difference between the fair value of the warrants and debenture conversion features at March 31, 2007 and their
fair value on June 30, 2007 using the Black-Scholes pricing model.

Maxwell may require that a specified amount of the principal of
the Debentures be converted if certain conditions are satisfied for a period of 20 consecutive trading days. To determine a fair value of this forced conversion the Company applies a Z factor, which is a theoretical measurement of the probability of
this occurrence. The Z factor used as of June 30, 2007 and 2006 was 16.9% and 37.6%, respectively, for forced conversion of 50% of the conversion option at 135% of the exercise price and 5.3% and 22.4%, respectively, for forced conversion of
the remaining conversion option at 175% of the exercise price.



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##### Table of Contents

The fair value of the warrants and embedded conversion option is estimated on the balance sheet date
using the Black-Scholes valuation model with the following assumptions:



|                                |  |                                     |       |   |                        |   |       |      |  |   |       |   |  |   |       |  
|------------------------------- |  | ----------------------------------- | ----- | - | ---------------------- | - | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                                |  | ConvertibleDebenturesas of June 30, |       |   | Warrants as ofJune 30, |  
|                                |  | 2007                                |       |   | 2006                   |   |       | 2007 |  |   | 2006  |  
|Black-Scholes Assumptions:      |  |                                     |       |   |                        |   |       |      |  |   |       |   |  |   |       |  
|Exercise price                  |  | $                                   | 18.47 |   |                        | $ | 19.00 |      |  | $ | 18.47 |   |  | $ | 19.00 |  
|Market price                    |  | $                                   | 14.22 |   |                        | $ | 19.63 |      |  | $ | 14.22 |   |  | $ | 19.63 |  
|Expected dividends              |  |                                     |      |   |                        |   |      |      |  |   |      |   |  |   |      |  
|Expected volatility             |  |                                     | 50.0  | % |                        |   | 48.7  | %    |  |   | 50.7  | % |  |   | 53.8  | %
|Average risk-free interest rate |  |                                     | 4.88  | % |                        |   | 5.12  | %    |  |   | 4.90  | % |  |   | 5.11  | %
|Expected term/life (in years)   |  |                                     | 2.5   |   |                        |   | 3.5   |      |  |   | 3.5   |   |  |   | 4.5   |  

The net fair value of the holders and Maxwells conversion rights at June 30, 2007
was $4.4 million which is included in Convertible debentures and long-term debt on the balance sheet. The fair value of the warrants at June 30, 2007 was $1.9 million and is included in Stock warrants on the balance
sheet. The effect of the fair market value adjustment for the three months ended June 30, 2007 was a $1.4 million loss, which is recorded as Gain (loss) on embedded derivatives and warrants.

The Company shall pay to each holder of registrable securities related to the embedded conversion
feature and warrants liquidated damages of 1.5% of the aggregate purchase price every 30thday after a maintenance failure of the registration of the
securities. These damages continue each 30 days (pro rated) until the registration failure is cured. As of June 30, 2007, if the Company was not in compliance we would incur damages of $375,000 every 30 days until we cured the maintenance
failure. In addition if the damages are not paid in 30 days after they are due the Company would incur interest of 1.0% per month on the outstanding damages. We do not accrue any liability for the penalty for not keeping the registration
statement effective, as the outcome is not probable.

The warrants are exercisable at any time through December 20, 2010. No
warrants had been exercised as of June 30, 2007.

Note 8  Defined Benefit Plan

We have a retirement plan for the Companys Swiss subsidiary that is classified as a defined benefit pension plan. The pension benefit is based on
compensation, length of service and credited investment earnings. The plan guarantees both a minimum rate of return as well as minimum annuity purchase rates. The Companys funding policy with respect to the pension plan is to contribute, at a
minimum the amount required by Swiss law, using the required percentage applied to the employees compensation. There is no offset provision based on the obligation level of the fund. In addition, the employee is required to contribute to the
pension plan. This plan has a measurement date of December 31. We adopted the provisions of SFAS No. 158 Employers Accounting for Defined Benefit Pension and Other Postretirement Plansan amendment of FASB Statements
No. 87, 88, 106, and 132(R) (SFAS 158) as of December 31, 2006.

Components of the net periodic benefit (cost)
were as follows (in thousands):



|                                |  |                            |      |   |                          |   |     |      |  |   |      |   |  |   |      |  
|------------------------------- |  | -------------------------- | ---- | - | ------------------------ | - | --- | ---- |  | - | ---- | - |  | - | ---- | -
|                                |  | Three MonthsEnded June 30, |      |   | Six MonthsEnded June 30, |  
|                                |  | 2007                       |      |   | 2006                     |   |     | 2007 |  |   | 2006 |  
|Service cost                    |  | $                          | (77  | ) |                          | $ | (54 | )    |  | $ | (153 | ) |  | $ | (106 | )
|Interest cost                   |  |                            | (105 | ) |                          |   | (78 | )    |  |   | (208 | ) |  |   | (154 | )
|Expected return on plan assets  |  |                            | 308  |   |                          |   | 278 |      |  |   | 614  |   |  |   | 545  |  
|Prior service cost amortization |  |                            | (8   | ) |                          |   |    |      |  |   | (17  | ) |  |   |     |  
|Net gain amortization           |  |                            | 43   |   |                          |   | 56  |      |  |   | 86   |   |  |   | 111  |  
|                                |  |                            |      |   |                          |   |     |      |  |   |      |   |  |   |      |  
|Net periodic benefit            |  | $                          | 161  |   |                          | $ | 202 |      |  | $ | 322  |   |  | $ | 396  |  
|                                |  |                            |      |   |                          |   |     |      |  |   |      |   |  |   |      |  

Employer contributions of $114,000 and $87,000 were paid during the three months ended
June 30, 2007 and 2006, respectively. Total employer contributions paid during the six months ended June 30, 2007 and 2006 were $217,000 and $165,000, respectively. Additional employer contributions of approximately $220,000 are expected
to be paid during the remainder of fiscal 2007.



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Note 9  Contingencies

The Company enters into indemnification agreements in the ordinary course of business in which the indemnified party is held harmless and is reimbursed for losses incurred from claims by third parties. In connection
with divestitures of certain assets or businesses, the Company often provides indemnities to the buyer with respect to certain matters including, for example, environmental liabilities and unidentified liabilities related to periods prior to the
disposition. Due to the uncertain nature of the indemnities, the maximum liability cannot be quantified. Liabilities for obligations are recorded where appropriate and when they are probable and can be reasonably estimated. Historically, the Company
has not made significant payments for these obligations.

The Company has been alerted to a possible defect in a product that we sourced
from another manufacturer and resold to the customer. We have discussed this issue with both parties and have not determined what, if any, warranty exposure Maxwell may have, and therefore, we have not recorded any warranty reserve provision. We
carry insurance that we believe would cover all or a portion of any obligation that might ultimately arise from this matter.

In March
2006, a customer sent us a demand letter requesting payment of $535,000 for a tester product initially sold in 2002. We have concluded this matter by negotiating a settlement with the customer by agreeing to refund $300,000 of the purchase price.
This amount was paid in the three months ended June 30, 2007.

In April 2007, the Company was required to post a $700,000 bond before
a court injunction of the patent infringement lawsuit against Nesscap was implemented. We purchased an injunction bond issued by a third party and we do not expect the bond to be called as we will comply with the underlying performance requirements.



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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations

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.

FORWARD-LOOKING STATEMENTS

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 the following:



| |  |  | 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;
| | - |  | ----------------------------------------------------------------------------------------



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##### Table of Contents

| |  |  | 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, 2006. 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 six months ended June 30, 2007, followed by a discussion of the different aspects of our business. We then proceed to
discuss our results of operations for the three and six month periods ended June 30, 2007 compared with the three and six month periods ended June 30, 2006. 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 headquartered in San Diego, California that was 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 highly reliable, cost-effective energy storage and power delivery components and systems. Our products are designed and manufactured to provide failure-free, very low maintenance, performance over the life of the applications
into which they are integrated. We believe that by satisfying the stringent requirements of such high-reliability, high-value applications, our products will be able to command higher margins than commodity products. We focus on the following three
discrete lines of high-reliability products:



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



| |  |  |  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 environmental radiation effects and perform reliably in space.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Highlights of the Quarter Ended
June 30, 2007

We reported revenue of $13.6 million and a net loss for the three months ended June 30, 2007 of approximately
$8.0 million, or $0.45 per diluted share, versus revenue of $12.8 million and a net loss of $4.3 million, or $0.25 per diluted share, for the three months ended June 30, 2006.



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During the six months ended June 30, 2007, we continued to focus on developing strategic alliances,
introducing new products, increasing production capacity, reducing product costs, and increasing revenue. Some of these efforts are described below:



| |  |  | In January, Maxwell announced that it received a purchase order for 100,000 square meters of its proprietary ultracapacitor electrode material from Shanghai Sanjiu
Electric Equipment Company, Ltd., (Sanjiu) which is preparing to introduce a line of ultracapacitor products based on Maxwells cell architecture and high-performance electrode for the Chinese transportation, electric utility and industrial
markets.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In February, we announced that Professor Burkhard Goeschel, who retired in November 2006 as a member of the six-person Management Board of BMW Group, with overall
responsibility for research, development and purchasing, had been appointed to Maxwells board of directors.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In March, we announced the introduction of a rugged 390-volt BOOSTCAP® ultracapacitor module to provide scalable, easy-to-integrate, energy storage and power delivery solutions for heavy hybrid and electric vehicles and heavy duty industrial applications requiring up to 1,170 volts.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In April, we announced the opening of a sales office in Shanghai, China, to market our BOOSTCAP® ultracapacitor products, service customers and support distribution channel partners throughout Asia.
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| |  |  | In April, we announced that a U.S. district judge granted a preliminary injunction to prohibit Nesscaps sale of certain infringing ultracapacitor products in
the United States. Maxwell Technologies filed a patent infringement lawsuit against Nesscap in October 2006 alleging that Nesscap products infringe two of Maxwells U.S. patents. The injunction would bar Nesscaps making, using, selling or
offering to sell its prismatic ultracapacitors in the United States while the litigation is pending. Nesscap filed an appeal staying the injunction. The court has denied Nesscaps appeal to the injunction.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In December 2006 Nesscap also filed a patent infringement action against Maxwell in the United States District Court in the District of Delaware. At Maxwells
request, Nesscaps suit was moved to the same district court in San Diego where Maxwell filed its initial action.
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| |  |  | In May, we announced that Edward B. Caudill was elected Chairman of the Companys board of directors.
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | In May, we announced that we will supply ultracapacitor cells and integration kits to the U.S. Department of Energys Argonne National Laboratory for a
collaborative research project to assemble and evaluate an integrated ultracapacitor/lithium-ion battery energy storage system for hybrid-electric and plug-in hybrid vehicles.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In May, we announced the sale of 1.15 million shares in a public offering, resulting in gross proceeds to the Company of $11.5 million. The Company plans to
use the proceeds for working capital and general corporate purposes.
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| |  |  | In June, we announced that Azure Dynamics Corporation, a leading developer of hybrid-electric and electric powertrains
for commercial vehicles, selected Maxwells BOOSTCAP®390-volt heavy transportation ultracapacitor module (HTM) as the
energy storage and power delivery component of its latest hybrid shuttle bus powertrain.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In July, we announced that we obtained a non-exclusive worldwide license from Enercon GmbH of Aurich, Germany, for a
patent covering the use of ultracapacitors in wind energy systems, including their use as backup power source for wind turbine blade pitch systems. This will allow Maxwell to market its BOOSTCAP® ultracapacitor products to any wind turbine or blade pitch system manufacturer that wants to incorporate the technology into its products.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In July, we announced the signing of a memorandum of understanding with Valeo, a Tier 1 supplier to automakers
worldwide, covering a development collaboration to incorporate Maxwells BOOSTCAP® ultracapacitors in Valeos StARS+X, stop-start and regenerative braking system.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | On July 24, we announced that the board of directors appointed David J. Schramm president and chief executive officer, replacing Richard D. Balanson, PhD, who
will remain a part-time employee of the Company, functioning as a senior technical advisor.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Results of Operations and Financial Condition Quarter Ended June 30, 2007 Compared with Quarter Ended
June 30, 2006

Total Revenue

Total revenue for the three months ended June 30, 2007 was approximately $13.6 million versus
$12.8 million for the three months ended June 30, 2006. BOOSTCAP®, Microelectronics and High Voltage product sales all increased in 2007 compared with the same period in 2006. Revenue
increased despite a reduction of licensing revenue from the prior years quarter. High Voltage revenue experienced the largest percentage and dollar increase from quarter to quarter sales comparison, while other revenue categories were up
slightly. We expect increased demand in the next quarter compared to prior years in all revenue categories except licensing revenue, as the current licensing agreement has concluded and the licensee will now be purchasing electrode raw materials in
the second half of 2007.

Gross Profit

For the three months ended June 30, 2007 and 2006, gross profit was approximately $2.7 million
and $2.4 million, respectively, which represented 20% and 18% of revenue, respectively. The increase in gross profit in absolute dollars is primarily attributed to the increase in High Voltage and Microelectronics sales and to a lesser extent
BOOSTCAP®product sales. The increase occurred although the current quarters license revenue was 54% lower and we did not record
contract revenue from the USABC or NPOESS contracts as compared with the three months ended June 30, 2006.

We continue to
produce a quality product which is reflected in the reduction of settlement of warranties and product warranty expense we have accrued. We also have improved production efficiency, and reduced product costs while simultaneously ramping up and
outsourcing production capacity to meet anticipated future demand. The gross profit is to some extent impacted by under-absorbed overhead costs for forecasted demand that is beyond actual order volume. Once the anticipated efficiencies are fully
implemented and the anticipated demand comes in-line with our expectations, gross profit contribution percentage is expected to increase.

Additionally, included in cost of sales for the three months ended June 30, 2007 and 2006 is $63,000 and $50,000, respectively, of stock compensation expense.

Selling, General & Administrative (SG&A) Expense

Selling, general and administrative
(SG&A) expenses were approximately $5.0 million for the three months ended June 30, 2007, compared with $3.9 million for the three months ended June 30, 2006. As a percentage of revenues, SG&A expenses were 37% for the three months
ended June 30, 2007 compared with 31% for the three months ended June 30, 2006. The approximate $1.1 million increase from the prior year quarter includes an approximate increase of $350,000 in sales commissions; $330,000 in audit fees;
$210,000 in wages; $70,000 in legal fees and a $150,000 increase in the stock compensation expense for restricted stock, ESPP and stock option awards recognized.

Research & Development (R&D) Expense

Research and
development (R&D) expenses were approximately $3.1 million for the three months ended June 30, 2007 compared with approximately $2.4 million for the same period in 2006. As a percentage of revenues, R&D expense was 23% and 19%,
respectively, for the three months ended June 30, 2007 and 2006. R&D spending continues to be focused mainly on BOOSTCAP® product development and Microelectronics single board
computer product development.

Provision for Income Taxes

We recorded income tax benefits of $59,000 and $11,000 for the three months ended June 30, 2007 and 2006, respectively.

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.

Six Month Period Ended June 30, 2007 Compared with Six Month Period Ended June 30, 2006

Total Revenue

Total revenue for the six months ended June 30, 2007 was approximately $26.2 million versus $24.7 million for the six months ended June 30,
2006. Revenue increased in all three product lines with Microelectronics making up the largest dollar and percentage increase. We expect increased revenue in the second half of 2007 compared to the first half of 2007 in all



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revenue categories except licensing revenue as the current licensing agreement has concluded and the licensee will now be purchasing electrode materials in
the second half of 2007.

Gross Profit

For the six months ended June 30, 2007 and 2006, gross profit was approximately $6.1 million and $5.9 million, respectively, which represented 23% and 24% of revenue, respectively. The reduction in gross profit percentage for the
current six month period is mainly attributable to the absence of contract revenue from the USABC and NPOESS contracts as compared to the six months ended June 2006.

We continue to produce quality products which is reflected in the reduction of settlement of warranties and product warranty expense we have accrued. We also have improved production efficiency, and reduced product
costs while simultaneously ramping up production capacity to meet anticipated future demand. The gross profit is to some extent impacted by under-absorbed overhead costs for forecasted demand that is beyond actual order volume. Once the anticipated
efficiencies are fully implemented and the anticipated demand comes in-line with our expectations, gross profit contribution percentage is expected to increase.

Additionally, included in cost of sales for the six months ended June 30, 2007 and 2006 is $128,000 and $107,000, respectively, of stock compensation expense.

Selling, General & Administrative (SG&A) Expense

Selling, general and administrative (SG&A) expenses were approximately $10.1 million for the six months ended June 30, 2007, compared with $8.2 million for the six months ended June 30, 2006. As a percentage of revenues,
SG&A expenses were 38% for the six months ended June 30, 2007 compared with 33% for the six months ended June 30, 2006. The approximate $1.9 million increase from the prior year period includes an approximate increase of $390,000 in
sales commissions; $285,000 in audit fees; $505,000 in wages; $150,000 in legal and consulting expenses; and an approximate $430,000 increase in the stock compensation expense for restricted stock, ESPP and stock option awards recognized in 2007.

Research & Development (R&D) Expense

Research and development (R&D) expenses were approximately $5.9 million for the six months
ended June 30, 2007 compared with approximately $4.6 million for the same period in 2006. As a percentage of revenues, R&D expense was 23% for the six months ended June 30, 2007 compared with 19% for six months ended June 30,
2006. R&D spending continues to be focused mainly on BOOSTCAP® product development and Microelectronics single board computer product development.

Provision for Income Taxes

We recorded an income tax
benefit of $158,000 for the six months ended June 30, 2007 compared with a provision for income tax of $164,000 for the six months ended June 30, 2006. The tax provision in 2006 was the result of our Swiss subsidiary generating profitable
results.

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

As of June 30, 2007, we had approximately $21.3 million in cash, cash equivalents, restricted cash and short-term investments.

We have a 1.2 million Swiss Francs (approximately $936,000) term loan from a Swiss bank for capital equipment purchases; approximately $374,000 of that facility was outstanding as of June 30, 2007. We have a 1 million Swiss
Francs (approximately $814,000) line of credit with another Swiss bank for working capital; approximately $773,000 of the line was utilized as of June 30, 2007. We entered into a lease agreement in May 2006 for the acquisition of manufacturing
equipment up to a maximum of 1.5 million Swiss Francs (approximately $1.2 million). The lease term is 48 months and $1.1 million of the credit agreement had been used to purchase equipment under this agreement as of June 30, 2007.

In November 2006, the Company filed a registration statement on Form S-3 with the Securities and Exchange Commission to, from time to
time, sell up to an aggregate of $125,000,000 of the Companys common stock, warrants or debt securities. In May 2007 we sold 1.15 million shares in a public offering resulting in gross proceeds to the Company of $11.5 million. The Company
plans to use the proceeds for working capital and general corporate purposes.



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Should additional funds be required, we have several options for raising capital. These include
negotiations to eliminate the current restriction on $8 million of cash, a bridge financing, divesting of non-strategic assets, and/or a private placement or public offering of marketable securities to provide additional liquidity. We believe our
current cash and investment balances and the various options we have to raise additional capital will provide sufficient capital to fund our capital equipment and working capital requirements and potential operating losses for more than the next 12
months.

Debentures, Short Term and Long Term Borrowings

Convertible Debentures

On December 20, 2005, the Company issued $25 million in aggregate principal amount of
senior subordinated convertible debentures due and payable in quarterly installments from December 2007 through December 2009 (the Debentures). Interest is due quarterly with the interest rate fixed to the Federal Funds Rate plus
1.125% per annum. All or a portion of the accrued and unpaid interest may be paid in shares of Maxwells common stock at the Companys option.

At the issuance date, the Debentures were convertible by the holder at any time into 1,315,789 common shares at a price of $19.00 per share. We also issued 394,737 warrants in connection with the issuance of the
Debentures, these had an exercise price of $19.00 at the issuance date. The exercise price, number of convertible shares and warrants are subject to adjustment upon certain events, such as the sale of equity securities by Maxwell at a price below
the current exercise price of $19.00 per share.

In June 2007 Maxwell sold a total 1.15 million shares at a price below $19.00 which
caused an adjustment to the price and number of warrants and convertible debenture shares relating to the convertible debt. The price for the warrants and convertible shares was adjusted to $18.47 along with an increase of warrants of 11,399 to
406,136 and the convertible debenture shares increased by 37,999 to 1,353,788 shares.

The Debentures are convertible by the holder at any
time into common shares however after eighteen months from the issue date, Maxwell may require that a specified amount of the principal of the Debentures be converted if certain conditions are satisfied for a period of 20 consecutive trading days.
The warrants issued in connection with the issuance of the Debentures are exercisable at any time through December 20, 2010. No warrants had been exercised as of June 30, 2007.

The change in fair value on revaluation of debenture conversion rights and warrant liabilities represents the difference between the fair value of the
warrants and debenture conversion features at March 31, 2007 and their fair value on June 30, 2007 using a Black-Scholes calculation. The fair value of the holders and Maxwells conversion rights (excluding warrants) at
June 30, 2007 was $4.4 million, which is included in Convertible debentures and long-term debt on the balance sheet. The effect of the fair market value adjustment to warrants, the holders and Maxwells conversion rights for
the three months ended June 30, 2007 was a $1.4 million loss, which is recorded as Gain (loss) on embedded derivative liabilities and warrants.

As long as Debentures are outstanding, the Company is required to maintain a cash balance in excess of $8.0 million. This amount is classified as restricted cash at June 30, 2007 and December 31, 2006.

Short-term borrowings

In April
Maxwell SA, our European subsidiary, received a 2.0 million Swiss Francs (approximately $1.6 million as of June 30, 2007) short term loan with a Swiss bank. Borrowings under the credit agreement bear annual interest at 4.05% with repayment
terms less than 12 months from the date of funding. Borrowings under the credit agreement are unsecured and as of June 30, 2007, the full amount of the credit line was drawn.

Maxwell SA, has a 2.0 million Swiss Francs (approximately $1.6 million as of June 30, 2007) credit agreement with a Swiss bank. Borrowings
under the credit agreement bear interest at 3.95% with repayment terms extending beyond one month from the date of funding. Borrowings under the credit agreement are unsecured and as of June 30, 2007, the full amount of the credit line was
drawn.

Maxwell SA, has a 1.0 million Swiss Francs (approximately $814,000 as of June 30, 2007) overdraft credit agreement with a
Swiss bank, which renews annually. Borrowings under the credit agreement bear annual interest at 3.4%. Borrowings under the credit agreement are unsecured and as of June 30, 2007, $773,000 was drawn on the overdraft credit line. The agreement
requires our Swiss subsidiary to maintain a minimum equity amount of 5.0 million Swiss Francs; we were in compliance with this covenant as of June 30, 2007.



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Long-term borrowings

Maxwell, SA has a term loan with a maximum draw of 1.2 million Swiss Francs, (approximately $936,000 as of June 30, 2007), for financing specific capital equipment expenditures. 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.
As of June 30, 2007 approximately $374,000 was outstanding. The weighted average annual interest rate on the funds borrowed at June 30, 2007 was 4.2%.

Maxwell, SA has a lease agreement for the acquisition of manufacturing equipment up to an amount of 1.5 million Swiss Francs (approximately $1.2 million as of June 30, 2007). Under this lease agreement
borrowings are for a minimum purchase of 250,000 Swiss Francs and the lease is secured by the equipment being purchased. The leasing fee is 2.22% of the acquisition price plus VAT and a residual value of .5% of the acquisition price. Equipment
suppliers are paid directly by the bank with interest payable at a rate of 6.75% per annum until the entire amount has been borrowed at which time the lending arrangement converts to a lease. As of June 30, 2007 $1.1 million of this credit
agreement had been paid to suppliers.

We secured a $1.0 million loan from a U.S. bank for capital equipment purchases, subject to a
three-year repayment period. The agreement bears interest at the US Government Treasury Note rate plus 825 basis points. As of June 30, 2007, $672,000 of the loan was drawn.

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.

Additional information about these critical accounting policies may be found in the Managements Discussion & Analysis of Financial
Condition and Results of Operations section included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006. There have been no changes to these critical accounting policies subsequent to December 31, 2006.

Accounting for Uncertainty in Income Taxes

In July 2006, the FASB issued Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes. FIN 48 is an interpretation of FASB No. 109, Accounting for Income Taxes, which
provides criteria for the recognition, measurement, presentation and disclosures of uncertain tax positions. A tax benefit from an uncertain tax position may be recognized if it is more likely than not that the position is sustainable
based solely on its technical merits. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. The Company adopted FIN 48 on January 1, 2007.

Revenue Recognition

We derive our revenue from the sale of manufactured products directly to
customers. For certain long-term contracts revenue is recognized at the time costs are incurred and for licensing fees we recognize revenue from the right to manufacture products based on our proprietary ultracapacitors design. Product revenue is
recognized, according to the guidelines of SEC Staff Accounting Bulletin Numbers 101 Revenue Recognition in Financial Statements, and 104 Revenue Recognition, when title passes to the customer at either shipment from our facilities, or
receipt at the customer facility, depending on shipping terms, provided collectability is reasonably assured. If a volume discount is offered revenue is recognized at the lowest price to the customer. This method has been consistently applied from
period to period and there is no right of return. Revenue on fixed price government contracts is recognized at the time costs are incurred and is calculated on a percentage of completion basis, in accordance with Statement of Position 81-1,
Accounting for Performance of Construction-Type and Certain Production-Type Contracts and is limited by the funding of the prime contractor. 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. The Company recognizes revenue that relates to specific deliverables, in accordance with EITF 00-21, Accounting for Revenue Arrangements with Multiple Deliverables. This revenue involves a contract that grants a license to
manufacture and market



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products in Mainland China, using Maxwells proprietary large cell and multi-cell module technology under a separate brand. The contract, obligates the
manufacturer to source ultracapacitor electrode material from Maxwell, the agreement has no general right of return and allows for no refunds.

Stock
Compensation

We value stock compensation based on the fair value recognition provisions of revised Statement of Financial
Accounting Standards No. 123 (revised)Share-Based Payment(SFAS 123R), which establishes accounting for share-based awards exchanged for employee services and requires companies to expense the estimated grant date fair value of
these awards over the requisite employee service period. The expense recognition provisions of SFAS 123R apply to new awards and to unvested awards that are outstanding on the effective date and awards subsequently modified or cancelled. Estimated
compensation expense for awards outstanding at the effective date are being recognized over the remaining service period using the compensation cost calculated for pro forma disclosure purposes under SFAS No. 123, Accounting for Stock-Based
Compensation.

Inventory

Inventories are stated at the lower of cost (on a first-in, first-out basis) or market. Finished goods and work-in-process inventory values include the cost of raw materials, labor and manufacturing overhead. Inventory written down to
market establishes a new cost basis and its value can not be subsequently increased based upon changes in underlying facts and circumstances.

Excess
and Obsolete Inventory

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.

Goodwill

We account for goodwill in accordance with SFAS No. 142, Goodwill and Other Intangible
Assets. This standard requires that goodwill balances undergo 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 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 impairment
charges could adversely affect the results of our operations.

Convertible Debentures

We account for convertible debentures and warrants in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. This standard requires the conversion feature of convertible debt be separated from the host contract and presented as a derivative instrument if certain conditions are met. EITF 00-19, Accounting for Derivative
Financial Instruments Indexed to and Potentially Settled in a Companys Own Stock and EITF 05-2, The Meaning of Conventional Convertible Debt Instrument in Issue No. 00-19were also analyzed to determine
whether the debt instrument is to be considered a conventional convertible debt instrument and classified in stockholders equity. The December 20, 2005 valuation was used for the effective debt discount that these instruments represent.
The debt discount is amortized over the four-year life of the debentures using the effective interest method.

The convertible debentures
issued on December 20, 2005 were evaluated and determined not to be conventional convertible and, therefore, because of certain terms and provisions including liquidating damages under the associated



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registration rights agreement the embedded conversion option was bifurcated and has been accounted for as a derivative liability instrument. The stock
warrants issued in conjunction with the convertible debt on December 20, 2005 were also evaluated and determined to be a derivative instrument and, therefore, classified as a liability on the balance sheet. The accounting guidance also requires
that the conversion feature and warrants be recorded at fair value for each reporting period with changes in fair value recorded in our statement of operations.

A Black-Scholes valuation calculation is applied to both the conversion features and warrants at the end of each period. The valuations were used to record the fair value of these instruments at the end of the
reporting periods with any difference from prior period calculations reflected in the statement of operations. The Companys stock price is one input used in the Black-Scholes calculation, which has a significant impact on the calculation. The
change in the Companys stock price will have a gain or loss effect on embedded derivative liabilities in the statement of operations. The volatility of the Companys stock price is likely to generate large swings in the valuations of the
conversion features and warrants in future periods.

Pension

The Company accounts for the retirement plan for its Swiss subsidiary as a defined benefit pension plan under SFAS No. 158 Employers Accounting for Defined Benefit Pension and Other Postretirement
Plansan amendment of FASB Statements No. 87, 88, 106, and 132(R) (SFAS 158). SFAS 158 requires balance sheet recognition of the over funded or under funded status of pension and postretirement benefit plans. Under
SFAS 158, actuarial gains and losses, prior service costs or credits, and any remaining transition assets or obligations that have not been recognized under previous accounting standards must be recognized as a component of accumulated other
comprehensive income (loss) within stockholders equity, net of tax effects, until they are amortized as a component of net periodic benefit cost.

This plan is implemented under the terms of the plan as required by Swiss law. Management believes that the Swiss plan is adequately funded and future payments do not appear significant based on the current
funding status of the plan.

The Swiss pension is similar to our U.S. defined contribution plan (401K) since the Company does not have
any access to this asset, approximately one half of the assets are contributed by the employees, and the plan is regulated by the Swiss Government. The Company does not have any access or rights to this pension asset. The pension asset is being
reported to comply with accounting pronouncements that require us to disclose the amount on our balance sheet.

Impact of Inflation

We believe that inflation has not had a material impact on our results of operations for the periods presented. However, there can be no assurance that
future inflation would not have an adverse impact on our operating results and financial condition.

Pending Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157 Fair Value Measurement (SFAS 157). SFAS 157 provides a new single authoritative
definition of fair value and provides enhanced guidance for measuring the fair value of assets and liabilities and requires additional disclosures related to the extent to which companies measure assets and liabilities at fair value, the information
used to measure fair value, and the effect of fair value measurements on earnings. SFAS 157 is effective for the Company as of January 1, 2008. The Company is currently assessing the impact, if any, of SFAS 157 on its consolidated financial
statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial
LiabilitiesIncluding an Amendment of FASB Statement No 115(SFAS 159)which permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS No 159 also includes an amendment to SFAS
No. 115, Accounting for Certain Investments in Debt and Equity Securities, which applies to all entities with available-for-sale and trading securities. This statement is effective as of the beginning of an entitys first
fiscal year that begins after November 15, 2007. The Company does not anticipate any material impact on its consolidated financial statements upon the adoption of this standard.

Off Balance Sheet Arrangements

None.



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Item 3. 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 SA has Euro and local currency (Swiss Francs) revenue and
operating expenses as well as loans. Changes in these currency exchange rates impact the U.S. dollar amount of revenue, expenses and debt. The Company has certain long term contracts in a currency other than U.S. dollars. A change of 100 basis
points in the customers local currency would impact the value of the contract by approximately $163,000. We do not hedge our currency exposures.

Interest Rate Risk

At June 30, 2007, we had approximately $31.5 million in debt, of which $18.6 million is classified
as long-term debt. We do not anticipate significant interest rate swings in the near future; however, if they do occur it may affect the consolidated balance sheet or statement of operations. The impact on earnings or cash flow during the next
fiscal year from a change of 100 basis points in the interest rate would have a $315,000 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. Our current policies do not allow the use of interest rate derivative instruments to manage exposure to interest rate changes. As of June 30, 2007, third parties manage approximately $698,000 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 100 basis point change in the interest rate on our marketable securities would not have a
material effect on our interest income.

Item 4. Controls and Procedures

Under the direction of our Chief Executive Officer and Chief Financial
Officer, we evaluated our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) and our Chief Executive Officer and Chief Financial Officer concluded that (i) our
disclosure controls and procedures were not effective as of June 30, 2007, and (ii) no change in internal control over financial reporting occurred during the quarter ended June 30, 2007, that has materially affected, or is reasonably
likely to materially affect, such internal control over financial reporting.

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures designed to ensure the information required to be disclosed in reports filed under the Securities
Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms. As of the end of the period covered by
this report, the Companys management, including our principal executive officer and principal financial officer, has evaluated the Companys disclosure controls and procedures, as that term is defined in Rule 13a-15(e) of the Exchange
Act.

Based on this evaluation our principal executive officer and principal financial officer concluded that, as of the end of the period
covered by this Quarterly Report on Form 10-Q, the Companys disclosure controls and procedures were not effective as a result of the unremediated material weakness relating to certain internal controls, surrounding the accounting for income
taxes, further outlined below. To address this control weakness, the Company performed additional analysis and performed other procedures in order to prepare the unaudited quarterly consolidated financial statements in accordance with generally
accepted accounting principles in the United States of America. Accordingly, management believes that the consolidated financial statements included in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial
condition, results of operations and cash flows for the periods presented.

Material weakness accounting for income taxes

At December 31, 2006, there was one primary tax issue related to our Swiss pension plan that led management to conclude that a material weakness
existed. Specifically, the Company did not record an income tax liability associated with an adjustment made as a result of the implementation of FAS 158 Employers Accounting for Defined Benefit Pension and Other Postretirement Plans in
the prior years comprehensive income when, in fact, an income tax liability should have been recorded.

Management concluded that the
principal factors contributing to the material weakness in accounting for income taxes related to our Swiss subsidiary were (a) inadequate consideration of the provisions of FAS No. 109Accounting for Income Taxes by our external
tax service provider resulting in an error in the accounting for income taxes and (b) insufficient or ineffective review practices by our internal personnel. This material weakness resulted in an accounting error which was corrected prior to
the issuance of the consolidated financial statements for the year ended December 31, 2006. Management has not identified any other material weaknesses in its internal control over financial reporting.



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Remediation Plans for Material Weakness in Internal control over Financial Reporting



| |  |  | The Company has engaged an additional outside tax advisor who will be an additional resource in the review of the work prepared by our current service provider.
This additional level of review will ensure that complex tax issues are identified and the related analyses, judgments and estimates are appropriately documented, reviewed and applied on a timely basis;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We are still considering if additional personnel trained and experienced in United States and foreign income tax accounting are necessary;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We are evaluating and, if necessary, will supplement the resources provided by our primary external tax service provider;
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | Management believes that improved timing of certain tax review activities during the financial statement closing process will improve the review process.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------

Changes in Internal Controls over Financial Reporting

Other than as noted above in this Item 4, there were no changes in the Companys internal control over financial reporting (as defined in Rules
13a-15(f) and 15d  15(f) under the Exchange Act) during the last fiscal quarter covered by this report that has materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.

PART II  OTHER INFORMATION

Item 1. Legal Proceedings

In October 2006, Maxwell filed a patent infringement lawsuit against Nesscap in
the United States District Court for the Southern District of California seeking monetary damages and an injunction to stop Nesscaps sales of infringing products. In April 2007 a U.S. district judge granted a preliminary injunction to bar
Nesscaps making, using, selling or offering to sell its prismatic ultracapacitors in the United States while the litigation is pending. Nesscap filed an appeal staying the injunction. The court has denied Nesscaps appeal to the
injunction.

In December 2006, Nesscap filed a lawsuit against Maxwell in United States District Court in the District of Delaware claiming
Maxwell has infringed Nesscaps patented intellectual property. In April 2007, at Maxwells request this lawsuit was moved to the same district court in San Diego where Maxwell filed its action in October 2006.

Item 1A. Risk Factors

There have been no material changes from the risk factors disclosed in Part I,
Item 1A, of the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2006.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

During the six months ended
June 30, 2007 there were no sales of unregistered securities. The Company sold 1.15 million shares of common stock that had been previously reported on Form 8-K with the SEC. Additionally, the Company has issued or sold new registered
common stock shares for its ESPP, employees exercising stock options or vesting of restricted stock previously noted in this document.

Item 3. Defaults Upon Senior Securities

None.

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

The Annual meeting of Stockholders of Maxwell
Technologies Inc. was held May 3, 2007. At the meeting, stockholders elected three Class II directors to serve on the Board of Directors until the 2010 Annual Meeting of the Stockholders or until their successors have been duly elected and
qualified.



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The three directors elected at the meeting were Mark Rossi, Burkhard Goeschel and Jean Lavigne. The votes
cast for the three elected directors were as follows:



|                  |  |            |  |              
|----------------- |  | ---------- |  | -------------
|NAME              |  | Votes For  |  | VotesWithheld
|Mark Rossi        |  | 13,023,847 |  | 100,774      
|Burkhard Goeschel |  | 13,030,407 |  | 94,214       
|Jean Lavigne      |  | 10,017,946 |  | 3,106,675    

The second matter voted on by the Stockholders of Maxwell Technologies, Inc. was the ratification
of the appointment of McGladrey & Pullen LLP as the Companys independent auditors for the 2007 fiscal year. The votes cast were as follows:



|           |  |               |  |        
|---------- |  | ------------- |  | -------
|Votes For  |  | Votes Against |  | Abstain
|12,963,210 |  | 34,688        |  | 126,723

The final matter voted on by the Stockholders of Maxwell Technologies, Inc. was the approval of an
increase of the 2005 Omnibus Equity Incentive Plan from 750,000 to 1,750,000 shares. The votes cast were as follows:



|          |  |               |  |         |  |                
|--------- |  | ------------- |  | ------- |  | ---------------
|Votes For |  | Votes Against |  | Abstain |  | Broker Non-Vote
|5,579,866 |  | 3,263,895     |  | 113,186 |  | 4,167,674      

Item 5. Other Information

None.

Item 6. Exhibits



|     |  |                                                                                                                                                                                                             
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | 
|10.1 |  | Transition agreement effective as of July 23, 2007 by and between the Company and Richard D Balanson. *                                                                                                     
|     | 
|10.2 |  | Employment agreement effective as of July 23, 2007 by and between the Company and David S. Schramm. *                                                                                                       
|     | 
|31.1 |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) (Section 302 Certification) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *                                     
|     | 
|31.2 |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) (Section 302 Certification) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *                                     
|     | 
|32   |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 (Section 906 Certification), as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002. *

---

|* | Filed herewith.
|- | ---------------



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



|                     |  |  |  |                            |  |                 |  |                                                                                       
|-------------------- |  |  |  | -------------------------- |  | --------------- |  | --------------------------------------------------------------------------------------
|Date: August 8, 2007 |  |  |  | MAXWELL TECHNOLOGIES, INC.
|                     |  |  |  |                           
|                     |  |  |  |                            |  | By:             |  | /s/ David Schramm                                                                     
|                     |  |  |  |                            |  |                 |  | David Schramm President and Chief Executive Officer                                   
|                     |  | 
|                     |  |  |  |                           
|                     |  |  | 
|Date: August 8, 2007 |  |  |  | By:                        |  | /s/ Tim T. Hart
|                     |  |  |  |                            |  |                 |  | Tim T. Hart Vice President  Finance, Treasurer, Chief Financial Officer and Secretary



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