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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-Q





(Mark One)

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

For the quarter ended September 30, 2010

OR



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

For the transition period from
 to

Commission file number 1-15477





MAXWELL
TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 95-2390133                          
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|5271 Viewridge Court, Suite 100, San Diego, California         |  | 92123                               
|(Address of principal executive offices)                       |  | (Zip Code)                          

(858)
503-3200

(Registrants telephone number, including area code)





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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES  ̈ NO  ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or
a smaller reporting company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.



|                           |  |                      |  |                                               |  |                             
|-------------------------- |  | -------------------- |  | --------------------------------------------- |  | ----------------------------
|Large accelerated filer   ̈ |  | Accelerated filer  x |  | Non-accelerated filer   ̈                      |  | Smaller reporting company   ̈
|                           |  |                      |  | (Do not check if a smaller reporting company)

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 November 5, 2010 is 26,587,013 shares.









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TABLE OF CONTENTS

MAXWELL TECHNOLOGIES, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

For the quarter ended September 30, 2010



|                               |  |                                                                                                           |    |      |    | 
|------------------------------ |  | --------------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                               |  |                                                                                                           |    | Page |   
|PART I  Financial Information | 
|                               |  |                                                                                                          
|Item 1.                        |  | Financial Statements (Unaudited):                                                                         |    |      | 3  | 
|                               |  |                                                                                                          
|                               |  | Condensed Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009                      |    |      | 4  | 
|                               |  |                                                                                                          
|                               |  | Condensed Consolidated Statements of Operations  Three and nine months ended September 30, 2010 and 2009 |    |      | 5  | 
|                               |  |                                                                                                          
|                               |  | Condensed Consolidated Statements of Cash Flows  Nine months ended September 30, 2010 and 2009           |    |      | 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 6.                        |  | Exhibits                                                                                                  |    |      | 28 | 
|                               | 
|Signatures                     |  |                                                                                                           | 29 |     



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PART I  Financial Information



|Item 1. | Financial Statements
|------- | --------------------

The
following condensed consolidated balance sheet as of December 31, 2009, 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 September 30, 2010, the condensed consolidated statements of operations for the three and nine months ended September 30, 2010 and 2009, and the condensed consolidated statements of cash flows for the nine months ended
September 30, 2010 and 2009, have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and 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 consolidated balance sheet as of December 31, 2009, 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, 2009. 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, 2009.

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, except as otherwise indicated) necessary for a fair presentation for the periods presented as required by Regulation S-X, Rule 10-01.

Actual results could differ materially from those estimates. In addition, operating results for the three and nine months ended
September 30, 2010 are not necessarily indicative of the results that may be expected for any subsequent period or for the year ending December 31, 2010.



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MAXWELL TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share
data)

(Unaudited)



|                                                                                                                                                                             |  |                   |          |   |                  |   |          |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | -------- | - | ---------------- | - | -------- | -
|                                                                                                                                                                             |  | September 30,2010 |          |   | December 31,2009 |  
|ASSETS                                                                                                                                                                       |  |                   |          |   |                  |   |          |  
|Current assets:                                                                                                                                                              |  |                   |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                                                                                    |  | $                 | 32,077   |   |                  | $ | 29,582   |  
|Trade and other accounts receivable, net of allowance for doubtful accounts of $244 and $386 at September 30, 2010 and
December 31, 2009, respectively                       |  |                   | 26,053   |   |                  |   | 20,485   |  
|Inventories, net                                                                                                                                                             |  |                   | 19,301   |   |                  |   | 17,788   |  
|Prepaid expenses and other current assets                                                                                                                                    |  |                   | 2,583    |   |                  |   | 1,776    |  
|                                                                                                                                                                             |  |                   |          |   |                  |   |          |  
|Total current assets                                                                                                                                                         |  |                   | 80,014   |   |                  |   | 69,631   |  
|Property and equipment, net                                                                                                                                                  |  |                   | 19,938   |   |                  |   | 17,080   |  
|Intangible assets, net                                                                                                                                                       |  |                   | 1,749    |   |                  |   | 2,922    |  
|Goodwill                                                                                                                                                                     |  |                   | 23,870   |   |                  |   | 22,799   |  
|Prepaid pension asset                                                                                                                                                        |  |                   | 8,726    |   |                  |   | 7,653    |  
|Restricted cash                                                                                                                                                              |  |                   | 8,000    |   |                  |   | 8,000    |  
|Other non-current assets                                                                                                                                                     |  |                   | 1,075    |   |                  |   | 734      |  
|                                                                                                                                                                             |  |                   |          |   |                  |   |          |  
|Total assets                                                                                                                                                                 |  | $                 | 143,372  |   |                  | $ | 128,819  |  
|                                                                                                                                                                             |  |                   |          |   |                  |   |          |  
|                                                                                                                                                                             |  |                  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                         |  |                   |          |   |                  |   |          |  
|Current liabilities:                                                                                                                                                         |  |                   |          |   |                  |   |          |  
|Accounts payable and accrued liabilities                                                                                                                                     |  | $                 | 38,542   |   |                  | $ | 23,672   |  
|Accrued warranty                                                                                                                                                             |  |                   | 399      |   |                  |   | 588      |  
|Accrued employee compensation                                                                                                                                                |  |                   | 5,532    |   |                  |   | 4,615    |  
|Short-term borrowings and current portion of long-term debt                                                                                                                  |  |                   | 11,025   |   |                  |   | 5,245    |  
|Stock warrants                                                                                                                                                               |  |                   | 514      |   |                  |   | 2,465    |  
|Deferred tax liability                                                                                                                                                       |  |                   | 906      |   |                  |   | 906      |  
|                                                                                                                                                                             |  |                   |          |   |                  |   |          |  
|Total current liabilities                                                                                                                                                    |  |                   | 56,918   |   |                  |   | 37,491   |  
|Deferred tax liability, long-term                                                                                                                                            |  |                   | 1,097    |   |                  |   | 1,097    |  
|Convertible debenture and long-term debt, excluding current portion                                                                                                          |  |                   | 4,111    |   |                  |   | 11,452   |  
|Other long-term liabilities                                                                                                                                                  |  |                   | 743      |   |                  |   | 787      |  
|                                                                                                                                                                             |  |                   |          |   |                  |   |          |  
|Total liabilities                                                                                                                                                            |  |                   | 62,869   |   |                  |   | 50,827   |  
|                                                                                                                                                                             |  |                   |          |   |                  |   |          |  
|Commitments and contingencies                                                                                                                                                |  |                   |          |   |                  |   |          |  
|Stockholders equity:                                                                                                                                                        |  |                   |          |   |                  |   |          |  
|Common stock, $0.10 par value per share, 40,000 shares authorized; 26,486 and 26,321 shares issued and outstanding at
September 30, 2010 and December 31, 2009, respectively |  |                   | 2,649    |   |                  |   | 2,633    |  
|Additional paid-in capital                                                                                                                                                   |  |                   | 227,664  |   |                  |   | 224,575  |  
|Accumulated deficit                                                                                                                                                          |  |                   | (161,506 | ) |                  |   | (157,814 | )
|Accumulated other comprehensive income                                                                                                                                       |  |                   | 11,696   |   |                  |   | 8,598    |  
|                                                                                                                                                                             |  |                   |          |   |                  |   |          |  
|Total stockholders equity                                                                                                                                                   |  |                   | 80,503   |   |                  |   | 77,992   |  
|                                                                                                                                                                             |  |                   |          |   |                  |   |          |  
|Total liabilities and stockholders equity                                                                                                                                   |  | $                 | 143,372  |   |                  | $ | 128,819  |  
|                                                                                                                                                                             |  |                   |          |   |                  |   |          |  

See accompanying notes to condensed consolidated financial statements.



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MAXWELL TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except
per share data)

(Unaudited)



|                                                     |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|---------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------- | -
|                                                     |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                                                     |  | 2010                            |        |   | 2009                           |   |        | 2010 |  |   | 2009   |  
|Revenue                                              |  | $                               | 31,452 |   |                                | $ | 26,101 |      |  | $ | 87,654 |   |  | $ | 73,314  |  
|Cost of revenue                                      |  |                                 | 19,130 |   |                                |   | 16,164 |      |  |   | 53,284 |   |  |   | 47,409  |  
|                                                     |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|Gross profit                                         |  |                                 | 12,322 |   |                                |   | 9,937  |      |  |   | 34,370 |   |  |   | 25,905  |  
|Operating expenses:                                  |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|Selling, general and administrative                  |  |                                 | 8,747  |   |                                |   | 7,288  |      |  |   | 27,086 |   |  |   | 17,962  |  
|Research and development                             |  |                                 | 4,432  |   |                                |   | 4,274  |      |  |   | 12,968 |   |  |   | 12,066  |  
|Amortization of intangibles                          |  |                                 | 50     |   |                                |   | 86     |      |  |   | 182    |   |  |   | 267     |  
|                                                     |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|Total operating expenses                             |  |                                 | 13,229 |   |                                |   | 11,648 |      |  |   | 40,236 |   |  |   | 30,295  |  
|                                                     |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|Loss from operations                                 |  |                                 | (907   | ) |                                |   | (1,711 | )    |  |   | (5,866 | ) |  |   | (4,390  | )
|Interest expense, net                                |  |                                 | (46    | ) |                                |   | (59    | )    |  |   | (144   | ) |  |   | (202    | )
|Amortization of debt discount and prepaid debt costs |  |                                 | (21    | ) |                                |   | (73    | )    |  |   | (62    | ) |  |   | (695    | )
|Gain (loss) on embedded derivatives and warrants     |  |                                 | (814   | ) |                                |   | (2,761 | )    |  |   | 3,661  |   |  |   | (7,175  | )
|                                                     |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|Loss from continuing operations before income taxes  |  |                                 | (1,788 | ) |                                |   | (4,604 | )    |  |   | (2,411 | ) |  |   | (12,462 | )
|Income tax provision                                 |  |                                 | 562    |   |                                |   | 33     |      |  |   | 1,281  |   |  |   | 475     |  
|                                                     |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|Net loss                                             |  | $                               | (2,350 | ) |                                | $ | (4,637 | )    |  | $ | (3,692 | ) |  | $ | (12,937 | )
|                                                     |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|Net loss per share:                                  |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|Basic and diluted                                    |  | $                               | (0.09  | ) |                                | $ | (0.18  | )    |  | $ | (0.14  | ) |  | $ | (0.54   | )
|Weighted average common shares outstanding:          |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|Basic and diluted                                    |  |                                 | 26,195 |   |                                |   | 25,673 |      |  |   | 26,149 |   |  |   | 23,974  |  

See accompanying notes
to condensed consolidated financial statements.



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MAXWELL TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)



|                                                                                          |  |                                |        |   |      |   |         |  
|----------------------------------------------------------------------------------------- |  | ------------------------------ | ------ | - | ---- | - | ------- | -
|                                                                                          |  | Nine Months EndedSeptember 30, |       
|                                                                                          |  | 2010                           |        |   | 2009 |  
|OPERATING ACTIVITIES:                                                                     |  |                                |        |   |      |   |         |  
|Net loss                                                                                  |  | $                              | (3,692 | ) |      | $ | (12,937 | )
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |  |                                |        |   |      |   |         |  
|Depreciation                                                                              |  |                                | 4,071  |   |      |   | 3,866   |  
|Amortization                                                                              |  |                                | 404    |   |      |   | 480     |  
|Amortization of debt discount and prepaid debt costs                                      |  |                                | 62     |   |      |   | 695     |  
|Loss (gain) on embedded derivatives and warrants                                          |  |                                | (3,661 | ) |      |   | 7,175   |  
|Pension cost (benefit)                                                                    |  |                                | (153   | ) |      |   | 313     |  
|Stock-based compensation                                                                  |  |                                | 2,043  |   |      |   | 2,478   |  
|Shares issued for interest payments                                                       |  |                                |       |   |      |   | 92      |  
|Shares issued for bonus payments                                                          |  |                                |       |   |      |   | 638     |  
|Loss on sale of property and equipment                                                    |  |                                |       |   |      |   | 34      |  
|Provision (recovery) for losses on accounts receivable                                    |  |                                | (119   | ) |      |   | 80      |  
|Changes in operating assets and liabilities:                                              |  |                                |        |   |      |   |         |  
|Trade and other accounts receivable                                                       |  |                                | (3,831 | ) |      |   | (6,487  | )
|Inventories                                                                               |  |                                | (1,083 | ) |      |   | (223    | )
|Prepaid expenses and other assets                                                         |  |                                | (242   | ) |      |   | 264     |  
|Accounts payable and accrued liabilities                                                  |  |                                | 13,584 |   |      |   | 2,308   |  
|Accrued employee compensation                                                             |  |                                | 1,171  |   |      |   | 1,144   |  
|Other long-term liabilities                                                               |  |                                | (59    | ) |      |   | (353    | )
|                                                                                          |  |                                |        |   |      |   |         |  
|Net cash provided by (used in) operating activities                                       |  |                                | 8,495  |   |      |   | (433    | )
|                                                                                          |  |                                |        |   |      |   |         |  
|INVESTING ACTIVITIES:                                                                     |  |                                |        |   |      |   |         |  
|Purchases of property and equipment                                                       |  |                                | (6,626 | ) |      |   | (3,785  | )
|                                                                                          |  |                                |        |   |      |   |         |  
|Net cash used in investing activities                                                     |  |                                | (6,626 | ) |      |   | (3,785  | )
|                                                                                          |  |                                |        |   |      |   |         |  
|FINANCING ACTIVITIES:                                                                     |  |                                |        |   |      |   |         |  
|Principal payments on long-term debt and short-term borrowings                            |  |                                | (8,944 | ) |      |   | (9,598  | )
|Proceeds from long-term and short-term borrowings                                         |  |                                | 8,718  |   |      |   | 6,305   |  
|Retirement of shares                                                                      |  |                                | (148   | ) |      |   | (450    | )
|Net cash proceeds from issuance of common stock                                           |  |                                | 1,210  |   |      |   | 25,675  |  
|                                                                                          |  |                                |        |   |      |   |         |  
|Net cash provided by financing activities                                                 |  |                                | 836    |   |      |   | 21,932  |  
|                                                                                          |  |                                |        |   |      |   |         |  
|Increase in cash and cash equivalents from operations                                     |  |                                | 2,705  |   |      |   | 17,714  |  
|Effect of exchange rate changes on cash and cash equivalents                              |  |                                | (210   | ) |      |   | (57     | )
|                                                                                          |  |                                |        |   |      |   |         |  
|Increase in cash and cash equivalents                                                     |  |                                | 2,495  |   |      |   | 17,657  |  
|Cash and cash equivalents, beginning of period                                            |  |                                | 29,582 |   |      |   | 12,576  |  
|                                                                                          |  |                                |        |   |      |   |         |  
|Cash and cash equivalents, end of period                                                  |  | $                              | 32,077 |   |      | $ | 30,233  |  
|                                                                                          |  |                                |        |   |      |   |         |  

See accompanying notes to condensed consolidated financial statements.



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MAXWELL TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Unless the context otherwise requires, all references to Maxwell and the Company refer to Maxwell
Technologies, Inc. and its subsidiaries; all references to Maxwell SA refer to our Swiss 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 originally incorporated in 1965 under the name Maxwell Laboratories, Inc. In 1996, the Company changed its name to Maxwell Technologies, Inc.

Maxwell has two manufacturing locations in San Diego, California and Rossens, Switzerland. In addition, the Company has two contract manufacturers located in Shenzhen, China and Tianjin, China. Maxwell
operates as one operating segment called High Reliability, which is comprised of three product lines:



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



| |  |  | High-Voltage Capacitors:The Companys 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 transportation, distribution and measurement of high-voltage
electrical energy.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Radiation-Mitigated Microelectronic Products:The Companys radiation-mitigated microelectronic products include high-performance,
high-density power modules, memory modules and single board computers that incorporate the Companys 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.

Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts of Maxwell Technologies, Inc. and its subsidiaries. All significant intercompany transactions and account balances have
been eliminated in consolidation. The Company has prepared the accompanying unaudited interim condensed consolidated financial statements in accordance with the instructions to Form 10-Q and the standards of accounting measurement set forth in the
Interim Reporting Topic of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC). Consequently, the Company has not necessarily included in this Form 10-Q all information and footnotes
required for audited financial statements. In the opinion of the Companys management, the accompanying unaudited condensed consolidated financial statements in this Form 10-Q contain all adjustments (consisting only of normal recurring
adjustments, except as otherwise indicated) 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 unaudited condensed consolidated financial statements and notes thereto should be read in
conjunction with the Companys audited 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 in the accompanying interim consolidated financial statements.

Liquidity

As of
September 30, 2010, the Company had approximately $32.1 million in cash and cash equivalents with an additional $8.0 million in restricted cash for a total of $40.1 million in cash, cash equivalents and restricted cash. The cash restriction
will be released when the convertible debenture is fully repaid or converted.

Based on the Companys assessment of its
current and long-term obligations, management believes it will have adequate resources to fund working capital requirements, settlement of alleged U.S. Foreign Corrupt Practice Act violations, obligations as they become due, planned capital
equipment additions and product development expenditures for the next several years.



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Use of Estimates

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, but are not limited to, assessing the collectability of accounts
receivable, applied and unapplied production costs, production capacities, the usage and recoverability of inventories and long-lived assets, provisions for deferred income taxes, the incurrence of warranty obligations, stock-based compensation
expense, impairment of goodwill and other intangible assets, estimation of potential losses associated with litigation and other claims, the cost to complete certain projects, the probability that the performance criteria of restricted stock awards
will be met and the fair value of warrants and embedded conversion options related to the convertible debenture. Actual results could differ materially from the estimates used by management.

Revenue Recognition

Revenue is derived from the sale of
manufactured products directly to customers. For certain long-term contracts, revenue is recognized at the time costs are incurred. Product revenue is recognized, according to the guidelines of the Securities and Exchange Commission
(SEC) Staff Accounting Bulletin (SAB) Numbers 101, Revenue Recognition in Financial Statements, and 104, Revenue Recognition, when all of the following criteria are met: (1) persuasive evidence of an
arrangement exists (upon contract signing or receipt of an authorized purchase order from a customer); (2) title passes to the customer at either shipment from the Companys facilities or receipt at the customer facility, depending on
shipping terms; (3) customer payment is deemed fixed or determinable and free of contingencies or significant uncertainties; and (4) 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 generated from fixed price contracts is recognized on a percentage of completion basis measured by the percentage of cost
incurred to date to the estimated costs for each contract, as required by the Construction-Type and Production-Type ContractsSubtopic of the FASB ASC, and is limited by the funding of the prime contractor. Provisions for estimated losses on
incomplete contracts are made in the period in which such losses are determined.

From time to time the Company has entered
into multiple-element contractual arrangements with elements of software that are essential to the functionality of the delivered elements. Additionally, the Company has contracts where all the elements of the agreement need to be delivered and
accepted by the customer prior to any revenue being recognized for the deliverables. The Company recognizes revenue on the delivered elements when vendor-specific objective evidence (VSOE) of the fair value of the undelivered elements
exists in accordance with the Software Revenue RecognitionSubtopic of the FASB ASC. The Company has entered into a contract whereby the Company has delivered certain elements and VSOE of the fair value of the undelivered elements does not
exist, therefore, revenue has been deferred The Company also records deferred revenue associated with advance payments from customers. As of September 30, 2010, the Company has recorded approximately $1.8 million of deferred revenue, net of
deferred costs of $740,000, which is included in accounts payable and accrued liabilities in the condensed consolidated balance sheet.

Foreign Currency Derivative Instruments

As part of its risk
management strategy, Maxwell uses forward contracts to hedge certain foreign currency exposures. Maxwells objective is to offset gains or losses resulting from these exposures with opposing gains or losses on the forward contracts, thereby
reducing volatility of earnings created by these foreign currency exposures. In accordance with the Derivatives and Hedging Topic of the FASB ASC, the fair values of the forward contracts are estimated based on quoted market prices and all
forward contracts are recorded in prepaid expenses and other current assets or accounts payable and accrued liabilities on the condensed consolidated balance sheets at fair value. Any gains or losses recognized on these
contracts are recorded in cost of revenue and selling, general and administrative expense in the condensed consolidated statement of operations.

Comprehensive Loss

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



|                                        |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|--------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------- | -
|                                        |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                                        |  | 2010                            |        |   | 2009                           |   |        | 2010 |  |   | 2009   |  
|Net loss as reported                    |  | $                               | (2,350 | ) |                                | $ | (4,637 | )    |  | $ | (3,692 | ) |  | $ | (12,937 | )
|Foreign currency translation adjustment |  |                                 | 4,866  |   |                                |   | 1,653  |      |  |   | 3,096  |   |  |   | 992     |  
|Unrealized gain on securities           |  |                                 |       |   |                                |   |       |      |  |   | 2      |   |  |   |        |  
|                                        |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|Comprehensive income (loss)             |  | $                               | 2,516  |   |                                | $ | (2,984 | )    |  | $ | (594   | ) |  | $ | (11,945 | )
|                                        |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  



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Computation of Net Loss per
Share

In accordance with the Earnings Per Share Topic of the FASB ASC, basic loss per share is calculated using
the weighted average number of common shares outstanding. Potentially dilutive securities are not considered in the calculation of net loss per share, as their inclusion would be anti-dilutive. The following table sets forth the computation of basic
and diluted loss per share (in thousands, except per share data).



|                                                               |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|-------------------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------- | -
|                                                               |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                                                               |  | 2010                            |        |   | 2009                           |   |        | 2010 |  |   | 2009   |  
|Numerator                                                      |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|Net loss                                                       |  | $                               | (2,350 | ) |                                | $ | (4,637 | )    |  | $ | (3,692 | ) |  | $ | (12,937 | )
|                                                               |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|Denominator                                                    |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|Weighted average common shares outstanding  basic and diluted |  |                                 | 26,195 |   |                                |   | 25,673 |      |  |   | 26,149 |   |  |   | 23,974  |  
|                                                               |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|Net loss per share                                             |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|Basic and diluted                                              |  | $                               | (0.09  | ) |                                | $ | (0.18  | )    |  | $ | (0.14  | ) |  | $ | (0.54   | )

The following table
summarizes instruments that may be convertible into common shares that are not included in the denominator used in the diluted net loss per share calculation because to do so would be antidilutive (in thousands).



|                                                       |  |               |       |  |      |  |       | 
|------------------------------------------------------ |  | ------------- | ----- |  | ---- |  | ----- | 
|                                                       |  | September 30, |      
|                                                       |  | 2010          |       |  | 2009 | 
|Outstanding options to purchase common stock           |  |               | 1,712 |  |      |  | 1,719 | 
|Restricted stock awards outstanding                    |  |               | 210   |  |      |  | 359   | 
|Shares issuable on conversion of convertible debenture |  |               | 514   |  |      |  | 685   | 
|Warrants to purchase common stock                      |  |               | 462   |  |      |  | 462   | 
|Restricted stock unit awards                           |  |               | 11    |  |      |  | 14    | 

Income Tax Provision

The effective tax rate differs from the statutory U.S. federal income tax rate of 35% primarily due to foreign income
tax and the valuation allowance against the Companys domestic deferred tax assets.

Pending Accounting Pronouncements

In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures, to improve the
disclosures about fair value measurements. This update requires the Company to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. In the
reconciliation for fair value measurements using significant unobservable inputs (Level 3), the Company will be required to present separately information about purchases, sales, issuances and settlements (that is, on a gross basis rather than as
one net number). This update provides clarification as to the level of disaggregation in determining the appropriate classes of assets and liabilities. This update clarifies disclosures about inputs and valuation techniques for Level 2 and Level 3
fair value measurements. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and
settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. As this update is only
disclosure-related, it does not have an impact on the Companys financial position and results of operations.

In October
2009, the FASB reached a consensus on ASU 2009-13, Multiple-Deliverable Revenue Arrangements, and ASU 2009-14, Certain Revenue Arrangements That Include Software Elements. ASU 2009-13 modifies the requirements that must be met for an
entity to recognize revenue from the sale of a delivered item that is part of a multiple-element arrangement when other items have not yet been delivered. ASU 2009-13 eliminates the requirement that all undelivered elements must have either: i) VSOE
or ii) third-party evidence (TPE) before an entity can recognize the portion of an overall arrangement consideration that is attributable to items that already have been delivered. In the absence of VSOE or TPE of the standalone selling
price for one or more delivered or undelivered elements in a multiple-element arrangement, entities will be required to estimate the selling prices of those elements. Overall arrangement consideration will be allocated to each element (both
delivered and undelivered items) based on their relative selling prices, regardless of whether those selling prices are evidenced by VSOE or TPE or are based on the entitys estimated selling price. The residual method of allocating arrangement
consideration has been eliminated. ASU 2009-14 modifies the software revenue recognition guidance to exclude from its scope tangible products that contain both software and non-software components that function together to deliver a products
essential functionality. These new updates are effective for revenue arrangements entered into



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or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. This new pronouncement allows the Company to recognize revenue on
multiple-deliverable arrangements earlier than in previous years. Although the Company is unable to estimate what those amounts will be in the future, there were no amounts recognized for multiple-deliverable revenue arrangements for the year ended
December 31, 2009 and $896,000 for the year ended December 31, 2008. As of September 30, 2010 and December 31, 2009, there was approximately $1.7 million and $2.1 million, respectively, of deferred revenue related to
multiple-deliverable revenue arrangements.

Note 2  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. The manufacturing overhead rate is calculated based on normal capacity. Inventory written down to market establishes a new cost basis and its value cannot be subsequently
increased based upon changes in underlying facts and circumstances. Inventory consists of the following (in thousands):



|                                 |  |                   |        |   |                  |   |        |  
|-------------------------------- |  | ----------------- | ------ | - | ---------------- | - | ------ | -
|                                 |  | September 30,2010 |        |   | December 31,2009 |  
|Inventories:                     |  |                   |        |   |                  |   |        |  
|Raw material and purchased parts |  | $                 | 10,771 |   |                  | $ | 10,190 |  
|Work-in-process                  |  |                   | 3,182  |   |                  |   | 3,685  |  
|Finished goods                   |  |                   | 7,993  |   |                  |   | 6,555  |  
|Inventory reserve                |  |                   | (2,645 | ) |                  |   | (2,642 | )
|                                 |  |                   |        |   |                  |   |        |  
|Net inventory                    |  | $                 | 19,301 |   |                  | $ | 17,788 |  
|                                 |  |                   |        |   |                  |   |        |  

Intangible Assets

Intangible assets consist of the following (in thousands):



|                                              |  |                    |       |  |                           |   |     |                         |  |   |                  |   |  |   |       | 
|--------------------------------------------- |  | ------------------ | ----- |  | ------------------------- | - | --- | ----------------------- |  | - | ---------------- | - |  | - | ----- | 
|                                              |  | GrossCarryingValue |       |  | ForeignCurrencyAdjustment |   |     | AccumulatedAmortization |  |   | NetCarryingValue |  
|As of September 30, 2010:                     |  |                    |       |  |                           |   |     |                         |  |   |                  |   |  |   |       | 
|Patents                                       |  | $                  | 2,476 |  |                           | $ |    |                         |  | $ | (1,446           | ) |  | $ | 1,030 | 
|Developed core technology                     |  |                    | 1,100 |  |                           |   | 301 |                         |  |   | (1,118           | ) |  |   | 283   | 
|Patent license agreement                      |  |                    | 741   |  |                           |   | (3  | )                       |  |   | (302             | ) |  |   | 436   | 
|                                              |  |                    |       |  |                           |   |     |                         |  |   |                  |   |  |   |       | 
|Total intangible assets at September 30, 2010 |  | $                  | 4,317 |  |                           | $ | 298 |                         |  | $ | (2,866           | ) |  | $ | 1,749 | 
|                                              |  |                    |       |  |                           |   |     |                         |  |   |                  |   |  |   |       | 
|                                              |  |                    |       | 
|                                              |  | GrossCarryingValue |       |  | ForeignCurrencyAdjustment |   |     | AccumulatedAmortization |  |   | NetCarryingValue |  
|As of December 31, 2009:                      |  |                    |       |  |                           |   |     |                         |  |   |                  |   |  |   |       | 
|Patents                                       |  | $                  | 3,276 |  |                           | $ |    |                         |  | $ | (1,263           | ) |  | $ | 2,013 | 
|Developed core technology                     |  |                    | 1,100 |  |                           |   | 288 |                         |  |   | (1,002           | ) |  |   | 386   | 
|Patent license agreement                      |  |                    | 741   |  |                           |   | (24 | )                       |  |   | (194             | ) |  |   | 523   | 
|                                              |  |                    |       |  |                           |   |     |                         |  |   |                  |   |  |   |       | 
|Total intangible assets at December 31, 2009  |  | $                  | 5,117 |  |                           | $ | 264 |                         |  | $ | (2,459           | ) |  | $ | 2,922 | 
|                                              |  |                    |       |  |                           |   |     |                         |  |   |                  |   |  |   |       | 

Goodwill

The change in the carrying amount of goodwill from December 31, 2009 to September 30, 2010 is as follows (in thousands):



|                                         |  |   |        | 
|---------------------------------------- |  | - | ------ | 
|Balance at December 31, 2009             |  | $ | 22,799 | 
|Foreign currency translation adjustments |  |   | 1,071  | 
|                                         |  |   |        | 
|Balance at September 30, 2010            |  | $ | 23,870 | 
|                                         |  |   |        | 

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 experience, including warranty return rates and related expenses, as well as any known or expected warranty exposure.



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The following table
sets forth an analysis of the warranty reserve activity for the nine months ended September 30, 2010 and 2009 (in thousands).



|                                         |  |                                 |      |   |      |   |      |  
|---------------------------------------- |  | ------------------------------- | ---- | - | ---- | - | ---- | -
|                                         |  | Nine Months Ended September 30, |     
|Accrued Warranty Activity:               |  | 2010                            |      |   | 2009 |  
|Beginning balance                        |  | $                               | 588  |   |      | $ | 905  |  
|Product warranty expense on sales        |  |                                 | 479  |   |      |   | 427  |  
|Charge to prior warranty expense/accrual |  |                                 | (30  | ) |      |   | (72  | )
|Settlement of warranties                 |  |                                 | (653 | ) |      |   | (389 | )
|Foreign currency translation adjustment  |  |                                 | 15   |   |      |   | (31  | )
|                                         |  |                                 |      |   |      |   |      |  
|Ending balance                           |  | $                               | 399  |   |      | $ | 840  |  
|                                         |  |                                 |      |   |      |   |      |  

Change in Additional Paid in Capital

For the nine months ended September 30, 2010, additional paid in capital increased $3.1 million, due to $3.2 million associated with the Companys stock-based compensation plans, offset by
$140,000 for the retirement of shares.

Note 3  Fair Value Measurement

The convertible debenture (the Debenture) issued on December 20, 2005 was evaluated and determined not to be a
conventional convertible debenture and, therefore, because of certain terms and provisions including liquidated damages under the associated registration rights agreement the embedded conversion options were bifurcated and have been accounted for as
derivative liability instruments. The stock warrants issued on December 20, 2005 in conjunction with the Debenture were also evaluated and determined to be a derivative instrument and, therefore, are classified as a liability on the balance
sheet. The accounting guidance also requires that the conversion features and warrants be recorded at fair value at each reporting period with changes in fair value recorded in the statement of operations. The fair value of the embedded conversion
options and stock warrants are based on a Black-Scholes fair value calculation. The carrying value and fair value of the convertible debenture was approximately $8.3 million and $7.9 million, respectively, as of September 30, 2010. The fair
value of the convertible debenture was based on the discounted cash flows of principal and interest payments using an interest rate of 5.88%.

The carrying value of restricted cash and short-term borrowings approximates fair value due to the short maturity of these instruments.

The foreign currency forward contracts are valued using quoted market prices. As of September 30, 2010, the fair value of foreign
currency forward contracts was nominal.

The Company records certain assets and liabilities at fair value in accordance with
the Fair Value Measurements and Disclosures Topic of the FASB ASC. As of September 30, 2010, the financial instruments to which this Topic applied were financial liabilities for the conversion features of the convertible debenture,
warrants and foreign currency forward contracts.



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Liabilities measured
at fair value on a recurring basis are summarized as follows (in thousands):



|                                             |  |                                                 |       |  |         |  |   |         |  |  |         |  |  |   |       | 
|-------------------------------------------- |  | ----------------------------------------------- | ----- |  | ------- |  | - | ------- |  |  | ------- |  |  | - | ----- | 
|                                             |  | Fair Value Measurements as ofSeptember 30, 2010 |      
|Description                                  |  | Total                                           |       |  | Level 1 |  |   | Level 2 |  |  | Level 3 | 
|Conversion features of convertible debenture |  | $                                               | 1,314 |  |         |  |  |         |  |  |        |  |  | $ | 1,314 | 
|Warrants                                     |  |                                                 | 514   |  |         |  |  |         |  |  |        |  |  |   | 514   | 

For those financial
instruments with significant Level 3 inputs, the following table summarizes the activity for the period by investment type (in thousands).



|                                               |  |                                          |        |   |           |   |        |  
|---------------------------------------------- |  | ---------------------------------------- | ------ | - | --------- | - | ------ | -
|Description                                    |  | Convertible1DebentureConversion Features |        |   | Warrants1 |  
|Beginning liability balance, December 31, 2009 |  | $                                        | 3,024  |   |           | $ | 2,465  |  
|Total unrealized gain included in net loss     |  |                                          | (1,710 | ) |           |   | (1,951 | )
|                                               |  |                                          |        |   |           |   |        |  
|Ending liability balance, September 30, 2010   |  | $                                        | 1,314  |   |           | $ | 514    |  
|                                               |  |                                          |        |   |           |   |        |  



|1 | Refer to Note 4  Convertible Debenture for the valuation model and unobservable data used to calculate the fair value of the conversion features
of the convertible debenture and warrants issued by the Company.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Note 4  Convertible Debenture

Maxwell accounts for the conversion options in the Debenture and the associated warrants as derivative liabilities in accordance with the
Derivatives and Hedging Topic of the FASB ASC. The Debenture was issued on December 20, 2005 for $25 million in aggregate principal of senior subordinated convertible debt, due and payable in quarterly installments of $2.8 million
beginning December 2007 through December 2009. However, the holder, at its election, could defer each quarterly payment one time, for a 24 month period. As the holder elected to defer some quarterly installments, the outstanding principal of the
Debenture at September 30, 2010 was $8.3 million; this amount is payable with equal installments in June, September and December 2011.

The discount at the issuance date attributable to the aggregate fair value of the conversion options and warrants and the issuance costs totaling $9.2 million, are being amortized using the effective
interest method over the term of the Debenture. For the three months ended September 30, 2010 and 2009, $21,000 and $73,000, respectively, and $62,000 and $695,000 for the nine months ended September 30, 2010 and 2009, respectively, of the
discount and prepaid fees was amortized and included in the condensed consolidated statement of operations.

Interest is due
quarterly with the interest rate tied 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. As of
September 30, 2010 and December 31, 2009, the interest rate on the Debenture was 1.375%. At September 30, 2010 and December 31, 2009, accrued interest on the Debenture was $29,000 and $34,000, respectively.

The following table summarizes principal and interest incurred on the Debenture for the three and nine months ended September 30,
2010 and 2009, respectively (in thousands).



|                                  |  |                                      |    |  |                                      |   |    | 
|--------------------------------- |  | ------------------------------------ | -- |  | ------------------------------------ | - | -- | 
|                                  |  | Three Months EndedSeptember 30, 2010 |    |  | Three Months EndedSeptember 30, 2009 |  
|Interest paid with cash           |  | $                                    | 29 |  |                                      | $ | 38 | 
|                                  |  |                                      |    |  |                                      |   |    | 
|Total Debenture interest payments |  | $                                    | 29 |  |                                      | $ | 38 | 
|                                  |  |                                      |    |  |                                      |   |    | 



|                                          |  |                                     |    |  |                                     |  |   |       |  |   |        |  |  |  |    | 
|----------------------------------------- |  | ----------------------------------- | -- |  | ----------------------------------- |  | - | ----- |  | - | ------ |  |  |  | -- | 
|                                          |  | Nine Months EndedSeptember 30, 2010 |    |  | Nine Months EndedSeptember 30, 2009 | 
|                                          |  | Value                               |    |  | Shares                              |  |   | Value |  |   | Shares | 
|Principal paid with cash                  |  | $                                   |   |  |                                     |  |  |       |  | $ | 2,778  |  |  |  |   | 
|Interest paid with cash                   |  |                                     | 91 |  |                                     |  |  |       |  |   | 84     |  |  |  |   | 
|Interest paid with shares of common stock |  |                                     |   |  |                                     |  |  |       |  |   | 92     |  |  |  | 18 | 
|                                          |  |                                     |    |  |                                     |  |   |       |  |   |        |  |  |  |    | 
|Total Debenture payments                  |  | $                                   | 91 |  |                                     |  |  |       |  | $ | 2,954  |  |  |  |   | 
|                                          |  |                                     |    |  |                                     |  |   |       |  |   |        |  |  |  |    | 



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At September 30,
2010, the Debenture was convertible by the holder at any time into 513,845 shares of common stock. The Company also issued warrants in connection with the issuance of the Debenture. At September 30, 2010, a total of 462,461 warrants were
outstanding, which had an exercise price of $16.22 per share. The warrants are exercisable at any time through December 20, 2010. The exercise price and the number of convertible shares and warrants have been adjusted from the originally issued
amounts and continue to be subject to an adjustment upon certain events, such as the sale of equity securities by Maxwell at a price below the current exercise price.

Additionally, Maxwell may require that a specified amount of the principal of the Debenture 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 probability used as of September 30, 2010 and December 31, 2009 was 9.0% and 35.2%,
respectively, for forced conversion of 50% of the conversion option at 135% of the original exercise price and 1.2% and 22.4%, respectively, for forced conversion of the remaining conversion option at 175% of the original exercise price. The
original exercise price was $19.00 per share.

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



|                                |  |                    |       |   |                  |   |       |                   |  |   |                  |   |  |   |       |  
|------------------------------- |  | ------------------ | ----- | - | ---------------- | - | ----- | ----------------- |  | - | ---------------- | - |  | - | ----- | -
|                                |  | Convertible Shares |       |   | Warrants         |  
|                                |  | September 30,2010  |       |   | December 31,2009 |   |       | September 30,2010 |  |   | December 31,2009 |  
|Black-Scholes Assumptions:      |  |                    |       |   |                  |   |       |                   |  |   |                  |   |  |   |       |  
|Conversion / exercise price     |  | $                  | 16.22 |   |                  | $ | 16.22 |                   |  | $ | 16.22            |   |  | $ | 16.22 |  
|Market price                    |  | $                  | 14.61 |   |                  | $ | 17.84 |                   |  | $ | 14.61            |   |  | $ | 17.84 |  
|Expected dividends              |  |                    |      |   |                  |   |      |                   |  |   |                 |   |  |   |      |  
|Expected volatility             |  |                    | 56.5  | % |                  |   | 86.9  | %                 |  |   | 62.5             | % |  |   | 67.7  | %
|Average risk-free interest rate |  |                    | 0.27  | % |                  |   | 0.98  | %                 |  |   | 0.16             | % |  |   | 0.47  | %
|Expected term/life (in years)   |  |                    | 1.0   |   |                  |   | 1.7   |                   |  |   | 0.22             |   |  |   | 1.0   |  

The change in fair
value on revaluation of the Debenture conversion rights and warrant liabilities represents the difference between the fair value at the end of the current period and the fair value at the beginning of the current period using the value calculated by
the Black-Scholes pricing model. The fair value of the warrants at September 30, 2010 and December 31, 2009 was $514,000 and $2.5 million, respectively and is included in stock warrants on the balance sheet. The net fair value
of the liability for the holders and Maxwells conversion rights at September 30, 2010 and December 31, 2009 was $1.3 million and $3.0 million, respectively, which is included in convertible debenture and long-term
debt on the balance sheet. The effect of the fair market value adjustment for the three months ended September 30, 2010 and 2009 was a $814,000 loss and a $2.8 million loss, respectively, and a $3.7 million gain and a $7.2 million loss
for the nine months ended September 30, 2010 and 2009, respectively. These adjustments are recorded as gain (loss) on embedded derivative and warrants.

In the event of any default or fundamental change as defined in the Debenture, the holder will be entitled to require Maxwell to redeem the Debenture (or any portion thereof) at a price equal to the
greater of (i) the applicable redemption premium (ranging from 103%-115%) or (ii) the product of (x) the number of shares into which the Debenture is convertible using the $16.22 per share conversion price and (y) the closing
price of Maxwells common stock on the day preceding the default or fundamental change.

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 30th day after a failure of the registration of the securities. These damages continue each 30
days (pro rated) until the registration failure is cured. As of September 30, 2010, if the Company was not in compliance it would have incurred damages of $238,000 every 30 days until the failure was cured. 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.

As
long as the Debenture is outstanding, the Company is required to maintain a cash balance of $8.0 million, which is classified as restricted cash at September 30, 2010 and December 31, 2009.

Note 5  Foreign Currency Derivative Instruments

Maxwell uses forward contracts to hedge certain monetary assets and liabilities, primarily receivables and payables, denominated in a foreign currency. The change in fair value of these instruments
represents a natural hedge as their gains and losses offset the changes in the underlying fair value of the monetary assets and liabilities due to movements in currency exchange rates. These contracts generally expire in one month. These contracts
are considered economic hedges and are not designated as hedges under the Derivatives and Hedging Topic of the FASB ASC. Therefore, the change in the instruments fair value is recognized currently in earnings.



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Gains (losses) on
foreign currency forward contracts included in cost of revenue and selling, general and administrative expense are as follows (in thousands):



|                                                                    |  |                                 |     |   |                                |   |     |      |  |   |      |  |  |   |     | 
|------------------------------------------------------------------- |  | ------------------------------- | --- | - | ------------------------------ | - | --- | ---- |  | - | ---- |  |  | - | --- | 
|                                                                    |  | Three Months EndedSeptember 30, |     |   | Nine Months EndedSeptember 30, |  
|                                                                    |  | 2010                            |     |   | 2009                           |   |     | 2010 |  |   | 2009 | 
|Gains (losses) on foreign currency forward contracts recognized in: |  |                                 |     |   |                                |   |     |      |  |   |      |  |  |   |     | 
|Cost of revenue                                                     |  | $                               | (59 | ) |                                | $ | 196 |      |  | $ | 296  |  |  | $ | 196 | 
|Selling, general and administrative expense                         |  |                                 | 705 |   |                                |   | 552 |      |  |   | 435  |  |  |   | 552 | 
|                                                                    |  |                                 |     |   |                                |   |     |      |  |   |      |  |  |   |     | 
|Total                                                               |  | $                               | 646 |   |                                |   | 748 |      |  | $ | 731  |  |  |   | 748 | 
|                                                                    |  |                                 |     |   |                                |   |     |      |  |   |      |  |  |   |     | 

As of September 30, 2010, the total notional amount of foreign currency forward contracts not
designated as hedges was approximately $36.8 million. The fair value of these derivatives not designated as hedging instruments was nominal at September 30, 2010 and is included in prepaid expenses and other current assets on the
balance sheet.

The gains (losses) on foreign currency forward contracts were partially offset by gains (losses) on the
underlying monetary assets and liabilities. Foreign currency transactions gains (losses) on the underlying monetary assets and liabilities included in cost of revenue and selling, general and administrative expense are as follows (in thousands):



|                                            |  |                                 |      |   |                                |   |     |      |  |   |      |   |  |   |     | 
|------------------------------------------- |  | ------------------------------- | ---- | - | ------------------------------ | - | --- | ---- |  | - | ---- | - |  | - | --- | 
|                                            |  | Three Months EndedSeptember 30, |      |   | Nine Months EndedSeptember 30, |  
|                                            |  | 2010                            |      |   | 2009                           |   |     | 2010 |  |   | 2009 |  
|Cost of revenue                             |  | $                               | 754  |   |                                | $ | 124 |      |  | $ | 450  |   |  | $ | 124 | 
|Selling, general and administrative expense |  |                                 | (838 | ) |                                |   | 526 |      |  |   | (669 | ) |  |   | 526 | 
|                                            |  |                                 |      |   |                                |   |     |      |  |   |      |   |  |   |     | 
|Total                                       |  | $                               | (84  | ) |                                |   | 650 |      |  | $ | (219 | ) |  |   | 650 | 
|                                            |  |                                 |      |   |                                |   |     |      |  |   |      |   |  |   |     | 

Note 6  Stock-Based Compensation

The Company has two active stock-based compensation plans as of September: the 2004 Employee Stock Purchase Plan (the ESPP) under which employees purchase common stock; and the 2005 Omnibus
Equity Incentive Plan (the Incentive Plan) under which the Company may grant incentive stock options, non-qualified stock options, restricted stock awards and restricted stock units.

Employee Stock Options

Compensation expense recognized from employee stock options for the three months ended September 30, 2010 and 2009 was $387,000 and $488,000, respectively, and $1.2 million and $1.1 million for the
nine months ended September 30, 2010 and 2009, respectively. For the nine months ended September 30, 2010 and 2009, total employee stock options granted were 200,650 and 402,350, respectively, with an average grant date fair value per
share of $9.09 and $5.09, respectively. The fair value of the stock options is estimated using the Black-Scholes valuation model with the following assumptions:



|                                |  |                                |      |   |      |  |      |  
|------------------------------- |  | ------------------------------ | ---- | - | ---- |  | ---- | -
|                                |  | Nine Months EndedSeptember 30, |     
|                                |  | 2010                           |      |   | 2009 | 
|Expected dividends              |  |                                |     |   |      |  |     |  
|Expected volatility             |  |                                | 69.4 | % |      |  | 68.9 | %
|Average risk-free interest rate |  |                                | 2.7  | % |      |  | 2.9  | %
|Expected term/life (in years)   |  |                                | 4.8  |   |      |  | 4.6  |  



14



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##### Table of Contents



Restricted Stock Awards

In accordance with the Stock CompensationTopic of the FASB ASC, the Company determines the fair value of
restricted stock awards at the grant date and expenses that amount over the requisite service period. At each reporting period, the Company reassesses the probability of achievement of performance milestones for each restricted stock award and
adjusts stock-based compensation expense based on the awards that are expected to vest. The following table summarizes the amount of compensation expense recognized for the three and nine months ended September 30, 2010 and 2009 (in thousands).



|                                                                  |  |                                 |     |   |                                |   |     |      |  |   |      |   |  |   |       | 
|----------------------------------------------------------------- |  | ------------------------------- | --- | - | ------------------------------ | - | --- | ---- |  | - | ---- | - |  | - | ----- | 
|                                                                  |  | Three Months EndedSeptember 30, |     |   | Nine Months EndedSeptember 30, |  
|                                                                  |  | 2010                            |     |   | 2009                           |   |     | 2010 |  |   | 2009 |  
|Service-based restricted stock                                    |  | $                               | 226 |   |                                | $ | 153 |      |  | $ | 617  |   |  | $ | 408   | 
|Performance-based restricted stock                                |  |                                 | (39 | ) |                                |   | 148 |      |  |   | (51  | ) |  |   | 634   | 
|                                                                  |  |                                 |     |   |                                |   |     |      |  |   |      |   |  |   |       | 
|Total compensation expense recognized for restricted stock awards |  | $                               | 187 |   |                                | $ | 301 |      |  | $ | 566  |   |  | $ | 1,042 | 
|                                                                  |  |                                 |     |   |                                |   |     |      |  |   |      |   |  |   |       | 

Employee Stock Purchase Plan

The ESPP permits substantially all employees to purchase common stock through payroll deductions at 85% of the lower of the trading price of the stock at the beginning or at the end of each six month
offering period commencing on January 1 and July 1. The number of shares purchased is based upon the participants contributions made during the offering period.

The fair value of the ESPP shares to be granted during the offering period is estimated using the Black-Scholes valuation model for a
call and a put option. Compensation expense recognized for the ESPP for the three months ended September 30, 2010 and 2009 was $58,000 and $60,000, respectively, and $146,000 and $203,000 for the nine months ended September 30, 2010 and
2009, respectively. The share price used for the model is a 15% discount on the stock price on the first day of the offering period; the number of shares to be purchased is calculated based on employee contributions. The table below summarizes the
assumptions used in valuing the ESPP shares:



|                                |  |                                                                     |       |   |      |   |       |  
|------------------------------- |  | ------------------------------------------------------------------- | ----- | - | ---- | - | ----- | -
|                                |  | For the offering period beginning January 1and ending
September 30, |      
|                                |  | 2010                                                                |       |   | 2009 |  
|Expected dividends              |  | $                                                                   |      |   |      | $ |      |  
|Stock price on valuation date   |  |                                                                     | 11.40 |   |      |   | 13.83 |  
|Expected volatility             |  |                                                                     | 54.7  | % |      |   | 87.6  | %
|Average risk-free interest rate |  |                                                                     | 0.22  | % |      |   | 0.35  | %
|Expected life (in years)        |  |                                                                     | 0.5   |   |      |   | 0.5   |  
|Fair value per share            |  | $                                                                   | 4.39  |   |      | $ | 4.94  |  

Restricted Stock Units

As of January 1, 2009, the non-employee directors of the Company were no longer paid a quarterly retainer in
cash. Instead, the Company granted non-discretionary restricted stock unit (RSU) awards under the 2005 Omnibus Equity Incentive Plan.

On the last trading day of each calendar quarter, each non-employee director who has been a director for the full quarter will automatically receive an RSU award covering a number of shares of the
Companys common stock determined by dividing $6,250 by the closing selling price of the Companys common stock on the last trading day of the calendar quarter. These quarterly RSU awards will be fully vested on the date of automatic
grant. Each RSU award granted pursuant to this retainer program will be settled and shares issued thereunder on the earliest to occur of (i) February 15 of the calendar year following the calendar year in which granted, (ii) 60 days
after the directors service terminates or (iii) the occurrence of a change of control.

The Company determines the
fair value at the grant date and expenses that amount immediately. Total compensation expense recognized for service-based restricted stock unit awards was $44,000 and $50,000 during the three months ended September 30, 2010 and 2009,
respectively, and $144,000 and $150,000 for the nine months ended September 30, 2010 and 2009, respectively.



15



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##### Table of Contents



Stock-based Compensation Expense

Compensation cost for employee stock options, restricted stock awards, RSU awards and the ESPP included in cost of
revenue; selling, general and administrative expense; and research and development expense is (in thousands):



|                                             |  |                                 |     |  |                                |   |     |      |  |   |       |  |  |   |       | 
|-------------------------------------------- |  | ------------------------------- | --- |  | ------------------------------ | - | --- | ---- |  | - | ----- |  |  | - | ----- | 
|                                             |  | Three Months EndedSeptember 30, |     |  | Nine Months EndedSeptember 30, |  
|                                             |  | 2010                            |     |  | 2009                           |   |     | 2010 |  |   | 2009  | 
|Stock-based compensation expense recognized: |  |                                 |     |  |                                |   |     |      |  |   |       |  |  |   |       | 
|Cost of revenue                              |  | $                               | 105 |  |                                | $ | 97  |      |  | $ | 310   |  |  | $ | 300   | 
|Selling, general and administrative expense  |  |                                 | 556 |  |                                |   | 682 |      |  |   | 1,625 |  |  |   | 1,832 | 
|Research and development expense             |  |                                 | 15  |  |                                |   | 120 |      |  |   | 108   |  |  |   | 346   | 
|                                             |  |                                 |     |  |                                |   |     |      |  |   |       |  |  |   |       | 
|Total stock-based compensation costs         |  | $                               | 676 |  |                                | $ | 899 |      |  | $ | 2,043 |  |  | $ | 2,478 | 
|                                             |  |                                 |     |  |                                |   |     |      |  |   |       |  |  |   |       | 

Note 7  Commitments and 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.

As a result of Maxwells international operations, the Company is subject to the U.S. Foreign Corrupt Practices Act
(FCPA), which prohibits companies from making improper payments to foreign officials for the purpose of obtaining or keeping business. As previously disclosed in its SEC filings, the Company has been conducting an internal review into
payments it made to its former independent sales agent in China with respect to sales of its high voltage capacitor products produced by its Swiss subsidiary. These payments may have violated the FCPA. The Company has taken certain remedial actions,
including terminating its relationship with the independent sales agent in China as well as terminating its relationship with Metar SA, a former related party to the Company. The termination of these relationships and the ongoing investigation could
harm the Companys business.

Throughout the internal review, management has voluntarily provided information related to
its internal review to the SEC and DOJ and has provided certain documents as requested by the SEC and DOJ in connection with their reviews of this matter. In the event that the Companys internal review or any governmental investigation
identifies violations of law, the DOJ, the SEC or other governmental authorities could seek civil and/or criminal sanctions, including monetary fines and penalties, against the Company and/or its employees, as well as additional changes to its
business practices and compliance programs, which could have a material adverse effect on the Companys business, results of operations and financial condition.

As previously disclosed, the Company has engaged in settlement discussions with the SEC and DOJ with regard to the ongoing FCPA investigations. The Company has negotiated an agreement in principle with
the SEC to resolve the ongoing FCPA investigation for a settlement payment of approximately $6.4 million, payable in two installments, with half paid upfront and the remaining half within 360 days of the Final Judgment, as well as certain other
settlement terms. Settlement discussions with the DOJ are ongoing. The Company anticipates final resolution of this matter with both the SEC and the DOJ in the near future. As with all prospective settlements with government entities, final
settlement remains subject to approval of the SEC and DOJ. Further, there are numerous other aspects of the prospective settlements, in addition to the monetary settlement amounts, that also need to be resolved.

In the fourth quarter of 2009, the Company accrued $9.3 million for potential settlements with the SEC and DOJ, and in the second quarter
of 2010 an additional $3.4 million was accrued. As a result of the ongoing discussions with the DOJ, the Company accrued an additional $1.7 million in the third quarter of 2010. However, there can be no assurance that negotiations to-date with the
SEC and DOJ will result in final resolution, or that the amount of the loss upon final resolution will not differ significantly from the current estimate. Previous discussions with the SEC and DOJ have resulted in an estimate of potential settlement
of up to $20.0 million  representing the combined first offers of settlement put forth by the SEC and DOJ. The total accrual as of September 30, 2010 of $14.4 million represents the Companys assessment of the best estimate of
settlement.

Note 8  Legal Proceedings

The legal proceedings in which the Company is engaged could have a material adverse effect on the Companys business, results of operations and financial condition. Other than the product defect and
Omega Chemical matters, as well as a new shareholder derivative suit, described below, there have been no additional material changes to the legal proceedings disclosed in Note 14 of the Notes to Consolidated Financial Statements included in Part
II, Item 8 of the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2009.



16



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##### Table of Contents



Product Defect Matter

In 2005, a customer claimed a possible defect in a product that was produced for the Company under contract by another
manufacturer, Epcos AG, and resold to the customer. In an effort to resolve the matter, the Companys Swiss subsidiary, Maxwell SA, initiated a legal proceeding in Germany in late 2007 against the product manufacturer. The suit is currently in
the discovery phase during which time the court-appointed technical expert issued an opinion that: (a) a defect in a substantial number of the products existed; and (b) the defect is one stemming from manufacturing of the products and not
from operating conditions of the end use system. Epcos AG opposed the validity of the experts opinion, which is standard practice within this type of proceeding, and the expert is now expected to submit a follow-up written opinion. Since the
matter is still in its preliminary stages and no quantified damages assertions have been formally made, the Company has not yet been able to determine what, if any, warranty exposure it may have, and therefore, has not recorded any warranty reserve
provision.

Omega Chemical

In August 2009, unrelated to the Angeles Chemical matter and yet pertaining to the original Omega Chemical matter, the Omega PRP Organized Group (OPOG) submitted a good faith offer letter to
parties who settled their portion of the Omega matter for 100% of their respective liabilities for the original Omega Chemical clean up efforts. Within the offer letter, OPOG solicited additional funding for additional clean up efforts it claims are
necessary to remediate the Omega Chemical site. Maxwell has joined several other parties receiving the same good faith offer letter from OPOG to review and assess the validity of OPOGs claim for further clean up funding. To review the state of
the Omega Chemical site and assist in determining the validity of such claims, including cost estimates made by OPOG, these collaborating parties hired an outside consultant and submitted a counter offer to OPOG in accordance with the
consultants recommendations which identifies Maxwells liability in the amount of $48,000. In July 2010, OPOG submitted an additional counter offer which allocates Maxwells liability in the amount of $136,000 and includes a
conditional indemnification for both the Omega Chemical matter and the Angeles Chemical matter along with any additional matters pertaining to activities stemming from the Omega site. The total accrual for this matter as of September 30, 2010
is $136,000, based on the additional counter offer. In October 2010, the collaborating parties reached a mutual understanding with OPOG regarding both the settlement amount and the terms and conditions of such a settlement. Accordingly, and pending
completion of the settlement formalities, the Company has accrued the full anticipated settlement amount for resolution of the matter.

Shareholder Derivative Suit

In August 2010, a shareholder derivative action was filed in the Superior Court for San Diego County, California, allegedly on behalf of and for the benefit of the Company, against certain of our current
and former officers and directors alleging, among other claims, breach of fiduciary duty, waste of corporate assets, and unjust enrichment. The complaint was titled Lozides v. Schramm et al. and alleged that the individual defendants allowed the
Company to violate the U.S. Foreign Corrupt Practices Act (FCPA) and failed to maintain internal controls and accounting systems for compliance with the FCPA. In September 2010, Washtenaw County Employees Retirement System v.
Guyett et al., another derivative action was filed in the same court against certain of our current and former officers and directors, as well as a member of our management team, alleging substantially similar claims. In October 2010, the two
actions were consolidated. A joint stipulation was filed shortly thereafter setting forth a proposed schedule for responding to the consolidated action. Because the consolidated action is derivative in nature, it does not seek monetary damages from
the Company. However, the Company may be required throughout the term of the action to advance the legal fees and costs incurred by the individual defendants and to incur other financial obligations. At this preliminary stage, the Company cannot
predict the ultimate outcome of this action and therefore the Company has not accrued an amount for any potential expenses associated with this action.

Note 9  Defined Benefit Plan

Maxwell SA, a subsidiary of the
Company, has a retirement plan 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. In
addition, the employee is required to contribute to the pension plan. This plan has a measurement date of December 31.



17



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##### Table of Contents



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



|                                |  |                                 |      |   |                                |   |      |      |  |   |       |   |  |   |      |  
|------------------------------- |  | ------------------------------- | ---- | - | ------------------------------ | - | ---- | ---- |  | - | ----- | - |  | - | ---- | -
|                                |  | Three MonthsEnded September 30, |      |   | Nine MonthsEnded September 30, |  
|                                |  | 2010                            |      |   | 2009                           |   |      | 2010 |  |   | 2009  |  
|Service cost                    |  | $                               | (159 | ) |                                | $ | (176 | )    |  | $ | (461  | ) |  | $ | (507 | )
|Interest cost                   |  |                                 | (154 | ) |                                |   | (161 | )    |  |   | (450  | ) |  |   | (463 | )
|Expected return on plan assets  |  |                                 | 376  |   |                                |   | 331  |      |  |   | 1,093 |   |  |   | 953  |  
|Prior service cost amortization |  |                                 | (10  | ) |                                |   | (10  | )    |  |   | (29   | ) |  |   | (28  | )
|Net gain amortization           |  |                                 |     |   |                                |   | (93  | )    |  |   |      |   |  |   | (268 | )
|                                |  |                                 |      |   |                                |   |      |      |  |   |       |   |  |   |      |  
|Net periodic benefit (cost)     |  | $                               | 53   |   |                                | $ | (109 | )    |  | $ | 153   |   |  | $ | (313 | )
|                                |  |                                 |      |   |                                |   |      |      |  |   |       |   |  |   |      |  

Employer contributions of $160,000 and $147,000 were paid during the three months ended September 30,
2010 and 2009, respectively. Total employer contributions of $468,000 and $425,000 were paid during the nine months ended September 30, 2010 and 2009, respectively. Additional employer contributions of approximately $171,000 are expected to be
paid during the remainder of fiscal 2010.

Note 10  Related Party

Maxwell SAs pension plan has provided a long term loan of 700,000 Swiss Francs (approximately $712,000 as of September 30,
2010) to Montena Properties SA. Montena Properties SA is 100% owned by Montena SA. The loan has been renegotiated to be repaid in full by or before November 15, 2011 and bears an interest rate of 4.5%. A member of Maxwell Technologies,
Incs Board of Directors, José Cortes, is also the Chairman of the Board of Montena SA, as well as an indirect minority stockholder. The loan was provided to Montena Properties SA prior to Mr. Cortes becoming a director of Maxwell.



|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 Swiss 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, but are not limited to, the following:



| |  |  | financial markets disruption, including, among other things, volatility in securities prices and diminished liquidity and credit availability;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | decline in the domestic and global economies that may delay development and introduction of new products by our customers;
| | - |  | --------------------------------------------------------------------------------------------------------------------------



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



| |  |  | the timing and success of new product introductions by third parties into which our products are integrated;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | our ability in growing markets to increase our market share relative to our competitors;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | our ability to successfully integrate our business with operations of businesses we may acquire;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | our ability to finance the growth of our business with internal resources or through outside equity or debt financing on reasonable terms or at
reasonable rates; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to produce our products at quality levels demanded by our customers.
| | - |  | --------------------------------------------------------------------------------



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##### Table of Contents



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 and
Part I, Item 1A, of the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2009. We do not have any obligation to update publicly any forward-looking statements, whether as a result of new information, future
events or otherwise.

Managements Discussion and Analysis of Financial Condition and Results of Operations
(MD&A) is designed to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our
future results. Our MD&A is presented in the following sections:



| |  |  | Overview
| | - |  | --------



| |  |  | Highlights of the Three and Nine Months Ended September 30, 2010
| | - |  | ----------------------------------------------------------------



| |  |  | Results of Operations
| | - |  | ---------------------



| |  |  | Liquidity and Capital Resources
| | - |  | -------------------------------



| |  |  | Critical Accounting Policies and Estimates
| | - |  | ------------------------------------------



| |  |  | Pending Accounting Pronouncements
| | - |  | ---------------------------------



| |  |  | Off Balance Sheet Arrangements
| | - |  | ------------------------------

Overview

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

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



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



| |  |  | High-Voltage Capacitors:Our CONDIS® high-voltage capacitors 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 transportation, distribution and measurement of high-voltage electrical energy.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

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

Highlights of the Three and Nine Months Ended September 30, 2010

We reported revenue of $31.5 million and a net loss of $2.4 million, or $0.09 per diluted share, for the third quarter of 2010; compared with revenue of
$26.1 million and a net loss of $4.6 million, or $0.18 per diluted share, for the same quarter in 2009. We reported revenue of $87.7 million and a net loss of $3.7 million, or $0.14 per diluted share, for the nine months ended September 30,
2010; compared with revenue of $73.3 million and a net loss of $12.9 million, or $0.54 per diluted share, for the nine months ended September 30, 2009.



19



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##### Table of Contents



During the nine months
ended September 30, 2010, we continued to focus on developing strategic alliances, introducing new products, increasing production capacity to meet anticipated future demand, reducing product costs, making capital investments to facilitate
growth, augmenting executive management and improving production processes. Some of these efforts are described below:



| |  |  | In October, we announced the delivery of production-level quantities of BOOSTCAP® ultracapacitors to Continental AG, one of the worlds leading automotive electronics and mechatronics suppliers, for Continentals E-booster
voltage stabilization system for micro hybrid automobiles.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In September, we announced the delivery of BOOSTCAP® ultracapacitor cells and multi-cell modules for more than 1,000 hybrid transit bus drive systems through the first three quarters of 2010.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In August, we reported that sales of BOOSTCAP® ultracapacitor products for wind energy applications through the first three quarters of 2010 are running more than 40 percent ahead of wind-related sales in the same
period last year, and we estimated that more than 13,000 BOOSTCAP-equipped turbines are in operation worldwide.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In May, we announced that Robert L. Guyett had been elected chairman of the Companys board of directors. Guyett, 73, joined Maxwells board
in January 2000, and previously served as chairman from May 2003 through May 2007. He also chairs the boards Audit Committee and serves on the Compensation and Governance, Nominating and Strategy Committees. Since 1995, he has been President
and Chief Executive Officer of Crescent Management Enterprises LLC, a consulting firm that provides financial management and investment advisory services. He is a director of Newport Corp., a NASDAQ-listed supplier of products and systems to the
semiconductor, communications, electronics, research and life science markets. He also serves on the boards of privately held companies and is a director and treasurer of the Christopher and Dana Reeve Foundation. Earlier in his career, he was a
director and chief financial officer of Engelhard Corp. and before that was a director and chief financial officer of Fluor Corporation.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In May, we announced an agreement with Rutronik Elektronische Bauelemente GmbH through which Rutronik will distribute Maxwells BOOSTCAP® ultracapacitor products throughout Europe. Under this new contract, Rutronik will especially address the European
industrial, automotive, renewable energies and other key energy storage market segments with Maxwells ultracapacitor products.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In March, we announced capacity expansion and process improvements in our production facility or our CONDIS® family of high voltage capacitor.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In March, we announced that Voith Turbo, a leading producer of heavy vehicle drive systems, had selected Maxwells 125-volt Boostcap® ultracapacitor modules for braking energy recuperation and torque assist in low-emission, fuel-efficient,
hybrid-electric transit bus drive systems. Voith and Maxwell have entered into a strategic supply agreement through which Maxwell is Voiths exclusive supplier of ultracapacitor modules assembled in the United States to meet local content
requirements.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In February, we introduced and began shipping our new K2 Series large cell Boostcap® ultracapacitors. The K2 series
Boostcap® cells operate at 2.7 volts and incorporate design and construction enhancements to ensure high
performance, durability and long operating lifetime. This design advancement allowed us to improve the performance of our large cell ultracapacitor product line, while maintaining the same form and function as well as reducing the cost of the
product.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In February, we announced the realignment and expansion of our executive team reflecting the increased focus we are placing on product development,
marketing and business development to strengthen and expand our presence in the marketplace. We changed the scope of vice president Michael Liedtkes responsibilities to business development, market intelligence and strategic planning,
appointed Van M. Andrews vice president, ultracapacitor sales and marketing and promoted Jeremy Cowperthwaite to the newly created position of vice president, ultracapacitor engineering.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents



Results of Operations

The Third Quarter of 2010 Compared with the Third Quarter of 2009

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



|                                                    |  |                            |     |    |      |  |     |   
|--------------------------------------------------- |  | -------------------------- | --- | -- | ---- |  | --- | --
|                                                    |  | Quarter EndedSeptember 30, |    
|                                                    |  | 2010                       |     |    | 2009 | 
|Revenue                                             |  |                            | 100 | %  |      |  | 100 | % 
|Cost of revenue                                     |  |                            | 61  | %  |      |  | 62  | % 
|                                                    |  |                            |     |    |      |  |     |   
|Gross profit                                        |  |                            | 39  | %  |      |  | 38  | % 
|Operating expenses:                                 |  |                            |     |    |      |  |     |   
|Selling, general and administrative                 |  |                            | 28  | %  |      |  | 28  | % 
|Research and development                            |  |                            | 14  | %  |      |  | 16  | % 
|                                                    |  |                            |     |    |      |  |     |   
|Total operating expenses                            |  |                            | 42  | %  |      |  | 44  | % 
|                                                    |  |                            |     |    |      |  |     |   
|Loss from operations                                |  |                            | (3  | )% |      |  | (6  | )%
|Other expense, net                                  |  |                            | (2  | )% |      |  | (11 | )%
|                                                    |  |                            |     |    |      |  |     |   
|Loss from continuing operations before income taxes |  |                            | (5  | )% |      |  | (17 | )%
|Income tax provision                                |  |                            | 2   | %  |      |  | 0   | % 
|                                                    |  |                            |     |    |      |  |     |   
|Net loss                                            |  |                            | (7  | )% |      |  | (17 | )%
|                                                    |  |                            |     |    |      |  |     |   

Our net loss for the third quarter of 2010 improved $2.3 million compared with the same quarter one year
ago. Our net loss reported in the current quarter was $2.4 million, or $0.09 per diluted share, compared with a net loss of $4.6 million, or $0.18 per diluted share, in the same quarter one year ago. The net loss comparison is affected by a $1.7
million additional accrual in the third quarter of 2010 for the potential settlement of alleged U.S. Foreign Corrupt Practices Act (FCPA) violations and a loss on embedded derivatives and warrants of $814,000 in the third quarter of 2010
compared with a loss on embedded derivatives and warrants of $2.8 million in the same quarter one year ago. Excluding the settlement accrual and the loss on embedded derivatives and warrants, our net loss for the third quarter of 2010 improved by
$2.0 million compared with the same period one year ago, driven primarily by an increase in revenues combined with an improvement in gross profit and operating margins. More specifics of these areas are discussed below.

Revenue and Gross Profit

The following table presents a comparison of revenue, cost of revenue and gross profit for the quarters ended September 30, 2010 and
2009 (in thousands, except percentages).



|                |  |                                 |        |  |                                 |  |     |        |  |   |             |  |  |          |     |   |         |   |       |  |  |  |    |  
|--------------- |  | ------------------------------- | ------ |  | ------------------------------- |  | --- | ------ |  | - | ----------- |  |  | -------- | --- | - | ------- | - | ----- |  |  |  | -- | -
|                |  | Quarter EndedSeptember 30, 2010 |        |  | Quarter EndedSeptember 30, 2009 |  |     |        |  |   |             | 
|                |  | Amount                          |        |  | % ofRevenue                     |  |     | Amount |  |   | % ofRevenue |  |  | Increase |     |   | %Change |  
|Revenue         |  | $                               | 31,452 |  |                                 |  | 100 | %      |  | $ | 26,101      |  |  |          | 100 | % |         | $ | 5,351 |  |  |  | 21 | %
|Cost of revenue |  |                                 | 19,130 |  |                                 |  | 61  | %      |  |   | 16,164      |  |  |          | 62  | % |         |   | 2,966 |  |  |  | 18 | %
|                |  |                                 |        |  |                                 |  |     |        |  |   |             |  |  |          |     |   |         |   |       |  |  |  |    |  
|Gross profit    |  | $                               | 12,322 |  |                                 |  | 39  | %      |  | $ | 9,937       |  |  |          | 38  | % |         | $ | 2,385 |  |  |  | 24 | %
|                |  |                                 |        |  |                                 |  |     |        |  |   |             |  |  |          |     |   |         |   |       |  |  |  |    |  

Revenue. In the third quarter of 2010, revenue increased 21% to $31.5 million, compared with $26.1
million in the same quarter one year ago. Ultracapacitor revenue increased by 78%, to $18.6 million in the third quarter of 2010, compared with $10.5 million in the same quarter one year ago. Sales of high voltage capacitor and microelectronics
products totaled $12.8 million in the third quarter of 2010, down 18% from the $15.6 million recorded in the same quarter one year ago. The increase in revenue from our ultracapacitor product line was influenced primarily by continuing strong demand
for energy storage and power delivery systems for wind energy, hybrid and electric transit vehicles, micro hybrid automotive systems, backup power and wireless communications. The decline in our combined high voltage capacitor and microelectronics
product revenues was a result of fewer deliveries of our single board computer products during the current quarter and a shift in the mix of high voltage product sales.



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A substantial amount
of our revenue is generated through our Swiss subsidiary which has a functional currency of the Swiss Franc. As such, reported revenue can be materially impacted by the changes in exchange rates between the Swiss Franc and the U.S. Dollar, our
reporting currency. Due to the weakening of the U.S. Dollar against the Swiss Franc during the quarter ended September 30, 2010 compared with the same period one year ago, revenue was positively impacted by $668,000.

Gross Profit. In the third quarter of 2010, gross profit increased $2.4 million or 24% compared with the same quarter one year
ago. As a percentage of revenue, gross profit increased to 39% compared with 38% in the same period one year ago. Gross profit was $2.0 million higher due to an increase in revenue volume and $348,000 higher due to reductions in product costs.
Product cost reductions were driven primarily by advancements in our manufacturing process and product design. The product design advancements allowed us to reduce product cost of our large cell ultracapacitor product line.

Selling, General and Administrative (SG&A) Expense

The following table presents a comparison of selling, general and administrative expense for the third quarter of 2010 and 2009 (in thousands, except percentages).



|                                            |  |                                 |       |  |                                 |  |    |        |  |   |             |  |  |          |    |   |         |   |       |  |  |  |    |  
|------------------------------------------- |  | ------------------------------- | ----- |  | ------------------------------- |  | -- | ------ |  | - | ----------- |  |  | -------- | -- | - | ------- | - | ----- |  |  |  | -- | -
|                                            |  | Quarter EndedSeptember 30, 2010 |       |  | Quarter EndedSeptember 30, 2009 |  |    |        |  |   |             | 
|                                            |  | Amount                          |       |  | % ofRevenue                     |  |    | Amount |  |   | % ofRevenue |  |  | Increase |    |   | %Change |  
|Selling, general and administrative expense |  | $                               | 8,747 |  |                                 |  | 28 | %      |  | $ | 7,288       |  |  |          | 28 | % |         | $ | 1,459 |  |  |  | 20 | %

SG&A expenses were 28%
of revenue for third quarter of 2010, consistent with the same quarter one year ago, while total expenses increased $1.5 million, or 20%, from the same quarter one year ago. The increase in absolute dollars was driven primarily by a $1.7 million
accrual for the potential settlement of alleged FCPA violations. In addition, $128,000 in net foreign exchange transaction losses were recorded in the third quarter of 2010 compared with approximately $465,000 in net foreign exchange transaction
losses in the same quarter one year ago. The Company hedges intercompany and third-party asset and liability balances denominated in currencies other than the local currency. The net foreign exchange transaction gains or losses recognized are the
transaction gains and losses incurred on the hedged assets and liabilities, net of the gains and losses realized on the hedge contracts.

Research and Development (R&D) Expense

The following table presents a comparison of research and development expense for the second quarter of 2010 and 2009 (in thousands, except percentages).



|                                 |  |                                 |       |  |                                 |  |    |        |  |   |             |  |  |          |    |   |         |   |     |  |  |  |   |  
|-------------------------------- |  | ------------------------------- | ----- |  | ------------------------------- |  | -- | ------ |  | - | ----------- |  |  | -------- | -- | - | ------- | - | --- |  |  |  | - | -
|                                 |  | Quarter EndedSeptember 30, 2010 |       |  | Quarter EndedSeptember 30, 2009 |  |    |        |  |   |             | 
|                                 |  | Amount                          |       |  | % ofRevenue                     |  |    | Amount |  |   | % ofRevenue |  |  | Increase |    |   | %Change |  
|Research and development expense |  | $                               | 4,432 |  |                                 |  | 14 | %      |  | $ | 4,274       |  |  |          | 16 | % |         | $ | 158 |  |  |  | 4 | %

R&D expenses were 14%
of revenue for the third quarter of 2010, compared with 16% for the same quarter one year ago, and total expenses increased by $158,000, or 4%. The increase in absolute dollars was driven primarily by an increase in expenses related to consulting
services and materials used for product development of $331,000, offset by a decrease in legal fees of $171,000.

Provision for Income
Taxes

We recorded an income tax provision of $562,000 for the third quarter of 2010 compared with $33,000 for the same
quarter in 2009. This provision is related to taxes on income generated by our Swiss subsidiary. Unremitted earnings of foreign subsidiaries have been included in the consolidated financial statements without giving effect to the United States taxes
that may be payable as it is not anticipated such earnings will be remitted to the United States.



22



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##### Table of Contents



The Nine Months Ended
September 30, 2010 Compared with the Nine Months Ended September 30, 2009

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



|                                                    |  |                                |     |    |      |  |     |   
|--------------------------------------------------- |  | ------------------------------ | --- | -- | ---- |  | --- | --
|                                                    |  | Nine Months EndedSeptember 30, |    
|                                                    |  | 2010                           |     |    | 2009 | 
|Revenue                                             |  |                                | 100 | %  |      |  | 100 | % 
|Cost of revenue                                     |  |                                | 61  | %  |      |  | 65  | % 
|                                                    |  |                                |     |    |      |  |     |   
|Gross profit                                        |  |                                | 39  | %  |      |  | 35  | % 
|Operating expenses:                                 |  |                                |     |    |      |  |     |   
|Selling, general and administrative                 |  |                                | 31  | %  |      |  | 25  | % 
|Research and development                            |  |                                | 15  | %  |      |  | 16  | % 
|                                                    |  |                                |     |    |      |  |     |   
|Total operating expenses                            |  |                                | 46  | %  |      |  | 41  | % 
|                                                    |  |                                |     |    |      |  |     |   
|Loss from operations                                |  |                                | (7  | )% |      |  | (6  | )%
|Other expense, net                                  |  |                                | (4  | )% |      |  | (11 | )%
|                                                    |  |                                |     |    |      |  |     |   
|Loss from continuing operations before income taxes |  |                                | (3  | )% |      |  | (17 | )%
|Income tax provision                                |  |                                | 1   | %  |      |  | 1   | % 
|                                                    |  |                                |     |    |      |  |     |   
|Net loss                                            |  |                                | (4  | )% |      |  | (18 | )%
|                                                    |  |                                |     |    |      |  |     |   

Our net loss for the nine months ended September 30, 2010 improved $9.2 million compared with the same
period one year ago. Our net loss for the nine months ended September 30, 2010 was $3.7 million, or $0.14 per diluted share, compared with a net loss of $12.9 million, or $0.54 per diluted share, in the same period one year ago. The net loss
comparison is affected by a $5.1 million accrual for the potential settlement of alleged FCPA violations and a gain on embedded derivatives and warrants of $3.7 million for the nine months ended September 30, 2010, compared with a loss on
embedded derivatives and warrants of $7.2 million in the same period one year ago. Excluding the settlement accrual and the gain on embedded derivative and warrants, net loss for the nine months ended September 30, 2010 improved by $3.5 million
compared with the same period one year ago, driven primarily by an increase in revenues combined with an improvement in gross profit. More specifics of these areas are discussed below.

Revenue and Gross Profit

The following table presents a comparison of
revenue, cost of revenue and gross profit for the nine months ended September 30, 2010 and 2009 (in thousands, except percentages).



|                |  |                                     |        |  |                                     |  |     |        |  |   |             |  |  |          |     |   |         |   |        |  |  |  |    |  
|--------------- |  | ----------------------------------- | ------ |  | ----------------------------------- |  | --- | ------ |  | - | ----------- |  |  | -------- | --- | - | ------- | - | ------ |  |  |  | -- | -
|                |  | Nine Months EndedSeptember 30, 2010 |        |  | Nine Months EndedSeptember 30, 2009 |  |     |        |  |   |             | 
|                |  | Amount                              |        |  | % ofRevenue                         |  |     | Amount |  |   | % ofRevenue |  |  | Increase |     |   | %Change |  
|Revenue         |  | $                                   | 87,654 |  |                                     |  | 100 | %      |  | $ | 73,314      |  |  |          | 100 | % |         | $ | 14,340 |  |  |  | 20 | %
|Cost of revenue |  |                                     | 53,284 |  |                                     |  | 61  | %      |  |   | 47,409      |  |  |          | 65  | % |         |   | 5,875  |  |  |  | 12 | %
|                |  |                                     |        |  |                                     |  |     |        |  |   |             |  |  |          |     |   |         |   |        |  |  |  |    |  
|Gross profit    |  | $                                   | 34,370 |  |                                     |  | 39  | %      |  | $ | 25,905      |  |  |          | 35  | % |         | $ | 8,465  |  |  |  | 33 | %
|                |  |                                     |        |  |                                     |  |     |        |  |   |             |  |  |          |     |   |         |   |        |  |  |  |    |  

Revenue. During the nine months ended September 30, 2010, revenue increased 20% to $87.7
million, compared with $73.3 million in the same period one year ago. Ultracapacitor revenue increased by 67%, to $48.3 million during the nine months ended September 30, 2010, compared with $28.9 million in the same period one year ago. Sales
of high voltage capacitor and microelectronics products totaled $39.3 million during the nine months ended September 30, 2010, down 11% from the $44.4 million recorded in the same period one year ago. The increase in revenue from our
ultracapacitor product line was influenced primarily by continuing strong demand for energy storage and power delivery systems for wind energy, hybrid and electric transit vehicles, micro hybrid automotive systems, backup power and wireless
communications.

A substantial amount of our revenue is generated through our Swiss subsidiary which has a functional currency
of the Swiss Franc. As such, reported revenue can be materially impacted by the changes in exchange rates between the Swiss Franc and the U.S. Dollar, our reporting currency. Due to the weakening of the U.S. Dollar against the Swiss Franc
during the nine months ended September 30, 2010 compared with the same period one year ago, revenue was positively impacted by $1.9 million.



23



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##### Table of Contents



Gross Profit.
During the nine months ended September 30, 2010, gross profit increased $8.5 million or 33% compared with the same period one year ago. As a percentage of revenue, gross profit increased to 39% compared with 35% in the same period one year ago.
Gross profit was higher by $5.1 million due to an increase in revenue volume and by $3.4 million due to reductions of product costs. Product cost reductions were driven primarily by advancements in our manufacturing processes and product design. The
product design advancements allowed us to reduce product cost of our large cell ultracapacitor product line.

Selling, General and
Administrative (SG&A) Expense

The following table presents a comparison of selling, general and administrative expense
for the nine months ended September 30, 2010 and 2009 (in thousands, except percentages).



|                                            |  |                                     |        |  |                                     |  |    |        |  |   |             |  |  |          |    |   |         |   |       |  |  |  |    |  
|------------------------------------------- |  | ----------------------------------- | ------ |  | ----------------------------------- |  | -- | ------ |  | - | ----------- |  |  | -------- | -- | - | ------- | - | ----- |  |  |  | -- | -
|                                            |  | Nine Months EndedSeptember 30, 2010 |        |  | Nine Months EndedSeptember 30, 2009 |  |    |        |  |   |             | 
|.                                           |  | Amount                              |        |  | % ofRevenue                         |  |    | Amount |  |   | % ofRevenue |  |  | Increase |    |   | %Change |  
|Selling, general and administrative expense |  | $                                   | 27,086 |  |                                     |  | 31 | %      |  | $ | 17,962      |  |  |          | 25 | % |         | $ | 9,124 |  |  |  | 51 | %

SG&A expenses were 31%
of revenue for the nine months ended September 30, 2010, up from 25% in the same period one year ago, and total expenses increased $9.1 million, or 51%, from the same period one year ago. The increase in absolute dollars and as a percentage of
revenue was driven primarily by a $5.1 million additional accrual for the potential settlement of alleged FCPA violations and $895,000 in higher labor costs due to increases in our sales and marketing operations. In addition, the Company recorded
net foreign exchange transaction losses during the nine months ended September 30, 2010 of $1.6 million compared with $827,000 of net foreign exchange transaction gains in the same period one year ago. The Company hedges intercompany and
third-party asset and liability balances denominated in currencies other than the local currency. The net foreign exchange transaction gains or losses recognized are the transaction gains and losses incurred on the hedged assets and liabilities, net
of the gains and losses realized on the hedge contracts.

Research and Development (R&D) Expense

The following table presents a comparison of research and development expense for the nine months ended September 30, 2010 and 2009
(in thousands, except percentages).



|                                 |  |                                     |        |  |                                     |  |    |        |  |   |             |  |  |          |    |   |         |   |     |  |  |  |   |  
|-------------------------------- |  | ----------------------------------- | ------ |  | ----------------------------------- |  | -- | ------ |  | - | ----------- |  |  | -------- | -- | - | ------- | - | --- |  |  |  | - | -
|                                 |  | Nine Months EndedSeptember 30, 2010 |        |  | Nine Months EndedSeptember 30, 2009 |  |    |        |  |   |             | 
|                                 |  | Amount                              |        |  | % ofRevenue                         |  |    | Amount |  |   | % ofRevenue |  |  | Increase |    |   | %Change |  
|Research and development expense |  | $                                   | 12,968 |  |                                     |  | 15 | %      |  | $ | 12,066      |  |  |          | 16 | % |         | $ | 902 |  |  |  | 7 | %

R&D expenses were 15%
of revenue for the nine months ended September 30, 2010, compared with 16% for the same period one year ago, while total expenses increased by $902,000, or 7%. The increase in absolute dollars was driven primarily by an increase in expenses
related to consulting services and materials used for product development of $544,000 and an increase of $231,000 in labor expense.

Provision for Income Taxes

We recorded an income tax provision of $1.3 million for the nine months ended September 30, 2010 compared with $475,000 for the same period in 2009. This provision is related to taxes on income
generated by our Swiss subsidiary. Unremitted earnings of foreign subsidiaries have been included in the consolidated financial statements without giving effect to the United States taxes that may be payable as it is not anticipated such earnings
will be remitted to the United States.

Commitments and Contingencies

As a result of our international operations, we are subject to the U.S. Foreign Corrupt Practices Act (FCPA), which prohibits
companies from making improper payments to foreign officials for the purpose of obtaining or keeping business. As previously disclosed in our periodic filings, we have been conducting an internal review regarding payments made to our former
independent sales agent in China with respect to sales of our high voltage capacitor products produced by our Swiss subsidiary. These payments may have violated the FCPA. We have taken certain remedial actions, including terminating of our
relationship with the independent sales agent in China as well as terminating our relationship with Metar SA, a former related party. The termination of these relationships and the ongoing investigation could harm our business.

Throughout our internal review, we have voluntarily provided information related to our internal review to the Securities and Exchange
Commission (SEC) and Department of Justice (DOJ) and have provided certain documents as requested by the SEC and DOJ in connection with their reviews of this matter. In the event that our internal review or any governmental
investigation



24



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##### Table of Contents

identifies violations of law, the DOJ, the SEC or other governmental authorities could seek civil and/or criminal sanctions, including monetary fines and penalties, against the Company and/or its
employees, as well as additional changes to its business practices and compliance programs, which could have a material adverse effect on our business, results of operations and financial condition.

As previously disclosed, we have engaged in settlement discussions with the SEC and DOJ with regard to the ongoing FCPA investigations. We
have negotiated an agreement in principle with the SEC to resolve the ongoing FCPA investigations for a payment of approximately $6.35 million in two installments, with half paid upfront and the remaining half upon the one year anniversary of the
signing, as well as certain other settlement terms. Settlement discussions with the DOJ are ongoing. As with all prospective settlements with government entities, final settlement remains subject to approval of the SEC and DOJ. Further, there are
numerous other aspects of the prospective settlements, in addition to the monetary settlement amounts, that also need to be resolved. In the fourth quarter of 2009, we accrued $9.3 million for a potential settlement, and in the second quarter of
2010 we accrued an additional $3.4 million. As a result of the ongoing discussions with the DOJ, we have accrued an additional $1.7 million in the third quarter of 2010. However, there can be no assurance that negotiations to-date with the SEC and
DOJ will result in final resolution, or that the amount of the loss upon final resolution will not differ significantly from the current estimate. Previous discussions with the SEC and DOJ have resulted in an estimate of potential settlement of up
to $20.0 million  representing the combined first offer of settlement put forth by the SEC and DOJ. The total accrual as of September 30, 2010 of $14.4 million represents our assessment of the best estimate of settlement.

Liquidity and Capital Resources

Changes in Cash Flow

The following table summarizes our cash flows from
operating, investing and financing activities for the nine months ended September 30, 2010 and 2009 (in thousands).



|                                                             |  |                                 |        |   |      |   |        |  
|------------------------------------------------------------ |  | ------------------------------- | ------ | - | ---- | - | ------ | -
|                                                             |  | Nine Months Ended September 30, |       
|                                                             |  | 2010                            |        |   | 2009 |  
|Total cash provided by (used in):                            |  |                                 |        |   |      |   |        |  
|Operating activities                                         |  | $                               | 8,495  |   |      | $ | (433   | )
|Investing activities                                         |  |                                 | (6,626 | ) |      |   | (3,785 | )
|Financing activities                                         |  |                                 | 836    |   |      |   | 21,932 |  
|Effect of exchange rate changes on cash and cash equivalents |  |                                 | (210   | ) |      |   | (57    | )
|                                                             |  |                                 |        |   |      |   |        |  
|Increase in cash and cash equivalents                        |  | $                               | 2,495  |   |      | $ | 17,657 |  
|                                                             |  |                                 |        |   |      |   |        |  

Net cash provided by operating activities was $8.5 million for the nine months ended September 30, 2010,
which resulted primarily from net working capital inflows of $9.5 million, offset by a net loss of $3.7 million which includes $2.6 million in net non-cash charges. The improvement in cash provided by operating activities was driven primarily by an
improvement in operating results and an increase in accounts payable, offset in part by an increase in accounts receivable. The increase in accounts payable was driven primarily by an increase in payment terms and the timing of payments. The
increase in accounts receivable was driven primarily by the timing of customer billings at the end of the third quarter of 2010. The net cash used in operating activities was $433,000 for the nine months ended September 30, 2009, which
primarily resulted from a net loss of $12.9 million and net working capital outflows of $3.3 million, offset by net non-cash charges of $15.9 million.

Net cash used in investing activities was $6.6 million and $3.8 million for the nine months ended September 30, 2010 and 2009, respectively, which resulted from capital expenditures. The majority of
the capital expenditures in 2010 and 2009 have been focused on increasing our production capacity to meet anticipated increases in demand.

Net cash provided by financing activities for the nine months ended September 30, 2010 was $836,000, which resulted from proceeds from borrowings of $8.7 million and $1.2 million from the issuance of
common stock under our stock-based compensation plans, offset by payments on borrowings of $8.9 million. The net cash provided by financing activities for the nine months ended September 30, 2009 was $21.9 million, which primarily resulted from
proceeds from the issuance of common stock of $25.7 million and proceeds from borrowing of $6.3 million, offset by payments on borrowings of $9.6 million and $450,000 paid to retire shares.

Liquidity

As of September 30, 2010, we had approximately $32.1 million in cash and cash equivalents with an additional $8.0 million in
restricted cash for a total of $40.1 million in cash, cash equivalents and restricted cash. The cash restriction will be released when the convertible debenture is fully repaid or converted.

As discussed above, we have accrued $14.4 million for the potential settlement of alleged FCPA violations. Principal payments on our convertible debenture
of $8.3 million are due throughout 2011, with the final payment due in December 2011. Additionally, we have $8.0 million of restricted cash that will be released when the debenture is fully repaid or converted. We believe that cash from operating
activities, combined with available cash balances, will be sufficient to fund our working capital requirements, settlement of alleged FCPA violations, debenture payments, obligations as they become due, planned capital equipment additions and
product development expenditures for at least the next twelve months.



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Debenture and Other Borrowings

Convertible Debenture

On December 20, 2005, we issued a senior subordinated convertible debenture in aggregate principal amount of $25 million (the Debenture) along with warrants to purchase shares of
Maxwell common stock. However, the holder, at its election, could defer each quarterly payment one time, for a 24 month period. As the holder has elected to defer some quarterly installments, the outstanding principal of the Debenture at
September 30, 2010 of $8.3 million is payable in equal installments in June, September and December 2011.

Interest is
due quarterly with the interest rate tied 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. During the nine
months ended September 30, 2010, we made interest payments in cash of $91,000.

The change in fair value on revaluation
of the Debenture conversion rights and warrant liabilities represents the difference between the fair value of the warrants and the Debenture conversion rights between the two measurement dates using a Black-Scholes calculation. The effect of the
fair market value adjustment is recorded as gain (loss) on embedded derivatives and warrants.

The net fair value
of the holders and Maxwells conversion rights at September 30, 2010 was a net liability of $1.3 million, and is included in convertible debenture and long-term debt on the balance sheet.

The warrants issued in connection with the issuance of the Debenture had a fair value at September 30, 2010 of $514,000, which is
included in stock warrants on the balance sheet. The warrants are exercisable at any time through December 20, 2010. No warrants had been exercised through September 30, 2010.

As long as the Debenture is outstanding, the Company is required to maintain a restricted cash balance of $8.0 million.

Lines of credit

Maxwells Swiss subsidiary, Maxwell SA, has a 3.0 million Swiss Franc denominated (approximately $3.1 million as of September 30, 2010) credit agreement with a Swiss bank, which renews
quarterly and bears interest at 2.0%. Borrowings under the short-term loan agreement are unsecured and as of September 30, 2010 and December 31, 2009, the full amount of the credit line was drawn.

Maxwell SA, also has a 2.0 million Swiss Franc denominated (approximately $2.0 million as of September 30, 2010) credit
agreement with a Swiss bank, which renews annually and bears interest at 3.9%. Borrowings under the credit agreement are unsecured and as of September 30, 2010 and December 31, 2009, the full amount available under the credit line was
drawn.

Equipment financing

Maxwell SA entered into a lending agreement for the acquisition of manufacturing equipment in an amount up to 1.5 million Swiss Francs. After the acquisition of the equipment was completed the
agreement converted to 48 monthly payments of 34,302 Swiss Francs with an interest rate of 2.22%. As of September 30, 2010 and December 31, 2009, the balance of the obligation was $295,000 and $543,000, respectively, with final payment due
in 2011.

Critical Accounting Policies and Estimates

We describe our significant accounting policies in Note 1, Description of Business and Summary of Significant Accounting Policies, of the notes to consolidated financial statements included in our
Annual Report on Form 10-K for the fiscal year ended December 31, 2009. We discuss our critical accounting estimates in Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations, in our
Annual Report on Form 10-K for the fiscal year ended December 31, 2009. There has been no substantial change to our significant accounting policies or critical accounting estimates since the end of fiscal 2009.

Pending Accounting Pronouncements

In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures, to improve the disclosures about fair value measurements. This update requires us to disclose separately the
amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers. In the reconciliation for fair value measurements using significant unobservable inputs (Level 3), we will be
required to present separately information about purchases, sales, issuances and settlements (that is, on a gross basis rather than as one net number). This update provides clarification as to the level of disaggregation in determining the
appropriate classes of assets and liabilities and clarifies disclosures about inputs and valuation techniques for Level 2 and Level 3 fair value measurements. The new disclosures and clarifications of existing disclosures are effective for interim
and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and



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settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods
within those fiscal years. As this update is only disclosure-related, it does not have an impact on our financial position or results of operations.

In October 2009, the FASB reached a consensus on ASU 2009-13, Multiple-Deliverable Revenue Arrangements, and ASU 2009-14, Certain Revenue Arrangements That Include Software Elements. ASU
2009-13 modifies the requirements that must be met for an entity to recognize revenue from the sale of a delivered item that is part of a multiple-element arrangement when other items have not yet been delivered. ASU 2009-13 eliminates the
requirement that all undelivered elements must have either: i) vendor-specific objective evidence (VSOE) or ii) third-party evidence (TPE) before an entity can recognize the portion of an overall arrangement consideration
that is attributable to items that already have been delivered. In the absence of VSOE or TPE of the standalone selling price for one or more delivered or undelivered elements in a multiple-element arrangement, entities will be required to estimate
the selling prices of those elements. Overall arrangement consideration will be allocated to each element (both delivered and undelivered items) based on their relative selling prices, regardless of whether those selling prices are evidenced by VSOE
or TPE or are based on the entitys estimated selling price. The residual method of allocating arrangement consideration has been eliminated. ASU 2009-14 modifies the software revenue recognition guidance to exclude from its scope tangible
products that contain both software and non-software components that function together to deliver a products essential functionality. These new updates are effective for revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010. Early adoption is permitted. This new pronouncement allows us to recognize revenue on multiple-deliverable arrangements earlier than in previous years. Although we are unable to estimate what those amounts
will be in the future, there were no amounts recognized for multiple-deliverable revenue arrangements for the year ended December 31, 2009 and $896,000 for the year ended December 31 2008. As of September 30, 2010 and
December 31, 2009, there was approximately $1.7 million and $2.1 million, respectively, of deferred revenue related to multiple-deliverable revenue arrangements.

Off Balance Sheet Arrangements

None.



|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 Franc) revenue and operating expenses as well as local currency loans. Changes in these currency exchange rates impact the reported amount (U.S. dollar) of revenue,
expenses and debt. As part of our risk management strategy, we use forward contracts to hedge certain foreign currency exposures. Our objective is to offset gains and losses resulting from these exposures with gains and losses on the forward
contracts, thereby reducing volatility of earnings. We use the forward contracts to hedge certain monetary assets and liabilities, primarily receivables and payables, denominated in a foreign currency. The change in fair value of these
instruments represents a natural hedge as their gains and losses offset the changes in the underlying fair value of the monetary assets and liabilities due to movements in currency exchange rates.

Interest Rate Risk

At
September 30, 2010, we had approximately $15.1 million in debt, $4.1 million of which is classified as long-term debt. Changes in interest rates may affect the consolidated balance sheet and statement of operations. The impact on earnings or
cash flow during the next fiscal year from a change of 100 basis points (or 1%) in the interest rate would have a $151,000 effect on interest expense.

Fair Value Risk

We record a quarterly adjustment related to our
convertible debenture to adjust the embedded conversion options and stock warrants to fair value. The change in the fair value of these instruments is impacted primarily by the price of our stock at the end of each reporting period. This adjustment
creates a non-cash effect on our statement of operations which may have a significant impact.



|Item 4. | Controls and Procedures
|------- | -----------------------

Our management evaluated, under the supervision and with the participation of our principal executive officer and our principal financial
officer, the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the last fiscal quarter pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (the Exchange Act). Based
upon their evaluation, our



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principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of September 30, 2010 to ensure that information
required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the Securities and Exchange Commissions rules and forms, and to
ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate, to
allow timely decisions regarding required disclosures.

There was no change in our internal control over financial reporting
that occurred during the period ended September 30, 2010 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II  OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

The
information set forth under Note 8 of Notes to Unaudited Condensed Consolidated Financial Statements, included in Part I, Item 1 of this report, is incorporated herein by reference.



|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, 2009.

Item 2, 3, 4 and 5 are not applicable and have been omitted



|Item 6. | Exhibits
|------- | --------



|     |  |                                                                                                                                                                                                                     
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|31.1 |  | Certification of Principal 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 Principal 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 Principal Executive Officer and Principal 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: November 9, 2010 |  |  |  | MAXWELL TECHNOLOGIES, INC.
|                       |  |  | 
|                       |  |  |  | By:                        |  | /s/ David J. Schramm                           
|                       |  |  |  |                            |  | David J. Schramm                               
|                       |  |  |  |                            |  | President and Chief Executive Officer          
|                       |  |  | 
|Date: November 9, 2010 |  |  |  | By:                        |  | /s/ Kevin S. Royal                             
|                       |  |  |  |                            |  | Kevin S. Royal                                 
|                       |  |  |  |                            |  | Senior Vice President, Chief Financial Officer,
|                       |  |  |  |                            |  | Treasurer and Secretary                        



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