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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 
FORM 10-K
 
(Mark One)
x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934	
 
For the fiscal year ended December 31, 2004
 
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.)	
		
9244 Balboa Avenue
San Diego, California	 	92123	
(Address of principal executive offices)	 	(Zip Code)	
 
Registrant’s telephone number, including area code: (858) 503-3300
Securities registered pursuant to Section 12(b) of the Act:
None
 
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.10 per share
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES   x     NO   ¨
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     x
 
Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Act). YES   x     NO   ¨
 
As of June 30, 2004 the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of Common Stock held by non-affiliates of the registrant based on the closing price of the Common Stock on the Nasdaq National Market was $77,061,569.
 
The number of shares of the registrant’s Common Stock outstanding as of March 9, 2005 was 15,738,289 shares.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the registrant’s definitive Proxy Statement for the 2005 Annual Meeting of Stockholders to be held on May 5, 2005 are incorporated by reference into Parts II and III of this Annual Report on Form 10-K.

Table of Contents
 MAXWELL TECHNOLOGIES, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
For the fiscal year ended December 31, 2004

 	  	 	  	Page

 	  	PART I	  	 	
			
Item 1.	  	Business	  	2	
			
Item 2.	  	Properties	  	26	
			
Item 3.	  	Legal Proceedings	  	26	
			
Item 4.	  	Submission of Matters to a Vote of Security Holders	  	26	
			
 	  	PART II	  	 	
			
Item 5.	  	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	  	27	
			
Item 6.	  	Selected Financial Data	  	28	
			
Item 7.	  	Management’s Discussion and Analysis of Financial Condition and Results of Operations	  	29	
			
Item 7A.	  	Quantitative and Qualitative Disclosures About Market Risk	  	44	
			
Item 8.	  	Financial Statements and Supplementary Data	  	45	
			
Item 9.	  	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	  	80	
			
Item 9A.	  	Controls and Procedures	  	80	
			
Item 9B.	  	Other Information	  	83	
			
 	  	PART III	  	 	
			
Item 10.	  	Directors and Executive Officers of the Registrant	  	84	
			
Item 11.	  	Executive Compensation	  	84	
			
Item 12.	  	Security Ownership of Certain Beneficial Owners and Management	  	84	
			
Item 13.	  	Certain Relationships and Related Transactions	  	84	
			
Item 14.	  	Principal Accountant Fees and Services	  	84	
			
 	  	PART IV	  	 	
			
Item 15.	  	Exhibits and Financial Statement Schedules	  	85	

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
Some of the statements contained in this document and incorporated by reference herein discuss our plans and strategies for our business or make other forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and other expressions of management’s belief or opinion that reflect its current understanding or belief with respect to such matters. The words “anticipates,” “believes,” “estimates,” “expects,” “plans,” “intends,” “may,” “could,” “will,” “continue,” “seek,” “should,” “would” and similar expressions are intended to identify these forward-looking statements, but are not the exclusive means of identifying them. These forward-looking statements reflect the current views of our management; however, various risks, uncertainties and contingencies could cause our actual results, performance or achievements to differ materially from those expressed in, or implied by, these statements, including the following:
 
 	•	 	decline in the domestic or global economies that may delay the development and introduction by our customers of products that incorporate our components and systems;	
 
 	•	 	success in introducing and marketing new products into existing and new markets;	
 
 	•	 	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;	
 
 	•	 	ability in growing markets to maintain or increase our market share relative to our competitors;	
 
 	•	 	ability to successfully integrate our business with operations of businesses we may acquire;	
 
 	•	 	ability to finance the growth of our business with internal resources or through outside financing;	
 
 	•	 	ability to produce our products at quality levels demanded by our customers;	
 
 	•	 	ability to invent and protect proprietary technology that creates a compelling value proposition for our customers and differentiates our products from those of our competitors;	
 
 	•	 	impact of currency exchange rates; and	
 
 	•	 	availability of qualified staff.	
 
Many of these factors are beyond our control. There can be no assurance that we will not incur new or additional unforeseen costs in connection with the ongoing conduct of our business. Accordingly, any forward-looking statements included herein do not purport to be predictions of future events or circumstances and may not be realized.
 
For a discussion of important risks of an investment in our securities, including factors that could cause actual results to differ materially from results referred to in the forward-looking statements, see “Risk Factors” beginning on page 16 of this document. We do not have any obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

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PART I
 
 Item 1. Business
 
Introduction
 
We develop, manufacture and market highly reliable, cost-effective energy storage and power delivery solutions. Our solutions are designed and manufactured to provide failure-free, maintenance-free, performance over the life of the applications into which they are integrated. By satisfying the stringent requirements of such high-value applications, we believe that our products will be able to command higher profit margins than commodity products. We have two manufacturing locations (San Diego, California and Rossens, Switzerland) and focus on the following three lines of high-reliability products:
 
 	•	 	Ultracapacitors: Our primary focus, ultracapacitors, are energy storage devices that possess a unique combination of high power density, extremely long operational life and the ability to charge and discharge very rapidly. Our BOOSTCAP ® ultracapacitor cells, multi-cell packs and modules and POWERCACHE ® backup power systems provide highly reliable energy storage and power delivery solutions for applications in multiple industries, including consumer and industrial electronics, transportation and telecommunications.	
 
 	•	 	High-Voltage Capacitors: Our CONDIS ® high-voltage capacitors are extremely robust devices that are designed and manufactured to perform reliably for decades in all climates. These products include grading and coupling capacitors and capacitive voltage dividers that are used to ensure the safety and reliability of electric utility infrastructure and other applications involving transport, distribution and measurement of high-voltage electrical energy.	
 
 	•	 	Radiation-Mitigated Microelectronic Products: Our RADPAK ® radiation-mitigated microelectronic products include high-performance, high-density power modules, memory modules and single board computers that incorporate proprietary packaging and shielding technology and novel architectures that enable them to withstand environmental radiation effects and perform reliably in space.	
 
In keeping with this strategic focus on high-value, high-margin product lines, over the past several years we have exited several non-strategic, low-margin businesses. These efforts culminated in the sale of our Winding Equipment product line in December 2003, and the phase-out of low-margin magnetics-based power systems products, which was completed in the first quarter of 2004. As a result of these actions and other divestitures from 2002 through 2004, we have reduced operating expenses, improved efficiency and intensified our focus on our core high-reliability product lines.
 
General Overview
 
Each of our high-reliability electronic component product lines addresses a distinct industry or, in the case of our ultracapacitor products, a group of distinct industry segments.
 
Ultracapacitors
 
Ultracapacitors offer innovative, cost-effective energy storage and power delivery solutions for a wide range of electronic applications by bringing together in a single component both energy storage characteristics generally found in batteries and power delivery characteristics generally found in electrolytic capacitors. For example, although batteries store far more electrical energy than ultracapacitors, they cannot deliver that energy as rapidly and efficiently as an ultracapacitor. Conversely, although electrolytic capacitors can deliver bursts of high power very rapidly, they cannot sustain that power delivery even for a full second because they have extremely limited energy storage capacity. Also, unlike batteries, which produce electrical energy through a chemical reaction that depletes their energy generation capability within a few thousand charge/discharge cycles, ultracapacitors’ energy storage and power delivery mechanisms involve no chemical reaction, so they can be charged and discharged hundreds of thousands of times with minimal performance degradation. This ability to store energy, deliver bursts of power and perform reliably for years without maintenance makes ultracapacitors an attractive option for a wide range of power-hungry devices and systems.
 
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Ultracapacitors have been designed into and are ramping to commercial production volumes in industrial electronics applications, including wind turbines and automated meter reading systems and other devices that incorporate wireless transmitters. Potential end-users in the telecommunications and cable television industries currently are testing and evaluating our multi-cell POWERCACHE ® ultracapacitor-based systems to replace batteries as the short-term bridge power element of uninterruptible power supply (UPS) back-up power systems. Based on potential volumes, we believe that the transportation industry ultimately represents the largest market opportunity for ultracapacitors. These applications include distributed power nodes to support electronic subsystems including door switches, power steering and brakes and electric air-conditioning, as well as braking energy recapture and torque-assist systems for hybrid-electric buses, trucks and autos and electric rail vehicles.
 
High-Voltage Capacitors
 
High-voltage grading and coupling capacitors are used mainly in the electric utility industry. These devices prevent high-voltage arcing that can damage switches, circuit breakers, step-down transformers and other equipment responsible for the transport, distribution and measurement of high-voltage electrical energy in electric utility infrastructure. The market for these products consists of expansion and upgrading of existing infrastructure and the installation of new infrastructure in developing countries. Such installations are capital-intensive and frequently are subject to regulation, availability of government funding and general economic conditions. For example, while North America has the world’s largest installed base of electric utility infrastructure, and has begun to experience more frequent power interruptions and supply problems, utility deregulation, government budget deficits, and other factors have depressed capital spending in what normally would be expected to be a very large market for utility infrastructure components. However, projects to meet growing demand for electrical energy in developing countries, such as the Three Gorges Dam in China, continue to drive global demand for high-voltage capacitors.
 
Radiation-Mitigated Microelectronics
 
Radiation-mitigated microelectronic products are used almost exclusively in the space and satellite industry. Because satellites and spacecraft are extremely expensive to manufacture and launch and space missions often span years or even decades, and because it is impractical or impossible to repair or replace malfunctioning parts, the industry demands electronic components that are virtually failure-free. As satellites and spacecraft routinely encounter ionizing radiation from solar flares and other natural sources, these components must be able to withstand such radiation and continue to perform reliably. For that reason, until recently, suppliers of components for space applications used only special radiation-hardened silicon in the manufacture of such components. However, since the space market is relatively small and the process of producing “rad-hard” silicon is very expensive, only a few government-funded wafer fabrication facilities are capable of producing this material. In addition, because it takes several years to produce a rad-hard version of a new semiconductor, components using rad-hard silicon typically are several generations behind their current commercial counterparts in terms of density, processing power and functionality.
 
To address the performance gap between rad-hard and commercial silicon and provide components with both increased functionality and much higher processing power, a few specialty components suppliers have developed shielding, packaging, and other novel radiation mitigation techniques that allow sensitive commercial semiconductors to withstand space radiation effects and perform as reliably as rad-hard parts. Although this market is limited in size, the value proposition for high-performance, radiation-tolerant components enables these specialty suppliers to generate profit margins significantly higher than those for commodity electronic components.
 
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Business Strategy
 
Our primary objective is to make ultracapacitors a standard and often preferred energy storage and power delivery option for a wide variety of applications. To accomplish this, we focus on:
 
Providing a standard energy storage and power delivery option by:
 
 	•	 	Facilitating the integration of ultracapacitors into a wide range of devices and systems that require highly reliable electrical energy through: training engineers in the purpose and function of ultracapacitors; using educational techniques including publications, seminars and white papers; and integrating ultracapacitor mathematical models into broadly accepted simulation software, among other efforts;	
 
 	•	 	Initiating and participating in a broad array of industry standards committees to disseminate knowledge of and promote use of ultracapacitors;	
 
 	•	 	Demonstrating the broad application universe of ultracapacitors, including through government sponsored projects, competitions and demonstrations; and	
 
 	•	 	Collaborative development initiatives with key customers in strategic application fields.	
 
Becoming a leading ultracapacitor supplier by:
 
 	•	 	Becoming a low-cost producer and focusing on price-enabled markets;	
 
 	•	 	Designing and manufacturing products with “life of the application” durability;	
 
 	•	 	Achieving superior performance while reducing product cost;	
 
 	•	 	Being a highly reliable supplier through global sourcing;	
 
 	•	 	Developing and deploying enabling technologies and systems, including cell-to-cell and module-to-module balancing and integrated charging systems, among others;	
 
 	•	 	Demonstrating through extensive in-house and third party tests, the extremely high durability of our ultracapacitors in a range of applications;	
 
 	•	 	Manufacturing products that are more environmentally friendly than batteries; and	
 
 	•	 	Establishing and maintaining broad and deep protections of key intellectual property.	
 
In addition to our market creation and commercialization strategy for ultracapacitors, we seek to expand revenue and market opportunities for our high-voltage capacitors and radiation-mitigated microelectronic products. While the latter are niche businesses with highly specialized applications, they are based on high-margin products for which we are a technology leader. Going forward, we plan to maintain and expand this competitive position by leveraging our technological expertise to develop new products that not only meet the demands of our current markets, but address additional applications as well. For example, our microelectronic group recently introduced a new single-board computer for the space and satellite market. This product, which leverages our expertise in reliability and radiation-mitigation, provides access to a new market opportunity by addressing an application that we did not previously serve. Likewise, in 2004, our high-voltage capacitor business introduced and delivered the first of a new line of capacitive voltage divider products.
 
Products and Applications
 
Our products incorporate our expertise and proprietary power and microelectronics technology at both the component and system level for specialized, high-value applications for which customers require ultra-high reliability.
 
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Ultracapacitors
 
Ultracapacitors, also known as supercapacitors, store energy electrostatically by polarizing an organic salt solution within a sealed package. As no chemical reaction is involved in their energy storage mechanism, this mechanism is highly reversible, allowing ultracapacitors to be rapidly charged and discharged hundreds of thousands of times without noticeable performance degradation even in very high peak power applications.
 
Compared with electrolytic capacitors, which have very little energy storage capacity and discharge power too rapidly to be suitable for many power delivery applications, ultracapacitors have much greater energy storage capacity and can discharge power over time periods ranging from fractions of a second to several minutes.
 
Unlike conventional rechargeable batteries, ultracapacitors discharge and recharge in as little as fractions of a second. They operate reliably through hundreds of thousands to millions of discharge/recharge cycles with minimal degradation of performance, compared with only up to a few thousand cycles for conventional batteries. Although ultracapacitors store only about one-tenth as much electrical energy as a conventional battery, they can deliver stored energy as electric power 100 times more rapidly.
 
We link our ultracapacitor cells together in packs and modules to satisfy higher energy storage and power delivery requirements, and both individual cells and multi-cell packs and modules can be charged from any primary energy source, such as a battery, generator, fuel cell, solar panel or electrical outlet. Virtually any device or system whose peak power demands are greater than its average power requirement is a candidate for an ultracapacitor-based energy storage and power delivery solution.
 
Our ultracapacitor products have significant advantages over batteries, including:
 
 	•	 	delivery of up to 100 times more instantaneous power;	
 
 	•	 	the ability to discharge deeper and recharge much faster and more efficiently, thus producing less wasted energy in the form of heat;	
 
 	•	 	the ability to operate reliably in extreme temperatures (-40 degrees C to +65 degrees C);	
 
 	•	 	minimal to no maintenance requirements;	
 
 	•	 	“life of the application” durability; and	
 
 	•	 	minimal environmental issues associated with disposal because they contain no heavy metals and are largely recyclable.	
 
Any device or system that requires electrical energy storage and repeated discharges of variable amounts of power represents a potential application for ultracapacitors. With no moving parts and no chemical reactions, ultracapacitors provide a simple, solid state-like, highly reliable solution to buffer short-term mismatches between power available and power required.
 
New power-hungry electronic products, such as wireless communication devices, increasing use of electric power in vehicles, and growing demand for highly reliable, maintenance-free, back-up power are creating significant markets for new and improved energy storage and power delivery solutions. In many applications, power demand varies widely from moment to moment, with peak power demand typically being much greater than the average power requirement. For example, automobiles require much more power to accelerate than to maintain a constant speed, and forklifts require more power to lift a heavy pallet than to move about within a warehouse.
 
Engineers historically have addressed such peak power requirements by over-sizing the engine, battery or other primary energy source to satisfy all of a system’s power demands, including demands that occur infrequently and may last only a few seconds or less. Sizing the primary power source to meet transient peak
 
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power requirements, rather than average power requirements, is costly and inefficient. Primary energy sources can be designed to be smaller, lighter and less costly if they are coupled with specialized power components, such as ultracapacitors, that can deliver or absorb brief bursts of high power on demand for periods of time ranging from fractions of a second to several minutes.
 
The following diagram depicts the separation of a primary energy storage source from a peak power delivery component. Highly reliable components that enable this separation permit new designs to optimize the size, efficiency and cost of the entire electrical power system.
 
Peak Power Application Model

 
Although conventional batteries are the most widely used component for both primary energy sourcing and peak power delivery, ultracapacitors, advanced batteries and flywheels now enable system designers to separate and optimize these functions. Based in part on ultracapacitors’ rapidly declining cost, high performance and “life-of-the-application” durability, we believe that our products are positioned to become a preferred solution for many energy storage and power delivery applications.
 
We offer our BOOSTCAP ® ultracapacitors in several form factors, ranging from postage stamp size 5-farad small cells to cylindrical 2,600-farad large cells approximately two inches in diameter and six inches long. We are supplying our BOOSTCAP ® ultracapacitors in volumes and at price points that are opening many market opportunities for us.
 
Our small ultracapacitor cells have been designed into consumer electronic devices, industrial electronics such as actuators, remote transmitting devices, high-intensity scanners, computer memory boards and transportation applications such as subway car alarm systems and electric actuators that replace mechanical latches in aircraft, train and automobile doors. Many products into which our small cell ultracapacitors have been designed now are in commercial production. Our large cell ultracapacitors have been designed into industrial applications such as wind turbines and UPS systems and transportation applications such as hybrid buses, trucks and autos, electric rail systems and capacitive starting systems for diesel trucks and locomotives. We received our first commercial production order to supply ultracapacitors for hybrid gasoline-electric transit buses in February 2004, and we have since received several additional orders for transit bus drive trains. We announced our first commercial supply agreement to provide ultracapacitors for wind energy applications in October 2004, and the volume of shipments to wind turbine system manufacturers is increasing rapidly. Other large cell design-ins are progressing through the field test and evaluation phase.

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

Market
	 	Application
	 	Stage of Commercialization
	
Industrial Electronics	 	 	 	 	
			
•   Utility meters
•   Actuators
•   Memory boards	 	Wireless communication
Energy storage
Back-up power	 	Commercial production
Commercial production
Commercial production	
			
Energy Generation	 	 	 	 	
			
•   Wind turbines	 	System control and
optimization, energy
storage and peak power	 	Commercial production	
		
Fuel Cell Augmentation	 	 	
			
•   Stationary systems	 	Startup and peak load
buffering to optimize system
size and cost	 	Field testing and evaluation	
			
•   Vehicle drive trains	 	Initial starting, braking
energy recapture and reuse
for torque assist	 	Field testing and evaluation	
		
Transportation	 	 	
			
•   Hybrid-electric bus drive trains	 	Braking energy recapture
and reuse for torque assist	 	Commercial production	
			
•   Airplane door actuators	 	Backup energy storage for
emergency deployment if
main power system fails	 	Commercial production	
			
•   Automobile door actuators	 	Energy storage for electric
switches that replace
mechanical door latches	 	Designed-in by a major door
latch OEM; awaiting
commercial production	
			
•   Rail systems	 	Braking energy recapture
and reuse for electric train
and tram propulsion (both
stationary and onboard
systems)	 	Field testing and evaluation
in multi-cell systems
developed by rail system
OEMs	
			
 	 	Capacitive starting systems
for diesel locomotives	 	Prototyping and evaluation
by locomotive OEMs	
			
•   Automobile systems	 	Braking energy recapture
and reuse for torque assist	 	Prototyping and evaluation	
			
 	 	Distributed power nodes for
all-electric power steering,
braking and other
subsystems	 	Prototyping and evaluation
by auto manufacturers and
Tier I subsystem OEMs	
 
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Market
	 	Application
	 	Stage of Commercialization

 	 	Power network buffering to
prevent malfunctions due to
voltage sags	 	Prototyping and evaluation
by automotive OEMs	
			
•   Truck starting	 	Capacitive starting for diesel
engines	 	Prototyping and evaluation
by fleet operators and
truck OEMs	
			
•   All-electric forklifts, airport
baggage handling
equipment and other light
mobility vehicles	 	Fuel cell augmentation for
startup and peak power in
battery replacement systems	 	Field testing and evaluation
by fuel cell and electric
vehicle OEMs	
 
Applications such as bus, truck and auto drive trains, electric rail systems and UPS systems require integrated modules consisting of up to more than 1,000 ultracapacitor cells. To facilitate adoption of ultracapacitors for these larger systems, we are aligning our internal capabilities with those of third parties who possess the systems integration and power and thermal management capabilities to provide fully integrated systems and modules.
 
We have also developed integration technologies to accelerate customer adoption of multi-cell ultracapacitor packs, modules and systems. These include proprietary electrical balancing, thermal management systems and interconnect technologies. We have applied, and are continuing to apply, for patents for many of these technologies.
 
High-Voltage Capacitors
 
Electric utility grids have switches, circuit breakers, step-down transformers and measurement instruments that transport, distribute and measure high-voltage electricity. High-voltage capacitors are used to protect these systems from high-voltage arcing. These applications require extremely high reliability and durability, with failure rates of less than a few percent over operational lifetimes measured in decades.
 
Through our acquisition in 2002 of Montena Components Ltd., now known as Maxwell Technologies SA, and its CONDIS ® line of high-voltage capacitor products, Maxwell has more than 20 years of experience in this industry, and is the world’s largest producer of such products for use in utility infrastructure. Engineers with specific expertise in high-voltage systems develop, design and test our high-voltage capacitor products in our development and production facility in Rossens, Switzerland. Our high-voltage capacitors are produced through a proprietary, automated, winding and assembly process to ensure consistent quality and reliability. We upgraded our high-voltage capacitor production facility in 2004 to double its output capacity and significantly shorten order-to-delivery intervals. We sell our high-voltage capacitor products to large systems integrators, such as ABB Ltd., which install and service electrical utility infrastructure around the world.
 
Radiation-Mitigated Microelectronic Products
 
Manufacturers of commercial and military satellites and other spacecraft require microelectronic components and sub-systems that meet specific functional requirements and can withstand exposure to radiation encountered in space, including gamma rays and hot electrons and protons. In the past, microelectronic components and systems for these special applications used only specifically fabricated radiation-hardened silicon. However, the process of designing and producing radiation-hardened silicon is lengthy and expensive, and there are only a few specialty semiconductor fabricators, so supplies of radiation-hardened silicon are limited. Commercial silicon provides much higher functionality and costs significantly less than radiation-hardened silicon. As a result, demand for components made with the latest commercial silicon, protected by
 
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shielding and other radiation mitigation techniques, is growing. Producing components and systems incorporating radiation-mitigated commercial silicon requires expertise in power electronics, circuit design, silicon selection, radiation shielding and extensive expertise in quality assurance testing and validation.
 
We design, manufacture and market radiation-mitigated microelectronic products, including power modules, memory modules and single-board computers, for the space and satellite markets. Using highly adaptable, proprietary, packaging and shielding and other radiation mitigation techniques, we custom design products that allow satellite and spacecraft manufacturers to use powerful, commercial silicon protected with the level of radiation shielding required for reliable performance in the specific orbit or environment in which they are to be deployed.
 
Manufacturing
 
We have consolidated all of our manufacturing operations into two production facilities located in San Diego, California, and Rossens, Switzerland. Over the past four years, we have made substantial capital investments to build and outfit production facilities incorporating the latest available mechanization and automation techniques and processes. We have trained our manufacturing personnel in advanced operational techniques, including demand-based manufacturing. We have also added advanced information technology infrastructure and have implemented new business processes and systems to increase our manufacturing capacity and improve efficiency, planning and product quality. Our production facilities have been designed with flexible overhead power grids and modular manufacturing cells and equipment that allow factory operations to be reconfigured rapidly at minimal expense. With the completion of upgrades undertaken and completed in 2004, and others currently underway, we believe that our manufacturing facilities plus capital expenditures of approximately $3.7 million will give us sufficient capacity to meet 2005 demand for all of our current product lines. As new products are developed, we will install pilot manufacturing lines to produce them, but we intend to limit capital expenditures for any such new lines and upgrades of existing lines to match the rate of depreciation on existing capital plant.
 
Acceptance of our ultracapacitor products and high-voltage capacitor products depends in part on compliance and certification with a number of U.S. and foreign standards for electronic components and systems. Among the entities that promulgate such standards are Underwriters Laboratories, Canadian Standards Association and Committee European. We incorporate compliance with such standards into our quality assurance protocols in building and testing these products. We employ rigorous quality management systems and processes that promote continuous improvement and the highest possible product quality. Both of our production facilities comply with ISO 9001-2000 requirements for all of our products.
 
Ultracapacitors
 
In 2001, we installed an automated assembly line for our 5-farad and 10-farad small cell ultracapacitors in our San Diego production facility. This line can produce approximately 40,000 to 50,000 small cells per 24-hour production day. Current production is approximately 10,000 to 20,000 small cells per day, based on a 12-hour production day.
 
We produce our large cell ultracapacitors on pilot production lines in both our San Diego and Rossens, Switzerland facilities. By the second half of 2005, we expect to complete our first high-volume, semi-automated manufacturing line for our 350-farad ultracapacitors in our Swiss facility. We have also redesigned our large cell products to facilitate automation and to incorporate lower-cost materials. In addition to incorporating significantly lower-cost materials, the new designs reduce both the number of parts in a finished cell and the number of manufacturing process steps to produce them. Our Swiss facility has been certified to the rigorous, auto industry-specific, ISO/TS 1649 standards, confirming the company’s competence as an automotive supplier, and our San Diego facility has initiated steps to achieve that certification.
 
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In February 2003, we formed an ultracapacitor manufacturing and marketing alliance with Yeong-Long Technologies Co., Ltd., or YEC. YEC is a $200 million revenue per annum manufacturer of electrolytic capacitors headquartered in Taichung, Taiwan, with manufacturing and sales operations in mainland China. We entered into this alliance to accelerate commercialization of our proprietary BOOSTCAP ® ultracapacitors in China, and to help position us as a global supplier of ultracapacitors with production facilities in North America and Europe, and access to facilities in Asia. This alliance allows YEC to produce and sell our ultracapacitor products in China and entitles us to receive a royalty on such sales in China. It also provides for YEC to develop products in new form factors and gives us access to YEC’s manufacturing capacity for our distribution outside China.
 
High-Voltage Capacitors
 
We produce our high-voltage grading and coupling capacitors in our Rossens, Switzerland facility. We believe we are the only high-voltage capacitor producer that manufactures its products with automated winding, stacking and assembly processes. This enables us to produce consistent, high quality and highly reliable products, and gives us sufficient capacity to satisfy growing global customer demand. Using advanced demand-based manufacturing techniques, we upgraded the assembly portion of the process to a “cell-based,” “just-in-time” design in 2004, doubling our production capacity without additional direct labor, and significantly shortening order-to-delivery intervals. This upgrade also enabled us to expand our market penetration into capacitive voltage divider products, which we believe could materially increase the size of the market we currently serve.
 
Radiation-Mitigated Microelectronics Products
 
We produce our radiation-mitigated microelectronics products in our San Diego production facility. We have reengineered our production processes for radiation-mitigated microelectronics, resulting in dramatic reductions in cycle time and a significant increase in yield. Customer audits have confirmed our belief that we have “top-tier” manufacturing capabilities for highly reliable, radiation-mitigated power modules, memory modules and single-board computers. In 2004, this facility earned QML-Q and QML-V certification by the Department of Defense procurement agency. There are only 15 QML-Q and -V certified microelectronics production facilities in the world.
 
Our radiation-mitigated microelectronics production operations include die characterization, packaging, electrical, environmental and life testing. During 2002 and 2003, manufacturing cycle times were reduced and operator productivity increased, such that our current facility is capable of doubling production volumes without the need for additional direct labor or capital. We believe that we have ample capacity to meet foreseeable demand in the space and satellite markets. 
 
Suppliers
 
We generally purchase components and materials, such as electronic components, dielectric materials, ceramic materials and metal enclosures from a number of suppliers. For certain products, such as our radiation-mitigated microelectronic products and our high-voltage capacitors, we rely on a limited number of suppliers or a single supplier. Although we believe there are alternative sources for some of the components and materials that we currently obtain from a single source, there can be no assurance that we will be able to identify and qualify alternative suppliers in a timely manner. Therefore, in critical component areas, we “bank,” or store, critical high value materials, especially silicon die. We are working to reduce material cost and our dependence on sole and limited source suppliers through an extensive global sourcing effort, with a particular emphasis on sourcing from low-cost countries.
 
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Marketing and Sales
 
We market and sell all of our components and systems products through both direct and indirect sales organizations in North America, Europe and Asia for integration by OEM customers into a wide range of electronic systems and products. Because the introduction of products based on emerging technologies requires customer acceptance of new and different technical approaches, and because many of our OEM customers have rigorous vendor qualification processes, the initial sale of our products can take months or even years.
 
Our principal marketing strategy is to cultivate long-term relationships by becoming a preferred supplier with an opportunity to compete for multiple supply agreements and follow-on contracts with our key OEM customers. As these design-in sales tend to be technical and engineering-intensive, we organize customer-specific teams composed of sales, engineering, research and development and other technical personnel to work closely with our customers across multiple disciplines to satisfy their requirements for form, fit, function and environmental needs. As time-to-market often is the primary consideration in our customers’ decisions to use our components, the initial sale and design-in process typically evolves into ongoing account management to ensure on-time delivery, responsive technical support and problem solving.
 
For each of our three product lines, we conduct discrete marketing programs intended to position and promote each product line. These include trade shows, seminars, advertising, product publicity, distribution of product literature and Internet websites. We employ marketing communications specialists and outside consultants to develop and implement our marketing programs, design and develop marketing materials, negotiate advertising media purchases, write and place product news releases and manage our marketing websites.
 
We have an alliance with YEC to manufacture and market our proprietary BOOSTCAP ® ultracapacitor products in China. Through this alliance, we seek to expand our ultracapacitor product line and increase sales in China.
 
Competition
 
Each of our product lines has competitors, many of whom have longer operating histories, significantly greater financial, technical, marketing and other resources, greater name recognition and larger installed customer bases than we have. In some of the target markets for our emerging technologies, we face competition both from products utilizing well-established existing technologies and from other novel or emerging technologies.
 
Ultracapacitors
 
Our ultracapacitor products have two types of competitors: other ultracapacitor suppliers and purveyors of energy storage and power delivery products based on other technologies. Although a number of companies are developing ultracapacitor technology, we currently have three principal competitors in ultracapacitor or supercapacitor products: Panasonic, a division of Matsushita Electric Industrial Co., Ltd., in Japan, EPCOS AG in Germany, and Ness Corporation in Korea. The key competitive factors in the ultracapacitor market are price, performance (energy stored and power delivered per unit volume), durability and reliability, form factor, operational lifetime and overall breadth of product offerings. We believe that our products compete favorably with respect to all of these competitive factors.
 
Ultracapacitors also compete with products based on other technologies, including advanced batteries in power quality and peak power applications, and flywheels and batteries in back-up energy storage applications. We believe that ultracapacitors’ high durability, long life, wide temperature range, high performance and value proposition give them a competitive advantage over these alternative choices in many applications. In addition, integration of ultracapacitors with some of these alternative solutions may provide an optimized solution for the customer that neither can provide by itself.
 
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High-Voltage Capacitors
 
Maxwell, through its acquisition in 2002 of Montena (now known as Maxwell Technologies SA) and its CONDIS ® line of high-voltage capacitor products, is the world’s largest producer of high-voltage capacitors for use in electric utility infrastructure. Our principal competitors in the high-voltage capacitor markets are in-house production groups of certain of our customers and other independent manufacturers, such as the Coil Product Division of Trench Limited in Canada and Europe and Hochspannungsgeräte Porz GmbH in Germany. We believe that we compete favorably with respect to being a consistent supplier of highly reliable high-voltage capacitors, and with respect to our expertise in high-voltage systems design. Over the last ten years, our largest customer, ABB Ltd., has evolved from producing its grading and coupling capacitors internally to outsourcing substantially all of its needs to us.
 
Radiation-Mitigated Microelectronic Products
 
Our radiation-mitigated power modules, memory modules and single-board computers compete with the products of traditional radiation-hardened integrated circuit suppliers such as Honeywell Corporation, Lockheed Martin Corporation and BAE Systems. We also compete with commercial integrated circuit suppliers with product lines that have inherent radiation tolerance characteristics, such as National Semiconductor Corporation, Analog Devices Inc. and Temic Instruments B.V. (in Europe). Our proprietary radiation-mitigation technologies enable us to provide flexible, high function, competitively priced, radiation mitigation solutions utilizing the most advanced commercial electronic circuits and processors. In addition, we compete with component product offerings from high reliability packaging houses such as Austin Semiconductor, Inc., White Microelectronics, Inc. and Teledyne Microelectronics, a unit of Teledyne Technologies, Inc.
 
Research and Development
 
We maintain active research and development programs to improve existing products and to develop new products. For the year ended December 31, 2004, our research and development expenditures totaled approximately $5.5 million, compared with $5.8 million and $8.4 million in the years ended December 31, 2003 and December 31, 2002, respectively. The large decrease from 2002 to 2003 reflects the elimination of R&D expense associated with several non-core business lines that we divested. In general, we focus our research and product development activities on:
 
 	•	 	designing and producing products that perform reliably for the life of the end products or systems into which they are integrated;	
 
 	•	 	making our products less expensive to produce so as to improve our profit margins and to enable our products to penetrate new, price-sensitive, markets;	
 
 	•	 	designing our products to have superior technical performance;	
 
 	•	 	designing new products that provide novel solutions to expand our market opportunities; and	
 
 	•	 	designing our products to be compact and light.	
 
Most of our current research, development and engineering activity is focused on material science, including electrically conducting and dielectric materials, ceramics and radiation-tolerant silicon and ceramic composites to reduce cost and improve performance, reliability and ease of manufacture. Additional efforts are focused on product design and manufacturing engineering and manufacturing processes for high-volume manufacturing.
 
 	•	 	The principal focus of our ultracapacitor development activities is to increase power and energy density and power delivery, ensure long operational life and dramatically reduce product cost. Our ultracapacitor designs focus on low-cost, high-capacity devices in standard sizes ranging from 5-farads to 2,600-farads. Our goal is to penetrate cost-sensitive applications at multi-million unit volumes.	
 
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 	•	 	The principal focus of our high-voltage capacitor development efforts is to enhance performance and reliability while reducing the size, weight and manufacturing cost of our products. We also are directing our design efforts to develop high-voltage capacitors for additional applications.	
 
 	•	 	The principal focus of our microelectronics product development activities is on circuit design, shielding and other radiation-mitigation techniques that allow the use of powerful commercial silicon components in space and satellite applications that require ultra high reliability. We also focus on creating system solutions that overcome the basic failure rate of individual components through architectural approaches, including redundancy, mitigation and correction. This involves expertise in system architecture, including algorithm and micro-code development, circuit design and the physics of radiation effects on silicon electronic components.	
 
Intellectual Property
 
We continue to place an increased emphasis on inventing new technologies, proprietary processes and innovative designs that significantly increase the value and uniqueness of our product portfolio, and on obtaining patents to provide the broadest possible protection for those products and related technologies. Our ultimate success will depend in part on our ability to protect existing patents, secure additional patent protection and develop new processes and designs not covered by the patents of third parties. As of December 31, 2004, Maxwell and its subsidiaries held 51 issued patents and had 44 pending patent applications and numerous provisional applications. Of the issued patents, 17 relate to our ultracapacitor products and technology and 12 relate to our microelectronics products and technology. Our subsidiary, PurePulse Technologies, Inc. (“PurePulse”), which suspended operations in 2002, holds the remaining 22 issued patents. Our issued patents have various expiration dates ranging from 2014 to 2024.
 
Our pending patent applications and any future patent applications may not be allowed. We routinely seek to protect our new developments and technologies by applying for patents in the U.S. and corresponding foreign patents in the principal countries of Europe and Asia. At present, with some exceptions in the microcode architectures of our radiation-mitigated microelectronics product line, we do not rely on licenses from any third parties to produce or commercialize our products.
 
The existing patent portfolios and pending patent applications covering technologies associated with our ultracapacitor and microelectronic products relate primarily to:
 
Ultracapacitors
 
 	•	 	the physical composition of the electrode, its design and fabrication;	
 
 	•	 	the physical cell package design and the processes used in its production;	
 
 	•	 	cell-to-cell interconnect technologies that increase the power performance and lifetime of BOOSTCAP ® products; and	
 
 	•	 	module and system designs that facilitate applications of ultracapacitor technology.	
 
Microelectronics
 
 	•	 	system architectures that enable commercial silicon products to be used in radiation-intense space environments;	
 
 	•	 	technologies and designs that improve packaging densities while mitigating the effect of radiation on commercial silicon; and	
 
 	•	 	radiation-mitigation techniques that improve performance while protecting sensitive commercial silicon from the effects of environmental radiation in space.	
 
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Historically, our high-voltage capacitor products have been based on our know-how and trade secrets rather than on patents. We filed our first patent application covering our high-voltage capacitor technology in 2003, and we will continue to pursue patent protection in addition to trade secret protection of certain aspects of our products’ design and production.
 
Establishing and protecting proprietary products and technologies is a key element of our strategy. Although we attempt to protect our intellectual property rights through patents, trademarks, copyrights, trade secrets and other measures, there can be no assurance that these steps will be adequate to prevent infringement, misappropriation or other misuse by third parties, or will be adequate under the laws of some foreign countries, which may not protect our intellectual property rights to the same extent as do the laws of the U.S.
 
We use employee and third party confidentiality and nondisclosure agreements to protect our trade secrets and unpatented know-how. We require each of our employees to enter into a proprietary rights and nondisclosure agreement in which the employee agrees to maintain the confidentiality of all our proprietary information and, subject to certain exceptions, to assign to us all rights in any proprietary information or technology made or contributed by the employee during his or her employment with us. In addition, we regularly enter into nondisclosure agreements with third parties, such as potential product development partners and customers.
 
Financial Information About Geographic Areas

 	  	Year ending December 31,
	 	
 	  	2004
	 	 	2003
	 	 	2002
	 	
 	  	Amount
	  	Percent
	 	 	Amount
	  	Percent
	 	 	Amount
	  	Percent
	 	
 	  	(Dollars in thousands)	 	
Revenues from external customers located in:	  	 	 	  	 	 	 	 	 	  	 	 	 	 	 	  	 	 	
United States	  	$	13,938	  	43	%	 	$	16,024	  	46	%	 	$	32,865	  	60	%	
All other countries	  	 	18,274	  	57	%	 	 	19,142	  	54	%	 	 	21,529	  	40	%	
 	  			  			 			  			 			  			
Total	  	$	32,212	  	100	%	 	$	35,166	  	100	%	 	$	54,394	  	100	%	
 	  			  			 			  			 			  			
Long-lived assets:	  	 	 	  	 	 	 	 	 	  	 	 	 	 	 	  	 	 	
United States	  	$	9,337	  	26	%	 	$	10,742	  	33	%	 	$	12,065	  	39	%	
Switzerland	  	 	24,547	  	74	%	 	 	21,507	  	67	%	 	 	19,174	  	61	%	
 	  			  			 			  			 			  			
Total	  	$	33,884	  	100	%	 	$	32,249	  	100	%	 	$	31,239	  	100	%	

Backlog 
 
Backlog for Maxwell’s three continuing core product lines was approximately $10.7 million as of December 31, 2004, compared with $10.2 million for those product lines as of December 31, 2003. Backlog consists of firm orders for products that will be delivered within 12 months. Because we have dramatically reduced production cycle times, our customers are less likely to commit firm purchase orders as far in advance of their production needs as they did in the past.
 
Significant Customers
 
Sales of high-voltage capacitors to various business units within the ABB group of companies amounted to approximately $11.5 million, or 36%, of our total revenue for the year ended December 31, 2004. We have long term supply agreements with ABB Ltd., the largest of which was renewed in April 2004 and expires in April 2007.
 
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Government Regulation
 
Due to the nature of our operations and the use of hazardous substances in some of our ongoing manufacturing and research and development activities, we are subject to stringent federal, state and local laws, rules, regulations and policies governing workplace safety and protection of the environment. These include the use, generation, manufacture, storage, air emission, effluent discharge, handling and disposal of certain materials and wastes. In the course of our historical operations, materials or wastes may have spilled or been released from properties owned or leased by us or on or under other locations where these materials and wastes have been taken for disposal. These properties and the materials and wastes spilled, released, or disposed thereon are subject to environmental laws that may impose strict liability, without regard to fault or the legality of the original conduct, for remediation of contamination resulting from such releases. Under such laws and regulations, we could be required to remediate previously spilled, released, or disposed substances or wastes or to make capital improvements to prevent future contamination. Failure to comply with such laws and regulations also could result in the assessment of substantial administrative, civil and criminal penalties and even the issuance of injunctions restricting or prohibiting our activities. It is also possible that implementation of stricter environmental laws and regulations in the future could result in additional costs or liabilities to us as well as the industry in general. While we believe we are in substantial compliance with existing environmental laws and regulations, we cannot be certain that we will not incur substantial costs in the future.
 
In addition, certain of our microelectronics products are subject to International Traffic in Arms export regulations when they are delivered to customers outside of the U.S. We routinely obtain export licenses for such product shipments outside the U.S.
 
Legal Proceedings
 
From time to time we are involved in litigation arising out of our operations. We maintain liability insurance, including product liability coverage, in amounts we believe to be adequate. We have been named as a defendant in a suit filed on March 4, 2004 in the Superior Court of the State of California for the County of San Luis Obispo. This suit, Edmonds vs. I-Bus/Phoenix, Inc. , was filed by the plaintiff on his behalf, alleging damages relating to the repurchase of I-Bus/Phoenix, Inc. shares. While the Company’s legal counsel cannot express an opinion on this matter, management believes that any liability of the Company that may arise out of or with respect to this matter will not materially adversely affect the financial position, results of operations or cash flows of the Company. 
 
Employees
 
As of December 31, 2004, we had 222 employees, consisting of 110 full-time employees, one part-time employee and one temporary employee in the U.S., and 78 full-time employees, 13 part-time employees and 19 temporary employees in Switzerland. None of our U.S. employees are members of a labor union. We believe that approximately 20% of our employees in Switzerland are members of a labor union. Swiss law prohibits employers from inquiring into the union status of employees. We consider our relations with our employees to be good.
 
Facilities
 
Our headquarters and principal research, manufacturing and marketing facilities occupy approximately 45,000 square feet in San Diego, California, under a renewable lease that expires in July 2007. In addition, we lease research, manufacturing and marketing facilities occupying 68,620 square feet in Rossens, Switzerland, under a renewable lease that expires in June 2009.
 
We have the capacity to meet increases to our forecasted production requirements and, therefore, we believe our facilities are adequate to meet our needs for the foreseeable future.
 
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RISK FACTORS
 
An investment in our common stock involves a high degree of risk. Our business, financial condition and results of operations could be seriously harmed if potentially adverse developments, some of which are described below, materialize and cannot be resolved successfully. In any such case, the market price of our common stock could decline and you may lose all or part of your investment in our common stock.
 
The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties, including those not presently known to us or that we currently deem immaterial, may also result in decreased revenues, increased expenses or other adverse impacts that could result in a decline in the price of our common stock.
 
We have a history of losses and we may not achieve or maintain profitability in the future, which may decrease the market value of our common stock.
 
We have incurred net losses in our last six fiscal years. We cannot assure you that we will become profitable in the foreseeable future, if ever. Even if we do achieve profitability, we may experience significant fluctuations in our revenues and we may incur net losses from period to period as a result of a number of factors, including but not limited to the following:
 
 	•	 	the amounts invested in developing, manufacturing and marketing our products in any period as compared with the volume of sales of those products in the same period;	
 
 	•	 	fluctuations in demand for our products by our OEM customers;	
 
 	•	 	the prices at which we sell our products and services as compared with the prices of our competitors and our product costs;	
 
 	•	 	the timing of our product introductions may lag behind those of our competitors;	
 
 	•	 	our profit margins may decrease; and	
 
 	•	 	any negative impacts resulting from acquisitions we have made or may make.	
 
In addition, we incur significant costs developing and marketing products based on new technologies and, in order to increase our market share, we may sell our products at profit margins below those we ultimately expect to achieve and/or we may significantly reduce the prices of our products and services in a particular quarter or quarters. Presently, we have made a strategic decision to accept certain orders to sell products to a limited number of customers at prices below our manufacturing costs. The impact of the foregoing may cause our operating results to be below the expectations of public market analysts and investors, which may result in a decrease in the market value of our common stock.
 
We may not be able to continue development of our products or market our products successfully, and thus may not be able to achieve or maintain profitability in the future.
 
Historically, we relied in part upon government contracts relating to our defense contracting business to fund our research and development, and we have derived a significant portion of our revenues from the government sector. In March 2001, we sold our defense contracting business and we now generate revenue solely from developing, manufacturing and marketing commercial products, many of which have been developed since 2000. If we are unable to continue to develop or to market our products successfully, we may not achieve or maintain profitability in the future.
 
We have recently introduced many of our products into commercial markets and, upon such introductions, we also must demonstrate our capabilities as a reliable supplier of these products. Some of our products are alternatives to established products or provide capabilities that do not presently exist in the marketplace. Our products are sold in highly competitive and rapidly changing markets. The success of our products is
 
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significantly affected by their cost, technology standards and end-user preferences. In addition, the success of our products depends on a number of factors, including our ability to:
 
 	•	 	hire and maintain an engineering and marketing staff sufficiently skilled to identify and design new products;	
 
 	•	 	overcome technical, financial and other risks involved in developing new products based on new technology as well as managing the introduction of those new products and technologies;	
 
 	•	 	identify and develop attractive markets for our new products and technologies and accurately anticipate demand;	
 
 	•	 	develop appropriate commercial sales and distribution channels;	
 
 	•	 	develop and manufacture new products that we can sell at competitive prices, with adequate margins;	
 
 	•	 	deliver products that meet our customers’ requirements for quality and reliability;	
 
 	•	 	increase our manufacturing capacity and improve manufacturing efficiency to meet our customer demands;	
 
 	•	 	successfully respond to technological changes by improving our existing products and technologies;	
 
 	•	 	demonstrate that our products have technological and/or economic advantages over the products of our competitors;	
 
 	•	 	successfully respond to competitors that are more experienced, have significantly greater resources and have a larger base of customers; and	
 
 	•	 	secure the raw materials required at the prices necessary to manufacture and deliver competitive products. If the supply of a commodity raw material changes or is interrupted, we may not be able to build our products or if we can build our products, we may be unable to sell our products profitably at competitive prices with adequate margins.	
 
We may not be able to obtain sufficient capital to meet potential customer demand or corporate needs, which could require us to change our business strategy and result in decreased profitability and a loss of customers.
 
We believe that in the future we will need a substantial amount of additional capital for a number of purposes, including the following:
 
 	•	 	to meet potential volume production requirements for several of our product lines, in particular our ultracapacitors, which require high-speed automated production lines to achieve targeted customer volume and price requirements;	
 
 	•	 	to expand our manufacturing capabilities and develop viable out-source partners and other production alternatives;	
 
 	•	 	to fund our continuing expansion into commercial markets and compete effectively in those markets;	
 
 	•	 	to develop new technology and cost effective solutions in our business;	
 
 	•	 	to achieve our long-term strategic objectives;	
 
 	•	 	to maintain and enhance our competitive position; and	
 
 	•	 	to acquire new or complementary businesses, product lines and technologies.	
 
There can be no assurance that any necessary additional financing will be available to us on acceptable terms or at all. If adequate funds are not available, we may be required to change or delay our planned growth, which could result in decreased revenues, profits and a loss of customers.
 
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We have a shelf registration statement on Form S-3 on file with the Securities and Exchange Commission. Approximately $5.5 million of it remains available to us for raising capital. If additional shares are issued under the shelf registration statement immediate dilution of our current stockholders may occur.
 
We may experience difficulty manufacturing our products, which would prevent us from achieving increased sales and market share.
 
We may experience difficulty in manufacturing our products in increased quantities, outsourcing the manufacturing of our products and improving our manufacturing processes. If we are unable to manufacture our products in increased quantities, or if we are unable to outsource the manufacturing of our products or improve our manufacturing processes, we may be unable to increase sales and market share for our products and could also lose existing customers. We have limited experience in manufacturing our products in high volume and, therefore, it may be difficult for us to achieve the following results:
 
 	•	 	increase the quantity of the new products we manufacture, especially those products that contain new technologies;	
 
 	•	 	reduce our manufacturing costs to a level needed to produce adequate profit margins and avoid losses on committed sales agreements; and	
 
 	•	 	design and procure additional automated manufacturing equipment.	
 
It may also be difficult for us to solve management, technological, engineering and other problems which may arise in connection with our manufacturing processes. These problems may include production volumes and yields, quality assurance, adequate and timely supply of high quality materials and shortages of qualified management and other personnel. In addition, we may elect to have some of our products manufactured by third parties. If we outsource the manufacture of our products, we will face risks with respect to quality assurance, cost and the absence of close engineering support.
 
Our large cell ultracapacitors designed for transportation and industrial applications may not gain widespread commercial acceptance, which will adversely impact our revenues and growth opportunities, and our overall business prospects.
 
We have designed our large cell ultracapacitor products primarily for use in transportation and industrial applications. Currently, most of the major automotive companies are pursuing initiatives to develop alternative power sources for cars and trucks for hybrid drive train power and to augment the current 12-volt electrical system. We believe our ultracapacitors provide an innovative alternative power solution for both of these applications, and we are currently in discussions with several major automotive companies and their suppliers with regard to designing our ultracapacitors into their future products. However, the historic per unit cost of ultracapacitors has prevented ultracapacitors from gaining widespread commercial acceptance. In addition, there are other competing technologies such as advanced batteries, compressed gas and hydrolytic fluids and competing ultracapacitors. We believe that the long-term success of our ultracapacitors will be determined by our ability to reduce the cost of production, outperform the competing technologies and to have our ultracapacitors widely designed into the next generation of the power drive trains in hybrid powered cars and trucks and the first generation of up rated 12 and 42-volt electrical systems. If our ultracapacitors fail to achieve widespread commercial acceptance in this next generation of automotive products, our revenues and growth opportunities will be adversely impacted in future periods and our overall business prospects will be significantly impaired.
 
We may be unable to produce our large cell ultracapacitors in commercial quantities or reduce the cost of production enough to be commercially viable for widespread application, which will adversely impact our revenues and growth opportunities, and our overall business prospects.
 
If we are not able to produce large quantities of our large cell ultracapacitors in the near future at the currently projected per unit cost, our large cell ultracapacitors may not be a commercially viable alternative to
 
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traditional or other alternative energy storage and power delivery devices. Although we have been selling a BOOSTCAP ® large cell ultracapacitor designed for transportation and industrial applications, we have only produced this ultracapacitor in limited quantities and at a relatively high cost as compared with traditional energy storage and power delivery devices. We are currently investing significant resources in improving the cell design for higher performance at lower cost and in automating and scaling up our manufacturing capacity to permit us to produce ultracapacitors in commercial quantities sufficient to meet the needs of our potential customers. Furthermore, we believe, based on discussions with potential customers in the automotive and transportation industry, that our ultracapacitors will not provide a commercially viable solution for our customers’ needs unless we are able to reduce the per unit cost dramatically below our current per unit cost. If we are not successful in the near future in reducing our cost of production and establishing the capability to produce large quantities of ultracapacitors at a reduced cost, we may not be able to generate commercial acceptance of, and sufficient revenue from, this product to recover our significant investment in the development and manufacturing scale-up of this product and our overall business prospects will be significantly impaired.
 
Our product lines may be subject to increased or intense competition, and this may adversely affect our ability to maintain our gross margins. If our competitors develop and commercialize products faster than we do, or commercialize products that are superior to our products, our commercial opportunities will be reduced or eliminated.
 
The extent to which any of our products achieve market acceptance will depend on competitive factors, many of which are beyond our control. Competition in our markets is intense and has been accentuated by the rapid pace of technological development. Our competitors include large fully-integrated electronics companies. We may not be able to develop, fund or invest in one or more of our product lines to the same degree as our competitors do, or we may not be able to do so in a timely manner or at all. Many of these entities have substantially greater research and development capabilities and financial, manufacturing, technological, marketing and sales resources than we do, as well as more experience in research and development, product testing, manufacturing, marketing and sales. These organizations also compete with us to:
 
 	•	 	attract parties for collaborations or joint ventures;	
 
 	•	 	license the proprietary technology that is competitive with our technology; and	
 
 	•	 	attract and hire scientific and engineering talent.	
 
Our competitors may succeed in developing and commercializing products earlier than we do. Our competitors may also develop products or technologies that are superior to those we are developing, and render our product candidates or technology obsolete or non-competitive. If we cannot successfully compete with new or existing products, our sales and revenue would suffer and we may not ever become profitable.
 
If our OEM customers fail to purchase our components or to sell sufficient quantities of their products incorporating our components, or if our OEM customers’ sales timing and volume fluctuates, it could prevent us from achieving our sales and market share goals.
 
Sales to a relatively small number of OEM customers, as opposed to direct retail sales to customers, make up virtually all of our revenues. Our ability to make sales to OEM customers depends on our ability to compete effectively, primarily on price, delivery and quality. The timing and volume of these sales depend upon the sales levels and shipping schedules for the products of our OEM customers. Thus, even if we develop a successful component, our sales will not increase unless the product into which our component is incorporated is successful. If our OEM customers fail to sell a sufficient quantity of products incorporating our components, or if the OEM customers’ sales timing and volume fluctuate, it could prevent us from achieving our sales targets and negatively impact our market share. Our OEM customers typically require a long development and engineering process before incorporating our products and services into their systems and products. This period of time is in addition to the time we spend on basic research and product development. As a result, we are vulnerable to changes in technology or end user preferences.
 
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Our opportunity to sell our products to our OEM customers typically occurs at infrequent intervals, depending on when the OEM customer designs a new product or enhances an existing one. If we are not aware of an OEM’s product development schedule, or if we cannot provide components or technologies when they develop their products, we may miss a sales opportunity that may not reappear for some time.
 
We might be faced with product liability or warranty claims, either directly or indirectly through our customers, and we have limited historical experience with some of our products as to our potential liability.
 
We offer our customers a warranty for our products. Any defects that may occur in our products could, in turn, lead to defects in our customers’ products that incorporate our products. The occurrence of defects in our products could give rise to warranty claims against us or to liability for damages caused by such defects to our customers or to the customers of our customers. Such defects could also lead to liability for consequential damages, or product liability claims. Defects in our products could, moreover, impair the market’s acceptance of our products. Any of these events could have a material adverse effect on our business and financial condition. We have limited historical experience with some of our products in evaluating the potential liability that could be created by claims under our warranty. If the claims made under such warranty exceed expected levels against which we have reserved, our results of operations and financial condition could be materially adversely affected.
 
Unfavorable economic conditions in the U.S. and abroad may adversely affect our OEM customers and prevent us from achieving sales growth.
 
Many of our new products are components designed to be integrated into new products and systems to be introduced to the marketplace by our OEM customers. Unfavorable economic conditions in 2003 and 2004, for example, slowed capital spending on U.S. electric utility infrastructure and delayed the introduction of certain new products by our OEM customers. A repeat of such unfavorable economic conditions may adversely affect our ability to market and sell our new products in the future.
 
A prolonged economic downturn could materially harm our business.
 
Any negative trends in the general economy, including trends resulting from actual or threatened military action by the United States and threats of terrorist attacks in the United States and abroad, could cause a decrease in capital spending in many of the markets we serve. In particular, a downward cycle affecting the technology, automotive and industrial, and military and aerospace markets would likely result in a reduction in demand for our products. In addition, if our customers’ own markets and financial performance decline, we may not be able to collect outstanding amounts due to us. Any of these circumstances could harm our consolidated financial position, results of operations and cash flows.
 
If we are unable to protect our intellectual property adequately, we could lose our competitive advantage in the industry segments in which we do business.
 
Our success depends on establishing and protecting our intellectual property rights. If we are unable to protect our intellectual property adequately, we could lose our competitive advantage in the industry segments in which we do business. Although we try to protect our intellectual property rights through patents, trademarks, copyrights, trade secrets and other measures, these steps may not prevent infringement, misappropriation or other misuse by third parties. We have taken steps to protect our intellectual property rights under the laws of certain foreign countries, but our efforts may not be effective to the extent that foreign laws are not as protective as the laws of the U.S. In addition, we face the possibility that third parties might “reverse engineer” our products to discover how they work and introduce competing products, or that third parties might independently develop products and intellectual property similar to ours.
 
We have increased our emphasis on protecting our technologies and products through patents. Our success depends on maintaining our patents, adding to them where appropriate, and developing products and applications
 
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without infringing the patent and proprietary rights of others. The following risks, among others, are involved in protecting our patents:
 
 	•	 	our patents may be circumvented or challenged and held unenforceable or invalid;	
 
 	•	 	our pending or future patent applications, if any, may not be issued in a timely manner and may not provide the protections we seek; and	
 
 	•	 	others may claim rights in the patented and other proprietary technology that we own or license.	
 
If our patents are invalidated or if it is determined that we, or the licensor of the patent, do not hold sole rights to the patent, we could lose our competitive advantage in the industry segments in which we do business.
 
Competing research and patent activity in our product areas is substantial. Conflicting patent and other proprietary rights claims may result in disputes or litigation. Although we do not believe that our products or proprietary rights infringe on third party rights, infringement claims could be asserted against us in the future. Also, we may not be able to stop a third party product from infringing on our proprietary rights without litigation. If we are subject to such claims, or if we are forced to bring such claims, we could face time-consuming, costly litigation that may result in product shipment delays and possible damage payments or injunctions that could prevent us from making, using or selling infringing products. We may also be required to enter into royalty or licensing agreements on unfavorable terms as part of a judgment or settlement which could have a negative impact on the amount of revenue derived from our products or proprietary rights.
 
We may have difficulty in protecting our intellectual property rights in the People’s Republic of China (PRC).
 
YEC is licensed to use our patented ultracapacitor technology to manufacture and market unltracapacitor products in the PRC. Patent and other intellectual property rights receive substantially less protections in the PRC than is available in the United States. We cannot assure you that we will be able to protect our proprietary rights in the PRC or elsewhere. The unauthorized use of our technology by others, particularly in the PRC where labor costs are low, could have a material adverse effect on our business, financial condition and results of operation.
 
Our ability to adequately license our technology may affect our success.
 
Our growth and success will be dependent to a substantial extent on our reputation. Since we anticipate licensing our technology to others, our reputation may be affected by the performance of the companies to which we license our technology. Our licenses may grant exclusivity with respect to certain uses or geographic areas. As a result, we will be wholly dependent on the success of the licensee for success with respect to any exclusive use or geographical area. We cannot assure you that we will be successful in granting our licenses to those who are likely to succeed. In addition, license agreements with foreign companies may be subject to additional risks, such as exchange rate fluctuations, political instability or weaknesses in the local economy. Certain provisions of the license agreements that benefit us may be subject to restrictions in foreign laws that limit our ability to enforce those contractual provisions. In addition, it may be more difficult to register and protect our proprietary rights in certain foreign countries. Our failure to obtain suitable licensees of our technology or the failure of our licensees to achieve our manufacturing or quality control standards or otherwise meet our expectations could have a material adverse effect on our business, financial condition and results of operations.
 
Our ability to enter into successful alliances or other strategic arrangements may affect our success.
 
Our alliance with YEC is with a foreign partner and we anticipate that future alliances may be with foreign partners or entities. As a result, such future alliances may be subject to the political climate and economies of the foreign countries where such partners reside and operate. We cannot assure you that our alliance partners or other partners will provide us with the support we anticipate, that any of the alliances or other relationships will be
 
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successful in developing our technology for use with their intended products, or that any of the alliances or other relationships will be successful in manufacturing and marketing their technologies for such products once developed. Any of our international operations will also be subject to certain external business risks such as exchange rate fluctuations, political instability and a significant weakening of a local economy in which a foreign entity with which we have an affiliation operates or is located. Certain provisions of the alliance agreements that are for our benefit may be subject to restrictions in foreign laws that limit our ability to enforce those contractual provisions. Failure of these alliances to be successful could have a material adverse effect on our business and prospects.
 
We face risks associated with the marketing, distribution and sale of our products internationally and, if we are unable to manage these risks effectively, it could impair our ability to increase sales.
 
We derive a significant portion of our revenues from sales to customers located outside the U.S. We expect our international sales to continue to represent a significant and increasing portion of our future revenues. As a result, our business will continue to be subject to certain risks, such as foreign government regulations, export controls, changes in tax laws, tax treaties, tariffs and freight rates. If we are unable to manage these risks effectively, it could impair our ability to increase international sales.
 
We have substantial operations in Switzerland. Since we are relatively inexperienced in managing our international operations, we may be unable to effectively operate and expand our worldwide business and to manage cultural, language and legal differences inherent in international operations. In addition, to the extent we are unable to respond to political, economic and other conditions in these countries effectively, our business, results of operations and financial condition could be materially adversely affected. Moreover, changes in the mix of income from our foreign subsidiaries, expiration of tax holidays and changes in tax laws and regulations could increase our tax rates.
 
International currency fluctuations could affect future reported product sales and operating expenses and harm or impact our ability to collect receivables or pay debts.
 
As a result of our international operations and related revenue generated outside of the U.S., the dollar amount of our revenue, expenses and debt may be materially affected by fluctuations in foreign currency exchange rates.
 
Assets or liabilities of our consolidated subsidiary that are not denominated in its functional currency are subject to effects of currency fluctuations, which may affect our reported earnings.
 
Government audits of two of our businesses sold or discontinued in 2001 could result in charges to our earnings and have a negative effect on our cash position. Further, a government audit of a contract entered into in 1995 by our Microelectronics business is in progress. We are unable to determine if additional audits of our current operating segments, divested businesses or discontinued operations will occur.
 
A contract, not assumed by the acquirers of our former defense contract business, entered into in 1990 and completed in the late 1990s is currently being audited by the Defense Department’s auditing services. We have submitted documentation supporting approximately $550,000 of costs charged to the contract. We believe that such costs were properly charged.
 
The Internal Revenue Service (IRS) has assessed us with a penalty of approximately $262,000 for failure to file Form W-2s for a business sold in 2001. The acquiring company of our former business did write the IRS stating that they would be responsible for the filing of 2001 Form W-2s. We have submitted this documentation to the IRS.
 
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There can be no assurance that the Defense Department’s auditing services or the IRS will accept the documentation submitted and that the matters will be resolved in our favor.
 
The Defense Department’s auditing service is auditing a contract entered into in 1995 and completed in 1999 by a company purchased by our Microelectronics group. The Company has requested a release of liability from the prime contractor. There is no assurance that such a release will be obtained and that the Company will not incur some liability.
 
Our credit agreements contain various restrictions and covenants that limit management’s discretion in the operation of our business and could limit our ability to grow and compete.
 
The credit agreements governing our bank credit facilities contain various provisions that limit our ability to:
 
 	•	 	incur additional debt;	
 
 	•	 	make loans, pay dividends and make other distributions;	
 
 	•	 	create certain liens on, or sell, our assets;	
 
 	•	 	merge or consolidate with another corporation or entity, or enter into other transactions outside the ordinary course of business; and	
 
 	•	 	make certain changes in our capital structure.	
 
These provisions restrict management’s ability to operate our business in accordance with management’s discretion and could limit our ability to grow and compete. Our credit agreements also require us to maintain our compliance with certain financial covenants and ratios. If we fail to comply with any of such financial covenants or ratios, or otherwise default under our credit agreements, the lenders under such agreements could:
 
 	•	 	accelerate and declare all amounts borrowed to be immediately due and payable, together with accrued and unpaid interest;	
 
 	•	 	terminate their commitments, if any, to make further extensions of credit to us and/or attempt to secure collateral.	
 
In the event that amounts due under our credit agreements are declared immediately payable, we may not have, or be able to obtain, sufficient funds to make such accelerated payments.
 
If we are unable to retain key personnel, we could lose our technological and competitive advantage in some product areas and business segments.
 
Since many of our products employ emerging technologies, our success depends upon the continued service of our key technical and senior management personnel. Some of our engineers are the key developers of our products and technologies and are recognized as leaders in their area of expertise. The loss of such engineers to our competitors could threaten our technological and competitive advantage in some product areas and business segments.
 
Our performance also depends on our ability to identify, hire, train, retain and motivate qualified personnel, especially key operations executives and highly skilled engineers. The industries in which we compete are characterized by a high level of employee mobility and aggressive recruiting of skilled personnel in a highly competitive employment market. Our employees may terminate their employment with us at any time.
 
Our ability to increase market share and sales depends on our ability to hire, train and retain qualified marketing and sales personnel.
 
Because many of our products are new, we have limited experience marketing and selling them. To sell our products, our marketing and sales personnel must demonstrate the advantages of our products over the products
 
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offered by our competitors, and we must be able to demonstrate the value of new technology in order to sell new products to existing and new customers. The highly technical nature of the products we offer requires that we attract and retain qualified marketing and sales personnel, and we may have difficulty doing that in a highly competitive employment market. Also, as part of our sales and marketing strategy, we enter into arrangements with distributors and sales representatives and depend upon their efforts to sell our products. Our arrangements with outside distributors and sales representatives may not be successful.
 
If we are unable to secure qualified and adequate sources for our materials, components and sub-assemblies, we may not be able to make our products at competitive costs and we may have difficulty meeting customer demand, which could damage our relationships with our customers.
 
Our ability to manufacture products depends in part on our ability to secure qualified and adequate sources of materials, components and sub-assemblies at prices that enable us to make our products at competitive costs. Some of our suppliers are currently the sole source of one or more items that we need to manufacture our products. Although we seek to reduce our dependence on sole and limited source suppliers, the partial or complete loss of these sources could have at least a temporary adverse effect on our business and results of operations, and damage customer relationships. Upon occasion, we have experienced difficulty in obtaining timely delivery of supplies from outside suppliers, which has adversely affected our delivery time to our customers. There can be no assurance that such supply problems will not recur.
 
Our backlog is limited and may not reflect future business activity.
 
Our order backlog for prior years includes businesses that were divested and therefore year-to-year comparisons are difficult to make. Additionally, our current backlog primarily represents orders for the next three months but does include some future orders and as a result, is not an indicator of future business activity. Due to the possibility of customer changes in delivery schedules, potential delays in product shipments, difficulties in obtaining parts from suppliers, production limitations and the possible inability to recognize revenue under accounting requirements, our backlog at any point in time may not be representative of sales in any future period.
 
Our business and operations would suffer in the event of system failures.
 
Despite the implementation of security measures, redundancy and backup our internal information technology networking systems are vulnerable to damages from computer viruses, unauthorized access, energy blackouts, natural disasters, terrorism, war and telecommunication failures. Additionally, from time to time, we install new or upgraded business management systems. To the extent such systems fail or are not properly implemented, we may experience material disruption to our business including our ability to report operating results on a timely basis.
 
Changes in financial accounting standards related to stock option expenses are expected to have a significant adverse effect on our reported results.
 
The Financial Accounting Standards Board (FASB) recently issued a revised standard that requires that we record compensation expense in our statement of operations for employee stock options using the fair value method. The adoption of the new standard is expected to have a significant adverse effect on our reported earnings, although it will not affect our cash flows, and may adversely impact our ability in the future to provide accurate guidance on future financial results due to the variability of the factors used to establish the value of stock options.
 
Future changes in financial accounting standards or practices may cause adverse unexpected revenue or expense fluctuations and affect our reported results of operations.
 
A change in accounting standards or practices can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. New accounting
 
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pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct business.
 
Compliance with changing regulation of corporate governance and public disclosure may result in additional expenses.
 
Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and NASDAQ National Market rules, are creating significant additional expenses and uncertainty for public companies. We are committed to maintaining high standards of corporate governance and public disclosure. As a result, our efforts to comply with evolving laws, regulations and standards have resulted in, and are likely to continue to result in, significantly increased general and administrative expenses and diversion of management time to such compliance activities. Our recent efforts to comply with section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations have required a significant effort of the company and its available resources, and resulted in significant cost to us.
 
Anti-takeover provisions in our certificate of incorporation and bylaws could prevent certain transactions and could make a takeover more difficult.
 
Some provisions in our certificate of incorporation and bylaws could make it more difficult for a third party to acquire control of Maxwell, even if such change in control would be beneficial to our stockholders. We have a staggered board of directors, which means that our directors are divided into three classes. The directors in each class are elected to serve three-year terms. Since the three-year terms of each class overlap the terms of the other classes of directors, the entire board of directors cannot be replaced in any one year. Furthermore, our certificate of incorporation contains a “fair price provision” which may require a potential acquirer to obtain the consent of our board to any business combination involving Maxwell.
 
We have adopted a program under which our stockholders have rights to purchase our stock directly from us at a below-market price if a company or person attempts to buy us without negotiating with the board. This program is intended to encourage a buyer to negotiate with us, but may have the effect of discouraging offers from possible buyers.
 
The provisions of our certificate of incorporation and bylaws could delay, deter or prevent a merger, tender offer, or other business combination or change in control involving us that some, or a majority, of our stockholders might consider to be in their best interests. This includes offers or attempted takeovers that could result in our stockholders receiving a premium over the market price for their shares of our common stock.
 
Our common stock experiences limited trading volume and our stock price has been volatile.
 
Our common stock is traded on the NASDAQ National Market. The trading volume of our common stock each day is relatively low. This means that sales or purchases of relatively small blocks of stock can have a significant impact on the price at which our stock is traded. We believe that factors such as quarterly fluctuations in financial results, announcements of new technologies impacting our products, announcements by competitors or changes in securities analysts’ recommendations could cause the price of our stock to fluctuate substantially. These fluctuations, as well as general economic conditions such as recessions or higher interest rates, may adversely affect the market price of our common stock.
 
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AVAILABLE INFORMATION
 
We file or furnish annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission, or SEC. Our SEC filings are available free of charge to the public over the Internet at the SEC’s website at http://www.sec.gov . Our SEC filings are also available free of charge on our website at http://www.maxwell.com as soon as reasonably practicable following the time that they are filed with or furnished to the SEC. You may also read and copy any document we file with or furnish to the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
 
 Item 2. Properties
 
We have ongoing operations in San Diego, California and Rossens, Switzerland. In San Diego, we currently lease approximately 45,000 square feet of administrative, research and development, manufacturing and sales space. The San Diego lease expires in July 2007. In Rossens, we currently lease approximately 68,620 square feet of manufacturing, sales and administrative space. The Rossens lease expires in June 2009.
 
 Item 3. Legal Proceedings
 
Our subsidiary I-Bus/Phoenix, Inc. has been named as a defendant in a suit filed on March 4, 2004 in the Superior Court of the State of California for the County of San Luis Obispo. This suit, Edmonds vs. I-Bus/Phoenix, Inc. , was filed by the plaintiff on his behalf and alleges damages concerning the repurchase of I-Bus/Phoenix, Inc. shares. While the Company’s legal counsel cannot express an opinion on this matter, management believes that any liability of the Company that may arise out of or with respect to this matter will have no significant adverse effect on the financial position, results of operations or cash flows of the Company. 
 
 Item 4. Submission of Matters to a Vote of Security Holders
 
No matters were submitted to stockholders during the fourth quarter of 2004.
 
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PART II
 
 Item 5.	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	
 
Our common stock has been quoted on the Nasdaq National Market under the symbol “MXWL” since 1983. The following table sets forth the high and low sale prices per share of our common stock as reported on the Nasdaq National Market for the periods indicated.

 	  	High
	  	Low
	
Year Ended December 31, 2004	  	 	 	  	 	 	
First Quarter	  	$	14.74	  	$	7.01	
Second Quarter	  	 	17.64	  	 	12.25	
Third Quarter	  	 	13.25	  	 	8.10	
Fourth Quarter	  	 	11.60	  	 	8.95	
Year Ended December 31, 2003	  	 	 	  	 	 	
First Quarter	  	 	7.00	  	 	5.76	
Second Quarter	  	 	6.90	  	 	5.30	
Third Quarter	  	 	9.56	  	 	5.93	
Fourth Quarter	  	 	9.40	  	 	6.70	
 
As of March 9, 2005, there were 477 holders of record of our common stock. We believe that the number of beneficial owners of our common stock substantially exceeds this number.
 
Dividend Policy
 
We have never declared or paid cash dividends on our capital stock. We currently anticipate that any earnings will be retained for the development and expansion of our business and, therefore, we do not anticipate paying cash dividends on our capital stock in the foreseeable future. In addition, under our bank credit agreements, neither we nor any of our subsidiaries may, directly or indirectly, pay any cash dividends to our stockholders.
 
Recent Sales of Unregistered Securities
 
None.
 
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 Item 6. Selected Financial Data
 
The selected consolidated financial data presented below are for each fiscal year in the five-year period ended December 31, 2004. This data is derived from the Company’s audited consolidated financial statements. During the year ended December 31, 2004, we completed the discontinuance of our Winding Equipment business segment, which we acquired in 2002. Therefore, the financial statements for fiscal 2004, 2003 and 2002 include the reclassification of the Winding Equipment business to discontinued operations.
 
The financial information for the year ended December 31, 2002 has been restated for the impact of adjustments discussed in Note 1 of the consolidated financial statements.

 	  	Years Ended December 31,
	 	
 	  	2004
	 	 	2003
	 	 	2002
	 	 	2001
	 	 	2000
	 	
 	  	(In thousands, except per share data)	 	
Consolidated Statement of Operations Data:	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Continuing Operations:	  	 	 	 	 	 	 	 	 	 	(Restated)	 	 	 	 	 	 	 	 	 	
Total revenue	  	$	32,212	 	 	$	35,166	 	 	$	54,394	 	 	$	77,856	 	 	$	102,347	 	
						
Loss from continuing operations	  	$	(9,808	)	 	$	(6,212	)	 	$	(37,140	)	 	$	(8,221	)	 	$	(16,291	)	
Income (loss) from discontinued operations, net of tax	  	 	733	 	 	 	(961	)	 	 	(4,937	)	 	 	(4,696	)	 	 	(26	)	
Cumulative effect of accounting change, net of tax	  	 	—  	 	 	 	878	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	
 	  				 				 				 				 				
Net loss	  	$	(9,075	)	 	$	(6,295	)	 	$	(42,077	)	 	$	(12,917	)	 	$	(16,317	)	
 	  				 				 				 				 				
Basic Net Loss Per Share:	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loss from continuing operations	  	$	(0.67	)	 	$	(0.44	)	 	$	(3.03	)	 	$	(0.82	)	 	$	(1.66	)	
Income (loss) from discontinued operations, net of tax	  	 	0.05	 	 	 	(0.07	)	 	 	(0.40	)	 	 	(0.47	)	 	 	—  	 	
Cumulative effect of accounting change, net of tax	  	 	—  	 	 	 	0.06	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	
 	  				 				 				 				 				
Net loss per share	  	$	(0.62	)	 	$	(0.45	)	 	$	(3.43	)	 	$	(1.29	)	 	$	(1.66	)	
 	  				 				 				 				 				
Diluted Net Loss Per Share:	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loss from continuing operations	  	$	(0.67	)	 	$	(0.44	)	 	$	(3.03	)	 	$	(0.82	)	 	$	(1.66	)	
Income (loss) from discontinued operations, net of tax	  	 	0.05	 	 	 	(0.07	)	 	 	(0.40	)	 	 	(0.47	)	 	 	(0.01	)	
Cumulative effect of accounting change, net of tax	  	 	—  	 	 	 	0.06	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	
 	  				 				 				 				 				
Net loss per share	  	$	(0.62	)	 	$	(0.45	)	 	$	(3.43	)	 	$	(1.29	)	 	$	(1.67	)	

																
 	  	As of December 31,
	
 	  	2004
	  	2003
	  	2002
	  	2001
	  	2000
	
Consolidated Balance Sheet Data:	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	
Total assets	  	$	67,726	  	$	63,013	  	$	71,380	  	$	85,704	  	$	122,109	
Cash, cash equivalents and short-term investments in marketable securities	  	$	12,795	  	$	11,307	  	$	11,091	  	$	25,559	  	$	2,686	
Short-term borrowings and current portion of long-term debt	  	$	1,970	  	$	1,851	  	$	570	  	$	—  	  	$	22,754	
Long-term debt excluding current portion	  	$	813	  	$	—  	  	$	2,675	  	$	6,000	  	$	—  	
Stockholders’ equity	  	$	52,791	  	$	47,692	  	$	49,951	  	$	59,731	  	$	69,754	
Shares outstanding	  	 	15,695	  	 	14,339	  	 	13,726	  	 	10,168	  	 	9,877	
 
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 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion of our financial condition and results of operations for the years ended December 31, 2004, 2003 and 2002 should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this Annual Report. In addition, the discussion and the historical information contain forward-looking statements that are subject to risks and uncertainties, including estimates based on our judgment in determining the allowance for inventory reserves, bad debt allowance, allowance for deferred tax assets and tax expenses in the future. Our estimation of liquidity for fiscal year 2005 may be significantly different than our actual results. Negative changes in revenues will affect our estimation in cost of sales, research and development, selling, general and administrative and other aspects of our business.
 
Executive Summary
 
We begin Management’s Discussion and Analysis of Financial Condition and Results of Operations with an overview of our business and strategic plan. Subsequently, we provide a summary of some of the highlights from the recently completed fiscal year, followed by a discussion of the different aspects of our business. We then proceed, on page 32, to discuss our results of operations for the year ended December 31, 2004 compared with the year ended December 31, 2003, and for the year ended December 31, 2003 compared with the year ended December 31, 2002. Thereafter, beginning on page 39, we provide an analysis of changes in our balance sheet and cash flows, and discuss our capital requirements and financing activities in the section entitled “Liquidity and Capital Resources.” Beginning on page 41, we discuss our critical accounting policies, the impact of inflation on our business and new accounting pronouncements.
 
Overview
 
Maxwell Technologies, Inc. is a Delaware corporation originally incorporated in 1965 under the name “Maxwell Laboratories, Inc.” In 1996, we changed our name to Maxwell Technologies, Inc. Presently headquartered in San Diego, California, we are a developer and manufacturer of innovative, cost-effective energy storage and power delivery solutions.
 
Maxwell operates as one business segment called High Reliability, which has two manufacturing locations (San Diego, California and Rossens, Switzerland) and is comprised of three product lines:
 
 	•	 	Ultracapacitors: Our primary product, ultracapacitors, includes our BOOSTCAP ® ultracapacitor cells and multi-cell modules and POWERCACHE ® backup power systems, which provide highly reliable power solutions for applications in consumer and industrial electronics, transportation and telecommunications.	
 
 	•	 	High-Voltage Capacitors: Our CONDIS ® high-voltage grading and coupling capacitors are used in electric utility infrastructure and other applications involving transport, distribution and measurement of high-voltage electrical energy.	
 
 	•	 	Radiation-Mitigated Microelectronic Products: Our radiation-mitigated microelectronic products include power modules, memory modules and single-board computers for applications in the space and satellite industries.	
 
We aim to design and manufacture our products to perform reliably for the life of the products and systems into which they are integrated. We seek to achieve high reliability through the application of proprietary technologies and rigorously controlled design, development, manufacturing and test processes. This high reliability strategy emphasizes the development and marketing of products that enable us to achieve higher profit margins than commodity electronic components and systems.
 
During the year ended December 31, 2004, we completed the discontinuance of our Winding Equipment product line segment, which was sold in December 2003, with the shipment of the final product order that we were obligated to fulfill. Therefore, the financial statements for fiscal 2004, 2003 and 2002 include the reclassification of the Winding Equipment product line segment to discontinued operations.
 
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2004 Highlights
 
We reported a net loss for fiscal 2004 of $9.1 million, or $0.62 per diluted share, versus a net loss of $6.3 million, or $0.45 per diluted share for fiscal 2003. The increased loss was primarily a result of the discontinuation of ultracapacitor sales for digital camera-based product applications, reserves recorded against our small-cell BOOSTCAP ® inventories and for ultracapacitor orders received that were priced below our production cost, costs incurred related to our compliance activities pursuant to section 404 of the Sarbanes-Oxley Act of 2002 and various non-recurring gains of approximately $4.8 million recorded in 2003.
 
During fiscal 2004, we continued to focus on developing strategic alliances, introducing new products, and reducing product costs and operating expenses. Some of these efforts are described below:
 
 	•	 	We continued our efforts to commercialize our proprietary BOOSTCAP ® ultracapacitors in China through our manufacturing and marketing alliance with Yeong Long Technologies, Co., Ltd. (“YEC”), and we placed our first order for 5- and 10-farad cells for delivery in 2004 with YEC. This manufacturing alliance will provide Maxwell with an additional low cost supply of ultracapacitors and help position us as a global supplier of ultracapacitors.	
 
 	•	 	We introduced our new BCAP-350- D Cell BOOSTCAP ® ultracapacitor, the first in a series of new ultracapacitors to be standardized on battery-sizing to drive down costs and ease the integration of the technology. By standardizing ultracapacitors, Maxwell is reducing its manufacturing costs and passing savings directly to OEMs, as well as reducing time-to-market by supplying known form factors for seamless, rapid product integration.	
 
 	•	 	We were selected to supply BOOSTCAP ® ultracapacitors for hybrid gasoline-electric transit buses being built for a California Transit facility. This production-level order resulted from the strategic alliance formed with ISE Corporation in 2002.	
 
 	•	 	We entered into a strategic alliance with Hydrogenics Corporation to collaborate on integrating Maxwell’s BOOSTCAP ® ultracapacitors into Hydrogenics’ fuel cell power systems. The alliance consists of a joint development program designed to accelerate ultracapacitor and fuel cell integration.	
 
 	•	 	Our BOOSTCAP ® ultracapacitor production facility in Rossens, Switzerland was certified to the rigorous, auto industry-specific International Organization for Standardization (ISO) TS 16949 standard, confirming the Company’s competence as an automotive supplier and commitment to organizational excellence. This achievement is an important milestone in the Company’s goal of becoming a preferred ultracapacitor supplier for high-volume automotive applications.	
 
 	•	 	We have entered into a multi-year strategic development and exclusive supply agreement with Tantalus Systems Corporation to accelerate deployment of advanced meter reading and data management systems in the North American electric utility market. Tantalus will utilize BOOSTCAP ® ultracapacitors to power wireless transmitters for its utility network products. The alliance highlights Maxwell’s product application diversity and will help position us to contribute to and profit from the advancing technology for electric, gas and water utility meters.	
 
 	•	 	We have entered into a multi-year strategic supply agreement with General Hydrogen Corporation to provide our BOOSTCAP ® ultracapacitors for use in fuel cell power systems for electric lift trucks and other applications. Fuel cell systems augmented by ultracapacitors have the potential to provide an efficient, lower maintenance alternative to conventional battery power for end-users.	
 
 	•	 	NASA’s Jet Propulsion Laboratory has independently verified the testing methodologies Maxwell uses to demonstrate the fault tolerance of our SCS750 super computer for space. Our product design uses a combination of proprietary packaging and radiation-mitigated architecture to match the fault tolerance of competing products that use radiation-hardened processors, thus providing an alternative that can potentially exceed the processing power of existing components.	
 
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 	•	 	Our new production line for our CONDIS ® High Tension capacitors was completed, and the first qualification runs have been successful. We expect this new factory concept to dramatically reduce our lead times and double our available output capacity.	
 
 	•	 	In July 2004, Maxwell received the Supplier of the Year award from Siemens Power Transmission & Distribution High Voltage Circuit Breakers Division. This marks the first time that the division’s insulation materials group has found one of their global suppliers to meet its stringent quality requirements. The award represents another milestone in Maxwell’s ongoing multi-disciplinary initiatives for organizational excellence.	
 
 	•	 	We added 21 additional form factors and configurations to our line of high-performance, radiation-hardened, Synchronous Dynamic Random Access Memory (SDRAM) components for space applications, dramatically increasing the options for aerospace engineers requiring higher density memory to keep up with the escalating computing demands of space applications.	
 
 	•	 	We were selected to supply BOOSTCAP ® ultracapacitors for 17 fuel-efficient, low emission, hybrid gasoline-electric drive trains that ISE Corporation is building for buses purchased by the City of Elk Grove, California transit agency. This is the second production-level transit bus order that ISE has won in 2004, and the selection of Maxwell’s BOOSTCAP ® product reflects ultracapacitors’ growing acceptance as a standard energy storage and power delivery solution for the transportation industry.	
 
 	•	 	We delivered two prototype SCS750 single board computers to Planning Systems Inc. (PSI) for evaluation as a fault-tolerant computing platform in systems that PSI is developing for the Air Force Research Laboratory’s Deployable Structures Experiment (DSX) space science mission. The SCS750, which employs proprietary component shielding technology and novel system-level architecture to mitigate radiation effects, has demonstrated error-free performance in extensive testing that simulates environmental radiation encountered in space. DSX is one of several space programs for which the SCS750 is being evaluated.	
 
 	•	 	We introduced two POWERCACHE ® ultracapacitor-based backup power modules that provide a maintenance-free, space-saving alternative to batteries for short-term “bridge” power in uninterruptible power supply (UPS) systems for telecommunications, industrial and medical applications. The modules allow mission-critical facilities who rely on UPS systems, such as wireless telecommunications base stations, data centers, automated factories and hospitals, to avoid downtime in the event of power interruptions.	
 
 	•	 	We entered into a strategic supply agreement with Enercon GmbH, a leading producer of wind turbines, through which Enercon will source ultracapacitors exclusively from Maxwell. Enercon’s turbines employ an independent braking and pitch adjustment mechanism for each blade, with backup power to ensure continuous operation in the event of a power failure.	
 
 	•	 	We delivered our first new CVT/CVD product to a well-known European high voltage instrumentation company during the first quarter of 2004.	
 
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RESULTS OF OPERATIONS
 
Year Ended December 31, 2004 Compared with Year Ended December 31, 2003
 
Revenue
 
Revenue for the year ended December 31, 2004 was $32.2 million, compared with $35.2 million for the year ended December 31, 2003. This represents a decrease of $3.0 million, or 8%, from the prior year. In the first quarter of 2004, we recorded the final $1.0 million payment in license fees received from Yeong-Long Technologies, Inc. (“YEC”) in exchange for the right to manufacture our BOOSTCAP ®  ultracapacitors in China. The license fee payment is shown as a separate line item in our Consolidated Statements of Operations. Revenues for the year ended December 31, 2003 included $4.0 million in license fees received from YEC. High Reliability product revenues for both fiscal 2004 and 2003 were approximately $31.2 million.
 
Gross Profit
 
For 2004, gross profit was approximately $6.9 million, or 21% of revenue, compared with $6.6 million, or 19% of revenue, for the prior year. Product gross profit, excluding YEC license fees, was approximately $5.9 million, or 19% of product revenue, for 2004, compared with $2.6 million, or 8% of product revenue, for 2003. Product gross profit in 2004 has improved dramatically (approximately $3.3 million, or 126%) compared with the prior year due to our focus on core product lines, the phase-out of low-margin product lines and improved manufacturing efficiencies.
 
The improvement in product gross profit is partially offset by reserves recorded of approximately $500,000 in the first quarter of 2004, approximately $440,000 in the third quarter of 2004 and approximately $1.4 million in the fourth quarter of 2004 for ultracapacitor orders received that were priced below our production costs. The orders placed in the third and fourth quarters of 2004 were part of a larger supply agreement. Additional reserves may be required against future orders placed under this agreement or similar agreements depending on the degree to which we are able to reduce our product costs at the time the orders are placed. We also recorded reserves of approximately $450,000 in the third quarter and approximately $730,000 in the fourth quarter of 2004 for excess and obsolete  inventories.
 
Total Operating Expenses
 
Operating Expenses—2004 vs. 2003
(Dollars in Thousands)

 	  	2004
	 	 	Change
	  	2003
	 	
Research and development	  	$	5,528	 	 	(5)%	  	$	5,844	 	
Percentage of net revenues	  	 	17	%	 	0 Pts	  	 	17	%	
Selling, general and administrative	  	$	10,214	 	 	(11)%	  	$	11,433	 	
Percentage of net revenues	  	 	32	%	 	(1) Pt	  	 	33	%	
Intangible assets amortization	  	$	76	 	 	0%	  	$	76	 	
 
For the year ended December 31, 2004, operating expenses were $15.9 million compared with $12.9 million for the same period in 2003. This represents an increase of $3.0 million, or 23%. Operating expenses for 2004 were approximately 51% of product revenue compared with 41% of product revenue for 2003.
 
The 2003 operating expenses included gains of approximately $2.2 million for pension curtailment and settlement gains, $1.4 million on sale of property and equipment and $1.2 million on sales of businesses. Adjusted for these gains, actual operating expenses for fiscal 2003 were $17.7 million. 
 
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Selling, General & Administrative (SG&A) Expense
 
SG&A expenses were $10.2 million for 2004, compared with $11.4 million for 2003. This represents a decrease of $1.2 million, or 11%. SG&A expenses were 32% and 33% of revenue for 2004 and 2003, respectively. During 2003, we recorded approximately $800,000 in charges related to reserves against loans made to a former subsidiary and accruals for severance to the former Chairman of the Company. Reductions in the labor force in the fourth quarter of 2003 also contributed to the overall decrease in 2004. The savings resulting from the reductions in labor force were partially offset by increased costs of approximately $1.0 million associated with our Sarbanes-Oxley compliance activities.
 
Research & Development (R&D) Expense
 
R&D expenses were $5.5 million for 2004 compared with $5.8 million for 2003. This represents a decrease of approximately $300,000, or 5%. R&D expense was 17% of revenue for both 2004 and 2003. Our R&D expenses will vary slightly from year to year due to non-headcount expenses relating to materials and outside services. Our R&D efforts are mostly focused on our single-board computer and ultracapacitor electrode and packaging technologies.
 
Loss From Continuing Operations Before Income Taxes
 
The loss from continuing operations before income taxes for 2004 increased to $9.1 million, or 28% of revenue, from $6.3 million, or 18%, of revenue for 2003. The loss from continuing operations before income taxes for 2003 excluding the impact of $4.8 million in gains discussed above in Total Operating Expenses would have been $11.1 million.
 
Provision (Benefit) For Income Taxes
 
For 2004, we recorded a $712,000 provision compared with a benefit of $96,000 during 2003. The provision booked in 2004 relates primarily to the change in tax rates applicable to the net deferred tax liabilities for our Swiss subsidiary. The Swiss subsidiary has a tax holiday which expires in 2005 and therefore existing tax liabilities will be realized at the higher non-tax holiday rate. The benefit recorded in 2003 relates to losses incurred in our Swiss subsidiary that we expect to offset against future taxable income.
 
Discontinued Operations
 
In December 2003, Maxwell Technologies, SA (our Swiss subsidiary formerly known as Montena Components Ltd.) sold all of the fixed assets, substantially all inventory, and all warranty and employee agreement obligations of its Winding Equipment business, located in Matran, Switzerland, to Metar SA, a new company formed by the former CEO of Montena Components and a Metar employee. The business was sold for $324,000, and we recognized a loss on disposal, net of tax, of $529,000. The new Metar company completed during January through June 2004 certain work in progress related to customer orders received by Maxwell Technologies, SA before the date of sale. We concluded our continuing involvement in the Winding Equipment business in the second quarter of 2004 with the shipment of the final Metar product order that we were obligated to fulfill. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets, the results of operations related to the Winding Equipment business which was recorded as continuing operations through the first quarter of 2004 have been reclassified as discontinued operations for fiscal 2004, 2003 and 2002. The Winding Equipment product line included in discontinued operations had sales of $1.0 million and cost of sales of $205,000 during 2004, which are reflected in income from discontinued operations.
 
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Year Ended December 31, 2003 Compared with Year Ended December 31, 2002
 
Total Revenue
 
Total revenue for the year ended December 31, 2003 was $35.2 million including $4.0 million in license fees received from YEC in exchange for a right to manufacture our BOOSTCAP ® ultracapacitors in China. The license fee is a one-time event and is shown as a separate line item in our Consolidated Statements of Operations. Product revenue (which excludes the YEC licensee fee) for the year ended December 31, 2003 was $31.2 million compared with $54.4 million for the year ended December 31, 2002, which was a reduction of approximately $23.2 million, or 43%. The reduction was attributed mainly to our I-Bus Computing Systems business, which was sold in the third quarter of 2002 and, therefore, did not generate any revenue for the year ended December 31, 2003. Increases in revenue from our flagship product, BOOSTCAP ® ultracapacitors, was offset by a reduction in revenue from microelectronic products.
 
High Reliability
 
For the year ended December 31, 2003, revenue from our High Reliability business segment was $35.2 million compared with $40.1 million for the year ended December 31, 2002. This represents a decrease of approximately $4.9 million, or 12%. Most of the decrease in revenue was from reduced sales of radiation-mitigated microelectronics products due to the downturn in the telecommunication industry and from the power systems products, as we phased-out our low-margin transformer business.
 
Winding Equipment
 
For the year ended December 31, 2003, revenue from our Winding Equipment product line segment was $9.9 million compared with $3.6 million for the year ended December 31, 2002. This represents an increase of approximately $6.3 million, or 176%. For the year ended December 31, 2002, revenue from this segment only covers the six-month period from our acquisition of Montena in July 2002 through year end December 31, 2002. We determined that our Winding Equipment business segment was not adding value to the Company in terms of margin contribution, technological advances, improvement in market share or contributing to improvements in economies of scale. The Winding Equipment segment, which was sold in December 2003, and which was recorded as continuing operations through the first quarter fiscal year 2004, has now been reclassified as discontinued operations.
 
I-Bus Computing Systems
 
Our I-Bus Computing Systems business was sold in September 2002 and did not generate any revenue in the year ended December 31, 2003. For the year ended December 31, 2002, revenue from our I-Bus Computing Systems business was approximately $11.0 million.
 
TeknaSeal
 
For the year ended December 31, 2002, revenue from the TeknaSeal glass-to-metal seals business was $3.3 million. The TeknaSeal glass-to-metal seals business was sold in September 2002. No revenue was generated for the year ended December 31, 2003.
 
Cost of Sales
 
For the year ended December 31, 2003, our cost of sales was $28.6 million compared with $48.0 million for the year ended December 31, 2002. This represents a decrease of $19.5 million, or 41%. This decrease was attributable primarily to our disposition and phase-out activities in 2002.
 
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Total Operating Expenses
 
Operating Expenses—2003 vs. 2002
(Dollars in Thousands)

 	  	2003
	 	 	Change
	  	2002
	 	
Research and development	  	$	5,844	 	 	(30)%	  	$	8,360	 	
Percentage of net revenues	  	 	17	%	 	2 Pts	  	 	15	%	
Selling, general and administrative	  	$	11,433	 	 	(35)%	  	$	17,555	 	
Percentage of net revenues	  	 	33	%	 	1 Pt	  	 	32	%	
Intangible assets amortization	  	$	76	 	 	(84)%	  	$	483	(1)	

(1)	$464,000 was attributable to the backlog acquired with the purchase of Montena, which was completely amortized in 2002.	
 
Selling, General & Administrative (SG&A) Expense
 
SG&A expense for the year ended December 31, 2003 was $11.4 million compared with $17.6 million for the year ended December 31, 2002. The decrease of approximately $6.1 million, or 35%, was primarily due to a reduction in personnel and overhead as a result of our disposition and phase-out activities during 2002 and 2003. SG&A expense was approximately 33% and 32% of revenue for the years ended December 31, 2003 and 2002, respectively.
 
Research & Development (R&D) Expense
 
R&D expense for the year ended December 31, 2003 was $5.8 million compared with $8.4 million for the year ended December 31, 2002. The decrease of approximately $2.5 million, or 30%, was partly due to our decision to streamline product lines and focus on our core High Reliability business segment products. R&D as a percent of sales was 17% and 15% for the years ended December 31, 2003 and 2002, respectively.
 
Loss From Continuing Operations Before Income Taxes
 
Loss from continuing operations before income taxes for the year ended December 31, 2003 was $6.3 million compared with $37.3 million for the year ended December 31, 2002, an improvement of $30.9 million, or 83%. The decrease in losses was primarily attributable to the disposition and phase-out of operations, which were unprofitable. The loss from continuing operations for the year ended December 31, 2003 includes $695,000 in income from the sale of our TeknaSeal glass-to-metal seals business, which is reflected in “(Gain) loss on sale of businesses” in 2003.
 
Loss from continuing operations before income taxes for the year ended December 31, 2003 includes a pension curtailment and settlement gain of $2.2 million. Under Swiss law, the pension plan for our Swiss employees must be managed by an entity that is legally separate from the Company. However, according to SFAS No. 87, we are required to recognize the gain or loss of the pension fund on our balance sheet and income statement. Regardless of the fact that the pension plan is over funded, we are obligated to continue contributing to it at a rate mandated by Swiss law. As a result, the defined benefit accounting treatment may create a distorted picture of our balance sheet and financial results for the year ended December 31, 2003 and in future periods. Loss from continuing operations before income taxes without the pension benefit would have been $8.5 million.
 
Benefit For Income Taxes
 
Our tax benefit for the year ended December 31, 2003 was $96,000 compared with $114,000 for the year ended December 31, 2002, a reduction of $18,000, or 16%. The benefit consists primarily of foreign income tax benefit recorded by our subsidiary, Maxwell Technologies SA. The valuation allowance increased in the year
 
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ended December 31, 2003 by $3.2 million from the prior year and we had net deferred tax assets before our valuation allowance of approximately $34.2 million at December 31, 2003.
 
Acquisitions, Restructuring, Divestitures, Discontinued Operations and Other Events
 
Acquisitions
 
In July 2002, we acquired Montena Components Ltd., a provider of ultracapacitors and high-voltage capacitors to OEM customers and automated winding equipment used to produce capacitors and lithium batteries, for approximately $3.0 million in cash and 2.25 million shares of Maxwell common stock. This acquisition brought us an additional high reliability power business focused on ultracapacitors and high-voltage capacitors and additional design and production capabilities that enhanced our profile as a reliable, global supplier. (See “—Discontinued Operations” below for a discussion of our disposition of the Winding Equipment business, which we acquired through our acquisition of Montena.)
 
Restructuring
 
Restructuring charges were $1.6 million for the year ended December 31, 2002. In 2002, the restructuring charges were primarily attributable to restructuring of our I-Bus/Phoenix, Inc. business and our actions to position that business for sale. In the first half of 2002, I-Bus/Phoenix introduced new applied computing products that had been developed in 2001. However, the market for applied computing products, particularly in telecommunications, deteriorated throughout 2002. We responded to the poor market conditions for computing systems and other capital goods by restructuring I-Bus/Phoenix. In June 2002, we began implementing the restructuring plan and recorded restructuring charges of $700,000. In addition, we also determined that certain components in inventory had been adversely impacted. Accordingly, we recorded an inventory charge of approximately $3.0 million for certain excess and obsolete raw material components and finished goods. This charge was included in cost of sales. During the third quarter of 2002, we decided to sell the applied computing business of I-Bus/Phoenix to a new company organized by former I-Bus/Phoenix senior managers. In preparation for the sale and to configure the I-Bus/Phoenix computing business to be self-supporting, I-Bus/Phoenix consolidated all production of the applied computing products in its facility in Tangmere, United Kingdom, and reduced personnel worldwide. As a result of these actions, we recorded additional restructuring charges of $900,000 during the quarter ended September 30, 2002. The unpaid restructuring balance of $400,000 at December 31, 2002 was paid in 2003.
 
Divestitures
 
In December 2003, we sold our former I-Bus manufacturing and administrative facility in San Diego. The facility was previously classified as Assets Held for Sale at its book value of $7.4 million. Proceeds from the sale of the facility were $9.0 million, resulting in a gain of $1.2 million after payment of a loan balance with Comerica Bank and closing costs of $387,000, which was recorded in gain on sale of property and equipment.
 
In June 2003, we decided to discontinue marketing and supporting our electronic components tester business and recorded charges in cost of sales of $444,000 primarily attributable to excess inventory and equipment, $393,000 primarily attributable to warranty buy-outs, and $259,000 primarily attributable to expected future warranty returns in the quarters ended June 30, 2003, September 30, 2003 and December 31, 2003, respectively. Sales for our electronic components tester business were immaterial in all periods presented.
 
In September 2002, we sold the I-Bus/Phoenix, Inc. business for $7.0 million in debt and certain other considerations. We also incurred $7.6 million in charges related to goodwill impairment and other asset write- downs related to that business. The loss on the disposition totaled $7.0 million as we fully reserved for the note due to risks of collectability. During 2003, we received final settlement payments of $475,000 from the new I- Bus Corporation, which was a partial recovery of the $7.0 million note. The recovery is reflected in “(Gain)/loss on sale of businesses” in the consolidated statements of operations.
 
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In September 2002, we also sold our non-core TeknaSeal glass-to-metal seals business for $5.5 million in cash, of which $1.0 million was held in an escrow account and subsequently released to us over the succeeding four calendar quarters. Approximately $400,000 of the $5.5 million proceeds was paid to certain former employees of TeknaSeal. We recorded a net gain of $200,000 in the fourth quarter of 2002 and recorded additional gains of $695,000 for the year ended December 31, 2003.
 
Discontinued Operations
 
In December 2003, Maxwell Technologies SA (our Swiss subsidiary formerly known as Montena Components Ltd.) sold all of the fixed assets, substantially all inventory, and all warranty and employee agreement obligations of its Winding Equipment business, located in Matran, Switzerland, to Metar SA, a new company formed by the former CEO of Montena Components and a Metar employee. The business was sold for $324,000, and we recognized a loss on disposal, net of tax, of $529,000. The new Metar company completed during January through June 2004 certain work in progress related to customer orders received by Maxwell Technologies, SA before the date of sale. We concluded our continuing involvement in the Winding Equipment business in the second quarter of 2004 with the shipment of the final Metar product order that we were obligated to fulfill. In accordance with SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets, the results of operations related to the Winding Equipment business which was recorded as continuing operations through the first quarter of 2004 have been reclassified as discontinued operations for fiscal 2004, 2003 and 2002. The Winding Equipment business included in discontinued operations had sales of $1.0 million and cost of sales of $205,000 during 2004, which are reflected in income from discontinued operations.
 
In September 2002, PurePulse suspended operations and we recorded non-cash charges of approximately $1.7 million and cash charges of approximately $0.5 million for severance and other charges. PurePulse had been designing and developing systems that generate extremely intense, broad-spectrum, pulsed light to purify water and inactivate viruses and other pathogens that contaminate vaccines and products sourced from human or animal tissues, such as plasma derivatives, transfusion blood components and biopharmaceuticals. Although PurePulse raised $5 million of equity capital from Millipore and Maxwell in March 2002, the venture capital and other equity markets deteriorated after that time and PurePulse was not able to raise additional capital to fund its operations.
 
In March 2001, we sold our Government Systems business for $20.7 million and recorded a gain of $1.1 million, net of a $2.7 million provision mainly related to ongoing lease obligations. As of December 31, 2004 and 2003, the remaining lease obligation, which expires in April 2006, is $650,000 with a reserve provision of $608,000, and $1.1 million with a reserve provision of $600,000, respectively.
 
Other Events
 
In 2004 and 2003, we made an assessment of the Company’s goodwill and intangible assets and determined that there was no impairment. Accordingly, no goodwill impairments were recognized for the years ended December 31, 2004 and 2003. Goodwill impairments were $5.3 million for the year ended December 31, 2002.
 
Amortization of other intangibles was $76,000, $76,000 and $483,000 for the years ended December 31, 2004, 2003 and 2002, respectively, and relates to the amortization of developed core technology and customer backlog acquired in conjunction with the acquisition of Montena and the amortization of ultracapacitor intellectual property that was recorded in conjunction with the merger of the Electronic Components Group, a majority-owned subsidiary, into Maxwell after the purchase of all shares not already owned by us.
 
Interest income, net was $46,000, $13,000 and $42,000 for the years ended December 31, 2004, 2003 and 2002, respectively. We used proceeds from the sales of businesses and assets in 2002 to pay down debt and the excess was invested in high quality short-term marketable investments.
 
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An investment impairment of $500,000 was recorded in 2001 related to Maxwell’s ownership of approximately 1% of a privately-held company involved in support services in the areas of information technology, system and software integration and engineering and technical services under contract with various government agencies. Upon review of its annual financial statements and discussions with its chief financial officer, we were informed that the company had a negative net worth and had decided to restructure its operations to discontinue its information technology and software integration and engineering businesses and focus only on government contracting. Based on these facts and the uncertainty surrounding its ability to return to profitability, we concluded that the investment was impaired and we fully reserved for the investment. We received $209,000 from the sale of the privately held company of which $26,000 had previously been recorded by us as investment. In 2003, we recovered $183,000 of the $500,000 recorded as impaired in 2001 and reflected the recovery as a (gain) loss on sale of business.
 
Minority interest in income of consolidated subsidiaries was $200,000 for the year ended December 31, 2002. During 2002, we acquired all of the outstanding minority interests, including stock options, of our majority-owned subsidiaries, except for PurePulse (see “—Discontinued Operations” above), in exchange for shares and options in Maxwell.
 
Fixed asset impairments were $2.3 million for the year ended December 31, 2002. Impairment charges recorded in 2002 were related to fixed assets associated with the I-Bus Computing Systems business that were abandoned, and computers and computer systems infrastructure directly related to supporting the I-Bus/Phoenix business. The impairment also included fixed assets associated with transformer and harness production for the I-Bus/Phoenix power systems group. Production of transformers and harnesses subsequently was outsourced.
 
Restatement of Consolidated Financial Statements for the year ended December 31, 2002
 
We have restated our consolidated financial statements to reflect adjustments to the Company’s Consolidated Financial Statements for the year ended December 31, 2002 as previously reported on Form 10-K. The adjustments giving rise to our need to restate the financial statements for the year ended December 31, 2002 relate to the stock-based compensation arising from our April 2002 repurchase of the remaining minority interests and merger of our I-Bus/Phoenix and Electronic Components Group subsidiaries.
 
In connection with these transactions, we exchanged all outstanding vested and unvested options to purchase shares of common stock of these subsidiaries for options to acquire shares of Maxwell. As a result and as more fully described in Note 7 to our consolidated financial statements, stock-based compensation expense totaling approximately $1.9 million was incurred in connection with the exchange of vested subsidiary stock options based on the difference between the fair market value of our common stock on the respective merger date and the exercise price of the modified stock option.
 
We assessed the impact of this error on our historical financial statements and concluded that we were required to restate our financial statements. As a result, the Company restated its Consolidated Financial Statements for the year ended December 31, 2002, the principal effect of which was to increase net loss by approximately $1.9 million. The correction had no impact on net stockholders’ equity or cash flows used in continuing operations.
 
Additional detail with respect to the impact of the restatement on our results of operations is reported in Note 1 to our Consolidated Financial Statements.
 
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Liquidity and Capital Resources
 
Changes in Cash Flow
 
For the year ended December 31, 2004, cash used in operating activities was $9.1 million compared with $4.3 million for the year ended December 31, 2003 and $8.9 million for the year ended December 31, 2002. The use of cash for the years ended December 31, 2004 and 2003 was primarily attributed to operating losses from continuing operations.
 
Capital expenditures for the years ended December 31, 2004, 2003 and 2002 were $3.0 million, $2.4 million and $1.8 million, respectively. In 2002, cash of $3.0 million was used in the Company’s third quarter as part of the purchase price for Montena. Capital expenditures for 2005 are expected to be approximately $3.7 million, which is approximately equal to our annual depreciation and amortization charges.
 
Our restructuring plan that started in 1999 was completed in early 2004, and we started realizing the benefit of our restructuring effort during 2004. All indicators such as productivity, lower production cost and new product introductions have increased. The reduction of overhead and increased productivity should continue to improve our gross margins and reduce our operating expenses as a percentage of revenues in 2005. In February 2004, we secured a $3.0 million line of credit from a U.S. bank, which was renewed in March 2005, that is available for working capital needs limited by the amount of eligible assets; the line has not been used to date. We also have a line of credit for approximately $1.8 million from a Swiss bank for working capital in Switzerland. The line was fully used as of December 31, 2004 and 2003. We also have approximately a $1.0 million term loan available from a Swiss bank for capital equipment purchases, all of which was used as of December 31, 2004. We had approximately $10.7 million in cash and cash equivalents and approximately $2.1 million in short-term investments at the end of December 2004. We have a shelf registration statement on Form S-3 on file with the Securities and Exchange Commission. We raised approximately $10.1 million in November 2004 from the sale of shares of common stock that were registered pursuant to the shelf registration statement. Approximately $5.5 million of the shelf registration statement remains available to us for raising capital. We believe the liquidity provided by the existing cash and cash equivalents and investments in marketable securities, borrowings available under our lines of credit and availability on Form S-3, will provide sufficient capital to fund our capital equipment and working capital requirements and potential operating losses for more than the next 12 months. Failure to achieve 2005 expected cash flows from operating activities or to obtain additional debt or equity investments, if necessary and if available, would have a material adverse effect on us.
 
Net accounts receivable increased to $6.9 million as of December 31, 2004 from $5.9 million at December 31, 2003. The primary reasons for the increase was due to longer credit terms to larger customers and slow payment from one large customer.
 
Net inventory balance increased to $8.1 million as of December 31, 2004 from $7.3 million as of December 2003. This increase is due to an increase in the Ultracapacitor business. Inventory reserves as of December 31, 2004, were $4.0 million compared with $3.2 million as of December 31, 2003.
 
Accounts payable and accrued liabilities as of December 31, 2004 were $7.3 million compared with $8.2 million as of December 31, 2003. The primary reason for the reduction was a decrease in SG&A expenses. Short-term borrowing, including the current portion of our term loan, increased to $2.0 million as of December 31, 2004 from $1.9 million as of December 31, 2003. Net liabilities of discontinued operations as of December 31, 2004 and 2003 was $1.0 million and $1.5 million, respectively.
 
Short-term and Long-term Borrowings
 
Short-term Borrowings
 
Maxwell’s European subsidiary, Maxwell Technologies SA, has a 2.0 million Swiss Franc, or approximately $1.8 million, bank credit agreement with a Swiss bank which renews annually. Borrowings under
 
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the credit agreement bear interest at LIBOR plus 1.75% with repayment terms extending beyond one month from the date of funding. The assets of Maxwell Technologies SA secure borrowings under the credit agreement. As of December 31, 2004, the full amount of the credit line was drawn. The interest rate on the funds borrowed at December 31, 2004 was 2.48%.
 
Approximately $334,000 of letters of guarantee were outstanding as of December 31, 2004 primarily related to customer deposits.
 
In February 2004, we secured a $3.0 million credit line from a U.S. bank for working capital purposes, subject to a one-year repayment period. In March 2005 the credit line was renewed on substantially the same terms as the prior credit line. The line has not been used to date. This line is secured by accounts receivable and assets of the Company and bears interest at the bank’s prime rate plus 1.75%, but subject to a minimum interest rate of 5.75%. The agreement requires us to maintain a minimum tangible net worth of $20.5 million plus 50% of any consideration from future equity and debt transactions plus 50% of net income in each fiscal quarter after the date of the agreement. At December 31, 2004, the Company was required to maintain 85% of their banking activities and investment balances with its bank which provides the credit line. At December 31, 2004 the Company had reduced its investment balance at its bank to less than 70% of the Company’s total investment value. On March 7, 2005 the credit line was amended to require that only 50% of the Company’s total investment balance be maintained at the bank. The Company is currently in compliance with all covenants and anticipates that it will be during the term of the credit line.
 
Long-term Borrowings
 
Maxwell Technologies SA has a term loan with a maximum draw of 1.15 million Swiss Francs, or approximately $1.0 million. The full amount of the term loan was outstanding as of December 31, 2004, of which $813,000 is classified as long-term debt. Borrowings under the term loan are secured by the equipment being purchased. This credit agreement bears interest at the Swiss inter-bank borrowing rate plus 2.0%. The term loan can be borrowed in quarterly advances up to the maximum limit and repaid over one to five years. The weighted average interest rate on the funds borrowed at December 31, 2004 was 3.76%.
 
Maxwell SA had a loan from the Montena SA pension plan for 300,000 Swiss Francs, or approximately $265,000, that was paid off during 2004.
 
Stock Sale
 
In November 2004, the Company raised approximately $10.1 million after deduction of expenses and fees through the sale of approximately 1.2 million shares of common stock to institutional investors. The Company sold the shares directly to the investors in a negotiated transaction in which no underwriters were used for placement. The shares had previously been registered under the Securities Act of 1933, as amended, pursuant to a shelf registration statement filed on Form S-3 with the Securities and Exchange Commission in September 2004. Approximately $5.5 million of securities are available for future issuance under this registration statement as of December 31, 2004.
 
Government Audits
 
The Company is the subject of government audits of two businesses sold or discontinued in 2001. A contract, not assumed by the acquirers of the Company’s former defense contract business, entered into in 1990 and completed in the late 1990s is currently being audited by the Defense Department’s auditing agency. The Company believes that such costs were properly charged.
 
The Internal Revenue Service (IRS) has assessed the Company with a penalty of approximately $262,000 for failure to file Form W-2s for a business sold in 2001. The acquiring company of our former business did write the IRS stating that they would be responsible for the filing of 2001 Form W-2s. The Company has submitted this documentation to the IRS.
 
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The Defense Department’s auditing service is auditing a contract entered into by our Microelectronics group as a subcontractor in 1995 and completed in 1999. The Company has requested a release of liability from the prime contractor. There is no assurance that such a release will be obtained or that the Company will not incur some liability.
 
While management does not anticipate an unfavorable settlement of these matters, unfavorable audit results for all or any combination of these audits would result in an adverse and potentially significant impact on the Company’s cash flow.
 
Minority Equity Interests in Subsidiaries and Subsidiary Option Programs
 
PurePulse, which suspended operations in 2002 and is classified as discontinued operations, has minority equity investors. These investors are former strategic partners; former employees who were issued shares when PurePulse originally was incorporated and former employees who have exercised stock options in that entity. As of December 31, 2004 and 2003, minority investors owned approximately 18% of the outstanding stock of PurePulse.
 
Contractual Obligations

 	  	Payment due by period (in thousands)
	
 	  	Total
	  	Less
than
1 Year
	  	1–3
Years
	  	3–5
Years
	  	More
than
5 Years
	
Operating Lease Obligations (1)	  	$	5,945	  	$	1,669	  	$	3,843	  	$	433	  	$	 —  	
Purchase Commitments (2)	  	 	1,753	  	 	1,753	  	 	—  	  	 	—  	  	 	 —  	
Debt Obligations (3)	  	 	2,783	  	 	1,970	  	 	610	  	 	203	  	 	 —  	
 	  			  			  			  			  			
Total	  	$	10,481	  	$	5,392	  	$	4,453	  	$	636	  	$	 —  	

(1)	Operating lease obligations represent building leases, for U.S. and Switzerland locations as well as vehicle leases for management personnel at our Switzerland facility.	
 
(2)	Purchase commitments primarily represent the value of non-cancelable purchase orders and an estimate of purchase orders that if cancelled would result in a significant penalty to the Company.	
 
(3)	Debt obligations represent long-term and short-term borrowings and current portion of long-term debt.	
 
Critical Accounting Policies
 
This discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which are prepared in accordance with accounting principles generally accepted in the United States of America, which we refer to as U.S. GAAP. We have used certain assumptions and judgments in the preparation of these financial statements, which assumptions and estimates may potentially affect the reported amounts of assets and liabilities and the disclosure of contingencies as well as reported amounts of revenues and expenses. The following may involve a higher degree of judgment and complexity and, as such, management assumptions and conclusions in these areas may significantly impact the results of operations of the Company.
 
Revenue Recognition
 
For the fiscal year ended December 31, 2004, substantially all of our revenue was derived from the sale of manufactured products directly to customers and licensing fees received for the right to manufacture our proprietary BOOSTCAP ® ultracapacitors. Product revenue is recognized at the time the product is shipped and title passes to the customer unless specific terms require otherwise. In general no discounts are offered and there
 
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is no right of return. License fee revenues are recognized when the performance requirements have been met, the fee is fixed or determinable, and collection of fees is probable. In prior years, certain continuing and discontinued segments involved revenues from both long-term and short-term fixed price contracts and cost plus contracts with the U.S. Government directly or through a prime contractor. Those revenues, including estimated profits, were recognized at the time the costs were incurred and included provisions for any anticipated losses. These contracts are subject to rate audits and other audits, which could result in the reduction of revenue in excess of estimated provisions. In turn, this could increase losses for the periods in which any such reduction occurs.
 
Production Costs
 
In anticipation of an increase in our production capacity, expected efficiencies from economies of scale, and a new production line expected to reduce future costs, we have accepted ultracapacitor orders that were priced below our current production costs. These orders are scheduled for shipments at various times through the third quarter of 2005. We have estimated production costs for each quarter of 2005 in order to determine the estimated loss to fulfill these commitments at December 31, 2004. These estimates include taking into account the installation, commencing in early 2005, of a new ultracapacitor production line in our facility located in Rossens, Switzerland. The new production line will create production efficiencies, thereby reducing production costs. Production efficiencies will be gained as each process of the line is implemented and as production volume increases. Actual production costs during 2005 may differ from our estimates of these efficiencies and could result in an adverse impact on our results of operations.
 
Accounts Receivable
 
We establish and maintain customer credit limits based on references, financial information, credit-worthiness and payment history. Accounts receivable consist primarily of amounts due to us from our normal business activities. We maintain an allowance for doubtful accounts to reflect anticipated bad debts based on past collection history and any specific risks identified in the portfolio. We determine our bad debt reserve based on an analysis we make to measure our reserve requirements and we establish specific reserves when we recognize the inability of our customer to pay its obligation. If we become aware of increasing negative changes in the financial condition of our customers, or if economic conditions change adversely, we may have to increase the allowance. An increase in such allowances would adversely impact our financial condition and results of operations.
 
Remaining Lease Obligation from Discontinued Operations
 
We have provided an estimate of the liability of PurePulse associated with a remaining lease obligation, which has been recorded in discontinued operations. In making this estimate, we considered factors such as the commercial real estate market, including our estimate as to how and when we will be able to sub-lease, terminate or buy out the remaining lease obligation. There can be no guarantee that we will be able to conclude this lease obligation for the amount that we have accrued, which could require additional charges.
 
Excess and Obsolete Inventory
 
We value inventories at the lower of cost or market. In assessing the ultimate realization of inventories, we make judgments as to future demand requirements and compare that with current and committed inventory levels. The markets for the Company’s products are extremely competitive and are characterized by rapid technological change, new product development, product obsolescence and evolving industry standards. In addition, price competition is intense and significant price erosion generally occurs over the life of a product. We have recorded significant charges for reserves in recent periods to reflect changes in market conditions. We believe that future events are subject to change and revisions in estimates may have a significant adverse impact on the balance sheet and statement of operations.
 
Long-Lived Assets and Other Intangible Assets
 
Long-lived assets such as property and equipment and other intangible assets are reviewed for impairment whenever events and changes in business circumstances indicate that the carrying value of the long-lived asset
 
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may not be recoverable in accordance with SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets.” The most significant assumptions in the analysis of impairment involve estimates of future undiscounted cash flows. We use cash flow assumptions that are consistent with our business plans and consider other relevant information. If we determine that the carrying value of the long-lived asset or asset group may not be recoverable, a permanent impairment charge is recorded for the amount by which the carrying value of the long-lived assets exceeds its fair market value. If there are changes in business circumstances or in the key assumptions used in estimating undiscounted cash flows, we may be required to recognize an impairment charge to reduce the carrying value of our long-lived assets.
 
Goodwill
 
We account for goodwill in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.” This standard requires that goodwill no longer be amortized but is subject to an annual impairment test and when an event occurs or circumstances change such that it is reasonably possible that an impairment may exist. The first step consists of estimating the fair value of each reporting unit and comparing those estimated fair values with the carrying values of the reporting units, which includes the allocated goodwill. If the fair value is less than the carrying value, a second step is performed to compute the amount of the impairment by determining an implied fair value of goodwill. The implied fair value of goodwill is the residual fair value derived by deducting the fair value of a reporting unit’s assets and liabilities from its estimated fair value, which was calculated in step one. The impairment charge represents the excess of the carrying amount of the reporting units’ goodwill over the implied fair value of their goodwill. We have determined the fair value of our reporting units based on a discounted cash flow model using revenue and profit forecasts.
 
In assessing the implied fair value of goodwill, we have made assumptions regarding estimates of future cash flows and other operating factors. The most significant assumptions in the analysis of impairment involve estimates of revenue and expense forecasts of the reporting unit. If there are changes in business circumstances or in the key assumptions used in estimating the fair value of the reporting unit, we may be required to recognize an impairment charge to reduce the carrying value of our goodwill. We cannot say with certainty that we may not incur charges for impairment of goodwill in the future if the fair value of Maxwell Technologies and Maxwell SA decrease due to market conditions, revisions in our assumptions or other unanticipated circumstances. Any additional impairment charges will adversely affect our results of operations.
 
Valuation Allowance for Deferred Tax Assets
 
A valuation allowance is provided for deferred tax assets if it is more likely than not that these items will either expire before we are able to realize their benefit, or that future deductibility is uncertain. In general, companies that have had a recent history of operating losses are faced with a difficult burden of proof as to their ability to generate sufficient future income in order to realize the benefit of the deferred tax assets. We determined that it was appropriate to record a valuation allowance as of December 31, 2004 against our deferred tax assets based on the recent history of losses to amounts that are expected to be more likely than not realizable. The deferred tax assets are still available for us to use in the future to offset taxable income, which would result in the recognition of a tax benefit and a reduction to the Company’s effective tax rate.
 
Impact of Inflation
 
We believe that inflation has not had a material impact on our results of operations for any of our fiscal years in the three-year period ended December 31, 2004. However, there can be no assurance that future inflation would not have an adverse impact on our operating results and financial condition.
 
New Accounting Pronouncements
 
In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004), Share-Based payment, or SFAS 123R, which is a revision of SFAS 123, Accounting for Stock-Based Compensation, or SFAS 123. SFAS 123R requires all share-based payments to employees, including grants of
 
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employee stock options, to be recognized in the financial statements based on their fair values and does not allow the previously permitted pro forma disclosure as an alternative to financial statement recognition. SFAS 123R supercedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, or APB 25, and related interpretations and amends SFAS No. 95, Statement of Cash Flows . SFAS 123R is scheduled to be effective beginning in the third quarter of fiscal 2005. SFAS 123R allows for either prospective recognition of compensation expense or retroactive recognition, which may date back to the original issuance of SFAS 123 or only to interim periods in the year of adoption. The Company is currently evaluating these transition methods.
 
The impact of adoption of SFAS 123R cannot be predicted at this time because that will depend on the method of adoption elected, the fair value and number of share-based payments granted in the future. However, had the Company adopted SFAS 123R in prior periods, the magnitude of the impact of that standard would have approximated the impact of SFAS 123 assuming the application of the Black-Scholes model as described in the disclosure of pro forma net loss and pro forma loss per share in Note 1 of the Notes to Consolidated Financial Statements. SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption.
 
In November 2004, the FASB issued SFAS No. 151, “Inventory Costs an amendment of ARB No. 43, Chapter 4,” requiring companies to treat idle facility costs, abnormal handling costs, freight and wasted materials as current period charges rather than as a portion of inventory costs. The effective date is annual periods beginning after June 15, 2005. The Company has evaluated SFAS 151 and management believes it will not have an impact on the Company’s results of operations or financial position.
 
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 
 
We face exposure to financial market risks, including adverse movements in foreign currency exchange rates and changes in interest rates. These exposures may change over time and could have a material adverse impact on our financial results. We have not entered into or invested in any instruments that are subject to market risk, except as follows:
 
Foreign Currency Risk
 
Our primary foreign currency exposure is related to our subsidiary in Switzerland. Maxwell Technologies SA has Euro and local currency (Swiss Franc) revenue and local currency operating expenses and loans. Changes in these currency exchange rates impact the U.S. dollar amount of revenue, expenses and debt. We do not hedge our currency exposures.
 
Interest Rate Risk
 
At December 31, 2004, we had approximately $2.8 million or 3.15 million Swiss Franc denominated-debt, of which $813,000 is classified as long-term debt. The carrying value of these borrowings approximates fair value due to the short maturity dates of these instruments. We do not anticipate significant interest rate swings in the near future; however, the exchange loss or gain may affect the consolidated balance sheet or the statement of operations. A 10% increase in the interest rate on our debt would not have a material effect on our related interest expense.
 
We invest excess cash in debt instruments of the U.S. Government and its agencies, high-quality corporate issuers and money market accounts. The primary objective of our investment activities is to preserve principal while maximizing yields without significantly increasing risk. Current policies do not allow the use of interest rate derivative instruments to manage exposure to interest rate changes. As of December 31, 2004, third parties manage approximately $8.0 million of the investment portfolio under guidelines approved by the Company’s Board of Directors. The balance of our cash is invested in money market accounts with banks. A 10% increase in the interest rate on our marketable securities would not have a material effect on our interest income.
 
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 Item 8. Financial Statements and Supplementary Data
 
Our consolidated financial statements and notes thereto appear on pages 45 to 78 of this Annual Report on Form 10-K.
 
MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 	  	Page
	
Report of Independent Registered Public Accounting Firm, McGladrey & Pullen, LLP	  	46	
		
Report of Independent Registered Public Accounting Firm, Deloitte & Touche LLP	  	47	
		
Report of Independent Registered Public Accounting Firm, Ernst & Young LLP	  	48	
		
Consolidated Balance Sheets as of December 31, 2004 and 2003	  	49	
		
Consolidated Statements of Operations for the Years Ended December 31, 2004, 2003 and 2002	  	50	
		
Consolidated Statements of Stockholders’ Equity and Comprehensive Loss for the Years Ended December 31, 2004, 2003 and 2002	  	51	
		
Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2003 and 2002	  	52	
		
Notes to Consolidated Financial Statements	  	53	
		
Financial Statement Schedule:	  	 	
		
Schedule II—Valuation and Qualifying Accounts	  	79	
 
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 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors
Maxwell Technologies, Inc.
San Diego, California
 
We have audited the consolidated balance sheet of Maxwell Technologies, Inc. as of December 31, 2004, and the related consolidated statements of operations, stockholders’ equity and comprehensive loss and cash flows for the year then ended. Our audit also included the 2004 financial statement schedule listed at Item 15. These financial statements and the schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Maxwell Technologies, Inc. as of December 31, 2004, and the results of its operations and its cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Maxwell Technologies, Inc.’s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Our report dated March 15, 2005 expressed an unqualified opinion on management’s assessment of the effectiveness of Maxwell Technologies, Inc.’s internal control over financial reporting and an opinion that Maxwell Technologies, Inc. had not maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
 
/s/    M C G LADREY & P ULLEN , LLP
 
San Diego, California
March 15, 2005
 
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 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
Board of Directors and Stockholders
Maxwell Technologies, Inc.
 
We have audited the accompanying consolidated balance sheet of Maxwell Technologies, Inc. and subsidiaries (the “Company”) as of December 31, 2003, and the related consolidated statements of operations, shareholders’ equity and comprehensive loss, and cash flows for the year then ended. Our audit also included the 2003 financial statement schedule listed at Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit.
 
We conducted our audit in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
 
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Maxwell Technologies, Inc. and subsidiaries as of December 31, 2003, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
 
As discussed in Note 1 to the consolidated financial statements, effective January 1, 2003, the Company changed its method of accounting for its Swiss pension plan to conform with Statement of Financial Accounting Standards No. 87, as amended.
 
/s/ DELOITTE & TOUCHE LLP
 
San Diego, California
March 29, 2004
 
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 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Stockholders of
Maxwell Technologies, Inc.
 
We have audited the accompanying consolidated statements of operations, stockholders’ equity, and cash flows of Maxwell Technologies, Inc. and subsidiaries for the year ended December 31, 2002. Our audit also included the financial statement schedule listed at Item 15(a)(2). These consolidated financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of their operations and their cash flows of Maxwell Technologies, Inc. and subsidiaries for the year ended December 31, 2002, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
 
/s/    E RNST & Y OUNG LLP
 
San Diego, California
February 7, 2003,
except for the 3 paragraphs under the
caption “Restatement of Consolidated Financial Statements
for the Year Ended December 31, 2002”
in Note 1 and the 3rd paragraph in Note 7 as
to which the date is
March 15, 2005
 
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 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)

 	  	December 31,
	 	
 	  	2004
	 	 	2003
	 	
Assets	  	 	 	 	 	 	 	 	
Current assets:	  	 	 	 	 	 	 	 	
Cash and cash equivalents	  	$	10,740	 	 	$	9,784	 	
Investments in marketable securities	  	 	2,055	 	 	 	1,523	 	
Trade and other accounts receivable, net	  	 	6,911	 	 	 	5,936	 	
Inventories, net	  	 	8,105	 	 	 	7,309	 	
Prepaid expenses and other current assets	  	 	921	 	 	 	1,143	 	
 	  				 				
Total current assets	  	 	28,732	 	 	 	25,695	 	
Property and equipment, net	  	 	10,892	 	 	 	10,769	 	
Other intangible assets, net	  	 	1,891	 	 	 	2,002	 	
Goodwill	  	 	21,101	 	 	 	19,478	 	
Prepaid pension asset	  	 	5,060	 	 	 	3,962	 	
Other non-current assets	  	 	50	 	 	 	1,107	 	
 	  				 				
 	  	$	67,726	 	 	$	63,013	 	
 	  				 				
Liabilities and Stockholders’ Equity	  	 	 	 	 	 	 	 	
Current liabilities:	  	 	 	 	 	 	 	 	
Accounts payable and accrued liabilities	  	$	7,291	 	 	$	8,249	 	
Accrued warranty	  	 	701	 	 	 	1,262	 	
Accrued employee compensation	  	 	1,591	 	 	 	1,653	 	
Short-term borrowings and current portion of long-term debt	  	 	1,970	 	 	 	1,851	 	
Deferred tax liability	  	 	357	 	 	 	339	 	
Net liabilities of discontinued operations	  	 	1,045	 	 	 	1,494	 	
 	  				 				
Total current liabilities	  	 	12,955	 	 	 	14,848	 	
Deferred tax liability	  	 	1,167	 	 	 	473	 	
Long-term debt, excluding current portion	  	 	813	 	 	 	—  	 	
Commitments and contingencies	  	 	 	 	 	 	 	 	
Stockholders’ equity:	  	 	 	 	 	 	 	 	
Common stock, $0.10 par value per share, 40,000 shares authorized; 15,695 and 14,339 shares issued and outstanding at December 31, 2004 and 2003, respectively	  	 	1,569	 	 	 	1,434	 	
Additional paid-in capital	  	 	126,317	 	 	 	115,142	 	
Accumulated deficit	  	 	(81,306	)	 	 	(72,231	)	
Accumulated other comprehensive income	  	 	6,211	 	 	 	3,347	 	
 	  				 				
Total stockholders’ equity	  	 	52,791	 	 	 	47,692	 	
 	  				 				
 	  	$	67,726	 	 	$	63,013	 	

See accompanying notes to consolidated financial statements.
 
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 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)

 	  	Years Ended December 31,
	 	
 	  	2004
	 	 	2003
	 	 	2002
	 	
 	  	 	 	 	 	 	 	(Restated)	 	
Sales	  	$	31,212	 	 	$	31,166	 	 	$	54,394	 	
License fees	  	 	1,000	 	 	 	4,000	 	 	 	—  	 	
 	  				 				 				
Total revenue	  	 	32,212	 	 	 	35,166	 	 	 	54,394	 	
Cost of sales	  	 	25,301	 	 	 	28,554	 	 	 	48,033	 	
 	  				 				 				
Gross profit	  	 	6,911	 	 	 	6,612	 	 	 	6,361	 	
Operating expenses (income):	  	 	 	 	 	 	 	 	 	 	 	 	
Selling, general and administrative	  	 	10,214	 	 	 	11,433	 	 	 	17,555	 	
Research and development	  	 	5,528	 	 	 	5,844	 	 	 	8,360	 	
Amortization of other intangibles	  	 	76	 	 	 	76	 	 	 	483	 	
Loss (gain) on sale of property and equipment	  	 	41	 	 	 	(1,417	)	 	 	—  	 	
(Gain) loss on sale of businesses	  	 	—  	 	 	 	(1,170	)	 	 	6,542	 	
Pension curtailment and settlement gain	  	 	—  	 	 	 	(2,177	)	 	 	—  	 	
Stock compensation expense	  	 	—  	 	 	 	313	 	 	 	1,921	 	
Asset impairment and restructuring charges	  	 	—  	 	 	 	—  	 	 	 	9,257	 	
 	  				 				 				
Total operating expenses	  	 	15,859	 	 	 	12,902	 	 	 	44,118	 	
 	  				 				 				
Loss from operations	  	 	(8,948	)	 	 	(6,290	)	 	 	(37,757	)	
Interest income, net	  	 	46	 	 	 	13	 	 	 	42	 	
Other (expense) income, net	  	 	(194	)	 	 	(31	)	 	 	461	 	
 	  				 				 				
Loss from continuing operations before income taxes	  	 	(9,096	)	 	 	(6,308	)	 	 	(37,254	)	
Income tax provision (benefit)	  	 	712	 	 	 	(96	)	 	 	(114	)	
 	  				 				 				
Loss from continuing operations	  	 	(9,808	)	 	 	(6,212	)	 	 	(37,140	)	
Income (loss) from discontinued operations, net of tax	  	 	733	 	 	 	(961	)	 	 	(4,937	)	
 	  				 				 				
Loss before cumulative effect of accounting change	  	 	(9,075	)	 	 	(7,173	)	 	 	(42,077	)	
Cumulative effect of accounting change, net of tax	  	 	—  	 	 	 	878	 	 	 	—  	 	
 	  				 				 				
Net loss	  	$	(9,075	)	 	$	(6,295	)	 	$	(42,077	)	
 	  				 				 				
Basic and diluted net loss per share:	  	 	 	 	 	 	 	 	 	 	 	 	
Loss from continuing operations	  	$	(0.67	)	 	$	(0.44	)	 	$	(3.03	)	
Income (loss) from discontinued operations, net of tax	  	 	0.05	 	 	 	(0.07	)	 	 	(0.40	)	
Cumulative effect of accounting change, net of tax	  	 	—  	 	 	 	0.06	 	 	 	—  	 	
 	  				 				 				
Net loss per share	  	$	(0.62	)	 	$	(0.45	)	 	$	(3.43	)	
 	  				 				 				
Shares used in computing basic and diluted net loss per share	  	 	14,637	 	 	 	13,939	 	 	 	12,264	 	

See accompanying notes to consolidated financial statements.
 
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 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE LOSS
(in thousands)

 	 	Shares
	 	Amount
	 	Additional
Paid-in
Capital
	 	 	Deferred
Compensation
and Notes
Receivable
from
Executives for
Stock
Purchases
	 	 	Accumulated
Deficit
	 	 	Accumulated
Other
Comprehensive
Income (Loss)
	 	 	Total
Stockholders’
Equity
	 	 	Comprehensive
Loss
	 	
Balance at January 1, 2002	 	10,168	 	$	1,017	 	$	84,283	 	 	$	(897	)	 	$	(23,859	)	 	$	(813	)	 	$	59,731	 	 	 	 	 	
Stock purchase and option plans	 	225	 	 	23	 	 	560	 	 	 	868	 	 	 	—  	 	 	 	—  	 	 	 	1,451	 	 	 	 	 	
Shares issued for business acquisition	 	2,250	 	 	225	 	 	17,724	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	17,949	 	 	 	 	 	
Shares and options issued in exchange for subsidiaries’ minority interests (restated)	 	1,083	 	 	108	 	 	11,609	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	11,717	 	 	 	 	 	
Payment on notes issued for purchase of stock	 	—  	 	 	—  	 	 	—  	 	 	 	29	 	 	 	—  	 	 	 	—  	 	 	 	29	 	 	 	 	 	
Deferred compensation	 	—  	 	 	—  	 	 	—  	 	 	 	(154	)	 	 	—  	 	 	 	—  	 	 	 	(154	)	 	 	 	 	
Amortization of deferred compensation	 	—  	 	 	—  	 	 	—  	 	 	 	154	 	 	 	—  	 	 	 	—  	 	 	 	154	 	 	 	 	 	
Net loss (restated)	 	—  	 	 	—  	 	 	—  	 	 	 	—  	 	 	 	(42,077	)	 	 	—  	 	 	 	(42,077	)	 	$	(42,077	)	
Other comprehensive income:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Foreign currency translation adjustments, net of taxes	 	—  	 	 	—  	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	1,121	 	 	 	1,121	 	 	 	1,121	 	
Unrealized gain on marketable securities, net of taxes	 	—  	 	 	—  	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	30	 	 	 	30	 	 	 	30	 	
 	 		 			 				 				 				 				 				 				
Balance at December 31, 2002 (restated)	 	13,726	 	 	1,373	 	 	114,176	 	 	 	—  	 	 	 	(65,936	)	 	 	338	 	 	 	49,951	 	 	$	(40,926	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 				
Stock purchase and option plans	 	148	 	 	15	 	 	1,012	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	1,027	 	 	 	 	 	
Shares issued for business acquisition	 	465	 	 	46	 	 	(46	)	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	 	 	
Net loss	 	—  	 	 	—  	 	 	—  	 	 	 	—  	 	 	 	(6,295	)	 	 	—  	 	 	 	(6,295	)	 	$	(6,295	)	
Other comprehensive income (loss):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Foreign currency translation adjustments, net of taxes	 	—  	 	 	—  	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	3,112	 	 	 	3,112	 	 	 	3,112	 	
Unrealized (loss) on marketable securities, net of taxes	 	—  	 	 	—  	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	(103	)	 	 	(103	)	 	 	(103	)	
 	 		 			 				 				 				 				 				 				
Balance at December 31, 2003	 	14,339	 	 	1,434	 	 	115,142	 	 	 	—  	 	 	 	(72,231	)	 	 	3,347	 	 	 	47,692	 	 	$	(3,286	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 				
Stock purchase and option plans	 	167	 	 	16	 	 	1,022	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	1,038	 	 	 	 	 	
Proceeds from issuance of common stock	 	1,189	 	 	119	 	 	10,153	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	10,272	 	 	 	 	 	
Net loss	 	—  	 	 	—  	 	 	—  	 	 	 	—  	 	 	 	(9,075	)	 	 	—  	 	 	 	(9,075	)	 	$	(9,075	)	
Other comprehensive income:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Foreign currency translation adjustments, net of taxes	 	—  	 	 	—  	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	2,859	 	 	 	2,859	 	 	 	2,859	 	
Unrealized gain on marketable securities, net of taxes	 	—  	 	 	—  	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	5	 	 	 	5	 	 	 	5	 	
 	 		 			 				 				 				 				 				 				
Balance at December 31, 2004	 	15,695	 	$	1,569	 	$	126,317	 	 	$	—  	 	 	$	(81,306	)	 	$	6,211	 	 	$	52,791	 	 	$	(6,211	)	

See accompanying notes to consolidated financial statements.
 
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 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

 	  	Years Ended December 31,
	 	
 	  	2004
	 	 	2003
	 	 	2002
	 	
 	  	 	 	 	 	 	 	(Restated)	 	
Operating activities:	  	 	 	 	 	 	 	 	 	 	 	 	
Loss from continuing operations	  	$	(9,808	)	 	$	(6,212	)	 	$	(37,140	)	
Adjustments to reconcile loss from continuing operations to net cash used in operating activities:	  	 	 	 	 	 	 	 	 	 	 	 	
Depreciation	  	 	3,553	 	 	 	3,608	 	 	 	4,090	 	
Amortization	  	 	207	 	 	 	197	 	 	 	543	 	
Pension benefit	  	 	(352	)	 	 	(2,265	)	 	 	—  	 	
Asset impairment, restructuring and other	  	 	—  	 	 	 	—  	 	 	 	10,939	 	
Stock compensation expense	  	 	—  	 	 	 	313	 	 	 	1,921	 	
Loss (gain) on sales of property and equipment	  	 	41	 	 	 	(1,417	)	 	 	—  	 	
(Gain) loss on sales of business	  	 	—  	 	 	 	(1,170	)	 	 	6,542	 	
Provision for losses on accounts receivable	  	 	212	 	 	 	241	 	 	 	576	 	
Changes in operating assets and liabilities, net of effect of acquisitions and dispositions:	  	 	 	 	 	 	 	 	 	 	 	 	
Trade and other accounts receivable	  	 	(861	)	 	 	2,335	 	 	 	6,846	 	
Inventories	  	 	(519	)	 	 	4,449	 	 	 	2,184	 	
Prepaid expenses and other assets	  	 	468	 	 	 	13	 	 	 	1,861	 	
Deferred income taxes	  	 	597	 	 	 	(116	)	 	 	75	 	
Accounts payable and accrued liabilities	  	 	(2,556	)	 	 	(4,302	)	 	 	(6,404	)	
Accrued employee compensation	  	 	(104	)	 	 	63	 	 	 	(920	)	
 	  				 				 				
Net cash used in operating activities	  	 	(9,122	)	 	 	(4,263	)	 	 	(8,887	)	
 	  				 				 				
Investing activities:	  	 	 	 	 	 	 	 	 	 	 	 	
Proceeds from sale of businesses	  	 	—  	 	 	 	632	 	 	 	4,927	 	
Purchases of business, net of cash acquired	  	 	—  	 	 	 	—  	 	 	 	(2,692	)	
Purchases of property and equipment	  	 	(3,022	)	 	 	(2,439	)	 	 	(1,796	)	
Proceeds from sale of property and equipment	  	 	263	 	 	 	8,872	 	 	 	—  	 	
Proceeds from sale of marketable securities	  	 	2,329	 	 	 	7,746	 	 	 	14,247	 	
Purchases of marketable securities	  	 	(1,974	)	 	 	(2,758	)	 	 	(9,877	)	
 	  				 				 				
Net cash (used in) provided by investing activities	  	 	(2,404	)	 	 	12,053	 	 	 	4,809	 	
 	  				 				 				
Financing activities:	  	 	 	 	 	 	 	 	 	 	 	 	
Principal payments on long-term debt and short-term borrowings	  	 	(1,816	)	 	 	(4,520	)	 	 	(3,385	)	
Proceeds from short-term borrowings	  	 	2,448	 	 	 	3,013	 	 	 	360	 	
Proceeds from issuance of company and subsidiary stock	  	 	11,310	 	 	 	714	 	 	 	1,167	 	
 	  				 				 				
Net cash provided by (used in) financing activities	  	 	11,942	 	 	 	(793	)	 	 	(1,858	)	
 	  				 				 				
Increase (decrease) in cash and cash equivalents from continuing operations	  	 	416	 	 	 	6,997	 	 	 	(5,936	)	
Net cash provided by (used in) discontinued operations	  	 	284	 	 	 	(1,255	)	 	 	(4,253	)	
Effect of exchange rate changes on cash and cash equivalents	  	 	256	 	 	 	497	 	 	 	61	 	
 	  				 				 				
Increase (decrease) in cash and cash equivalents	  	 	956	 	 	 	6,239	 	 	 	(10,128	)	
Cash and cash equivalents at beginning of year	  	 	9,784	 	 	 	3,545	 	 	 	13,673	 	
 	  				 				 				
Cash and cash equivalents at end of year	  	$	10,740	 	 	$	9,784	 	 	$	3,545	 	
 	  				 				 				
Cash paid for:	  	 	 	 	 	 	 	 	 	 	 	 	
Interest	  	$	82	 	 	$	193	 	 	$	124	 	
Income taxes	  	$	419	 	 	$	164	 	 	$	69	 	
 
See accompanying notes to consolidated financial statements.
 
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 MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Note 1—Description of Business and Summary of Significant Accounting Policies
 
Description of Business
 
Maxwell Technologies, Inc. (the “Company” or “Maxwell”) 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. Presently headquartered in San Diego, California, Maxwell is a developer and manufacturer of innovative, cost-effective energy storage and power delivery solutions.
 
Maxwell’s High Reliability business segment is comprised of two manufacturing locations (San Diego, California and Rossens, Switzerland) and three product lines:
 
 	•	 	Ultracapacitors : Maxwell’s primary product, ultracapacitors, includes its BOOSTCAP ® ultracapacitor cells and multi-cell modules and POWERCACHE ® backup power systems, which provide highly reliable power solutions for applications in consumer and industrial electronics, transportation and telecommunications.	
 
 	•	 	High-Voltage Capacitors : Maxwell’s CONDIS ® high-voltage grading and coupling capacitors are used in electric utility infrastructure and other applications involving transport, distribution and measurement of high-voltage electrical energy.	
 
 	•	 	Radiation-Mitigated Microelectronic Products : Maxwell’s RADPAK ® radiation-mitigated microelectronic products include power modules, memory modules and single-board computers for applications in the space and satellite industries.	
 
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. This high reliability strategy emphasizes development and marketing of products that enables Maxwell to achieve higher profit margins than commodity electronic components and systems.
 
Financial Statement Presentation
 
The consolidated financial statements include the accounts of Maxwell Technologies, Inc. and its subsidiaries. All significant intercompany transactions and account balances are eliminated in consolidation. The PurePulse business, which was discontinued in September 2002 and was previously reported as a separate segment, and the Winding Equipment segment, which was sold in December 2003, and which was recorded as continuing operations through the first quarter of fiscal year 2004, have been reclassified as discontinued operations (Note 15). The results of operations of other business units that do not meet the criteria to be classified as a discontinued operation and were sold or otherwise disposed of are included in continuing operations through the date of sale. As a result of the reclassification of the Winding Equipment business, the Company is operating as a single reportable segment.
 
The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts and related disclosures. These estimates include assessing the collectability of accounts receivable, the usage and recoverability of inventories and long-lived assets and the incurrence of losses on warranty costs, vacant leased facilities and other facilities offered for sale. The markets for the Company’s products are extremely competitive and are characterized by rapid technological change, new product development, product obsolescence and evolving industry standards. In addition, price competition is intense and significant price erosion generally occurs over the life of a product. As a result of such factors, actual results could differ from the estimates used by management.
 
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Certain prior year amounts have been reclassified to conform to the current year presentation with no effect on total stockholders’ equity or net loss. The Company’s fiscal quarters end on the last day of the calendar month on March 31, June 30, September 30, and December 31.
 
Restatement of Consolidated Financial Statements for the Year Ended December 31, 2002
 
The Company has restated its consolidated financial statements for the year ended December 31, 2002 as previously reported on Form 10-K. The adjustments giving rise to the Company’s need to restate its financial statements for the year ended December 31, 2002 relate to the stock-based compensation arising from the April 2002 repurchase of the remaining minority interests and merger of the I-Bus/Phoenix and Electronic Components Group subsidiaries.
 
In connection with these transactions, the Company exchanged all outstanding vested and unvested options to purchase shares of common stock of these subsidiaries for options to acquire shares of Maxwell. As a result and as more fully described in Note 7, stock-based compensation expense totaling approximately $1.9 million was incurred in connection with the exchange of vested subsidiary stock options based on the difference between the fair market value of Maxwell’s common stock on the respective merger date and the exercise price of the modified stock option. There was no tax effect as a result of the stock-based compensation as the deferred tax asset arising from the deferred tax benefit of non-qualified options was offset by an increase in the valuation allowance.
 
Management assessed the impact of this error on the Company’s historical financial statements and concluded that it was required to restate its financial statements. As a result, the Company restated its Consolidated Financial Statements for the year ended December 31, 2002. The effect of the restatement had no net impact on stockholders’ equity and the following impact on the net loss and loss per share for the year ended December 31, 2002 (in thousands, except per share data):

 	  	As previously
reported
	 	 	Restatement
	 	 	As restated
	 	
Loss from continuing operations	  	$	(35,219	)	 	$	(1,921	)	 	$	(37,140	)	
Loss from discontinued operations	  	 	(4,937	)	 	 	—  	 	 	 	(4,937	)	
 	  				 				 				
Net loss	  	$	(40,156	)	 	$	(1,921	)	 	$	(42,077	)	
 	  				 				 				
Basic and diluted loss per share:	  	 	 	 	 	 	 	 	 	 	 	 	
Loss from continuing operations	  	$	(2.87	)	 	$	(0.16	)	 	$	(3.03	)	
Loss from discontinued operations	  	 	(0.40	)	 	 	—  	 	 	 	(0.40	)	
 	  				 				 				
Net loss	  	$	(3.27	)	 	$	(0.16	)	 	$	(3.43	)	

Cash and Cash Equivalents, Investments in Marketable Securities
 
The Company invests its excess cash in debt instruments of the U.S. Government and its agencies, and in high-quality corporate issuers. All highly liquid instruments with an original maturity of three months or less from purchase are considered cash equivalents, and those with original maturities greater than three months on the date of purchase are considered investments in marketable securities. The Company’s investments in marketable securities are classified as available-for-sale and are reported at fair value, with unrealized gains and losses included in stockholders’ equity as a separate component of accumulated other comprehensive income. Realized gains or losses and other-than-temporary declines in value, if any, on available-for-sale securities are reported in other income or expense as incurred. The Company recognized zero, $49,000 and $22,000 in net realized gains in the years ended December 31, 2004, 2003 and 2002, respectively. The Company uses the specific identification method on sales of investments.
 
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Maturities and gross unrealized gains on investments in marketable securities at December 31, 2004 and 2003 are as follows (in thousands):

 	  	Gross
Amortized
Cost
	  	Gross
Unrealized
Gain
	  	Estimated
Fair
Value
	
As of December 31, 2004:	  	 	 	  	 	 	  	 	 	
U.S. Government and Agencies:	  	 	 	  	 	 	  	 	 	
Maturing within 1 year	  	$	1,845	  	$	8	  	$	1,853	
Corporate Debt Securities:	  	 	 	  	 	 	  	 	 	
Maturing within 1 year	  	 	199	  	 	3	  	 	202	
Maturing between 1 and 5 years	  	 	50	  	 	—  	  	 	50	
 	  			  			  			
 	  	$	2,094	  	$	11	  	$	2,105	
 	  			  			  			
Current	  	$	2,044	  	$	11	  	$	2,055	
Non-current	  	 	50	  	 	—  	  	 	50	
As of December 31, 2003:	  	 	 	  	 	 	  	 	 	
U.S. Government and Agencies:	  	 	 	  	 	 	  	 	 	
Maturing within 1 year	  	$	1,113	  	$	4	  	$	1,117	
Maturing between 1 and 5 years	  	 	903	  	 	2	  	 	905	
Corporate Debt Securities:	  	 	 	  	 	 	  	 	 	
Maturing within 1 year	  	 	204	  	 	—  	  	 	204	
Certificates of Deposit:	  	 	 	  	 	 	  	 	 	
Maturing within 1 year	  	 	100	  	 	—  	  	 	100	
Asset-Backed Securities:	  	 	 	  	 	 	  	 	 	
Maturing within 1 year	  	 	102	  	 	—  	  	 	102	
Maturing between 1 and 5 years	  	 	27	  	 	—  	  	 	27	
 	  			  			  			
 	  	$	2,449	  	$	6	  	$	2,455	
 	  			  			  			
Current	  	$	1,519	  	$	4	  	$	1,523	
Non-current	  	 	930	  	 	2	  	 	932	
 
Fair Value of Financial Instruments
 
The Company’s financial instruments consist principally of cash and cash equivalents, investments in marketable securities, accounts receivable, accounts payable and borrowings. The Company believes all of the financial instruments’ recorded values approximate current values because of their nature and respective durations. The fair value of marketable securities is determined using quoted market prices for those securities or similar financial instruments. The fair value of long-term debt is based on quoted market prices for same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities with similar collateral requirements.
 
Allowance for Doubtful Accounts
 
The allowance for doubtful accounts reflects management’s best estimate of probable losses inherent in the accounts receivable balance. Management determines the allowance based on known troubled accounts, historical experience and other currently available evidence.
 
Inventories
 
Inventories are stated at the lower of cost or market. Inventory values are based on standard costs, which approximate average costs (first-in first-out method).
 
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Property and Equipment
 
Property and equipment are carried at cost and are depreciated using the straight-line method. Depreciation and amortization is provided over the estimated useful lives of the related assets (three to ten years). Leasehold improvements are amortized over the shorter of their estimated useful lives or the terms of the lease
 
Long-Lived Assets
 
Long-lived assets such as property and equipment are reviewed for impairment whenever events and changes in business circumstances indicate the carrying value of the long-lived asset may not be recoverable. If the Company determines that the carrying value of the long-lived asset may not be recoverable, a permanent impairment charge is recorded for the amount by which the carrying value of the long-lived asset exceeds its fair value.
 
Goodwill and Intangible Assets
 
Goodwill, which represents the excess of the cost of an acquired business over the net of the fair value assigned to its assets acquired and liabilities assumed, is not amortized. Instead, goodwill is assessed for impairment under Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets (Note 8). Intangible assets with finite lives continue to be amortized on a straight-line basis over their useful lives of 10 to 12 years and are evaluated for impairment whenever events, or changes in circumstances, indicate that their carrying value may not be recoverable under SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets.
 
Warranty Obligation
 
The Company generally provides a warranty to its customers for one to two years in the normal course of business. The Company accrues for the estimated warranty at the time of sale based on historical warranty expenses. The estimated warranty liability is calculated based on historical warranty expenses plus any known warranty exposure.
 
Income Taxes
 
The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes, which requires the use of the liability method of accounting for deferred income taxes. Under this method, deferred income taxes are recorded to reflect the tax consequences on future years of temporary differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized.
 
Concentration of Credit Risk
 
The Company maintains cash balances at various financial institutions primarily in California and such balances commonly exceed the $100,000 insured amount by the Federal Deposit Insurance Corporation. The Company has not experienced any losses in such accounts and management believes that the Company is not exposed to any significant credit risk with respect to such cash and cash equivalents.
 
Financial instruments, which subject the Company to potential concentrations of credit risk, consist principally of the Company’s accounts receivable. The Company’s accounts receivable result from product sales to customers in various industries and in various geographical areas, both domestic and foreign. The Company performs ongoing credit evaluations of its customers and generally requires no collateral. One customer, ABB Ltd., provided 36% and 13% of revenue in 2004 and 2003, respectively and comprised 23% and 17% of accounts
 
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receivable balances at December 31, 2004 and 2003, respectively. Sales to General Electric Medical Systems (GEMS) amounted to approximately 20% of total revenue for 2002.
 
Certain financial information by geographic region based on Company locations is provided below:

 	  	Year ending December 31,
	 	
 	  	2004
	 	 	2003
	 	 	2002
	 	
 	  	(in thousands)	 	
 	  	 	 	 	 	 	 	(Restated)	 	
Revenues:	  	 	 	 	 	 	 	 	 	 	 	 	
United States	  	$	16,773	 	 	$	22,205	 	 	$	38,486	 	
Europe	  	 	15,439	 	 	 	12,961	 	 	 	15,908	 	
 	  				 				 				
Total	  	$	32,212	 	 	$	35,166	 	 	$	54,394	 	
 	  				 				 				
(Loss) income from operations:	  	 	 	 	 	 	 	 	 	 	 	 	
United States	  	$	(8,119	)	 	$	(8,128	)	 	$	(33,196	)	
Europe	  	 	(829	)	 	 	1,838	 	 	 	(4,561	)	
 	  				 				 				
Total	  	$	(8,948	)	 	$	(6,290	)	 	$	(37,757	)	
 	  				 				 				
Long-lived assets:	  	 	 	 	 	 	 	 	 	 	 	 	
United States	  	$	9,337	 	 	$	10,742	 	 	$	12,065	 	
Europe	  	 	24,547	 	 	 	21,507	 	 	 	19,174	 	
 	  				 				 				
Total	  	$	33,884	 	 	$	32,249	 	 	$	31,239	 	

Revenue Recognition
 
The Company derives substantially all of its revenue from the sale of manufactured products. Product revenue is recognized as products are shipped and title passes to the customer. Revenues from licensing arrangements became significant during 2003 as a result of the Company’s strategic alliance with YEC, which paid it for the right to manufacture its proprietary BOOSTCAP ® Ultracapacitors. License fee revenue is recognized when the performance requirements have been met, the fee is fixed or determinable and collection of fees is probable. In general, the Company does not offer discounts and there is no right of return. The Company does not provide installation services or incur post sale obligations other than product warranty, which is accrued for at the time of the sale.
 
In prior years, certain continuing and discontinued segments recorded revenue from both long-term and short-term fixed price contracts and cost plus contracts with the U.S. Government directly or through a prime contractor. Those revenues, including estimated profits, were recognized as costs were incurred and included provisions for any anticipated losses.
 
Research and Development Expense
 
Research and development expenditures are expensed in the period incurred.
 
Advertising Expense
 
Advertising costs are expensed in the period incurred. Advertising expense was $326,000, $276,000 and $152,000 for fiscal 2004, 2003 and 2002, respectively.
 
Foreign Currencies
 
The Company’s primary foreign currency exposure is related to its subsidiary in Switzerland. Maxwell Technologies SA has Euro and local currency (Swiss Franc) revenue and operating expenses. Changes in these
 
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currency exchange rates impact the U.S. dollar amount of revenue and expenses. Assets and liabilities of Maxwell’s Swiss subsidiary are translated at year-end exchange rates, and revenues, expenses, gains and losses are translated at rates of exchange that approximate the rate in effect at the time of the transaction. The Company does not hedge its currency exposures.
 
Other Comprehensive Income (Loss)
 
Comprehensive income (loss), as defined, includes all changes in equity during a period from non-owner sources. Net loss and other comprehensive loss, including foreign currency translation adjustments and unrealized gains and losses on investments in marketable securities are reported, net of their related tax effect, to arrive at comprehensive loss. As of December 31, 2004, accumulated other comprehensive income consisted of $6.2 million of unrealized gain on foreign currency translation and $11,000 in unrealized gain on investments in marketable securities.
 
Income (Loss) Per Share
 
Income (loss) per share is calculated using the weighted average number of common shares outstanding. Diluted income (loss) per share is calculated on the basis of the weighted average number of common shares outstanding plus the dilutive effect of outstanding stock options of the Company and certain of its subsidiaries, assuming their exercise using the “treasury stock” method. The following table sets forth the computation of basic and diluted income (loss) per share (in thousands, except per share data):

 	  	Years Ended December 31,
	 	
 	  	2004
	 	 	2003
	 	 	2002
	 	
 	  	 	 	 	 	 	 	(Restated)	 	
Numerator	  	 	 	 	 	 	 	 	 	 	 	 	
Basic:	  	 	 	 	 	 	 	 	 	 	 	 	
Loss from continuing operations	  	$	(9,808	)	 	$	(6,212	)	 	$	(37,140	)	
Income (loss) from discontinued operations, net of tax	  	 	733	 	 	 	(961	)	 	 	(4,937	)	
Cumulative effect of accounting change, net of tax	  	 	—  	 	 	 	878	 	 	 	—  	 	
 	  				 				 				
Net loss	  	$	(9,075	)	 	$	(6,295	)	 	$	(42,077	)	
 	  				 				 				
Denominator	  	 	 	 	 	 	 	 	 	 	 	 	
Basic:	  	 	 	 	 	 	 	 	 	 	 	 	
Weighted average shares outstanding	  	 	14,637	 	 	 	13,939	 	 	 	12,264	 	
Diluted:	  	 	 	 	 	 	 	 	 	 	 	 	
Effect of dilutive securities:	  	 	 	 	 	 	 	 	 	 	 	 	
Common stock options	  	 	—  	 	 	 	—  	 	 	 	—  	 	
 	  				 				 				
Total weighted average common and potential common shares outstanding	  	 	14,637	 	 	 	13,939	 	 	 	12,264	 	
 	  				 				 				
Basic and diluted net loss per share:	  	 	 	 	 	 	 	 	 	 	 	 	
Loss from continuing operations	  	$	(0.67	)	 	$	(0.44	)	 	$	(3.03	)	
Income (loss) from discontinued operations, net of tax	  	 	0.05	 	 	 	(0.07	)	 	 	(0.40	)	
Cumulative effect of accounting change, net of tax	  	 	—  	 	 	 	0.06	 	 	 	—  	 	
 	  				 				 				
Basic and diluted net loss per share	  	$	(0.62	)	 	$	(0.45	)	 	$	(3.43	)	

For fiscal years 2004, 2003, and 2002, incremental equivalent shares under common stock options of 211,826, 143,560, and 87,955 respectively, were not included in the computation of diluted earnings per share as their impact would have been anti-dilutive.
 
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Stock Compensation
 
The Company has adopted the disclosure only provisions of SFAS No. 123, Accounting for Stock-Based Compensation , as amended by SFAS No. 148 Accounting for Stock Based Compensation—Transitions and Disclosure. In accordance with the provisions of SFAS No. 123, the Company applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its stock option plans, and accordingly, no compensation expense has been recognized for stock options granted to employees in the years ended December 31, 2004, 2003 and 2002, as the stock options have been granted to employees with exercise prices equal to the fair value of the underlying common stock at the time of grant. If the Company had elected to recognize compensation cost based on the fair value method prescribed by SFAS No. 123, the Company’s net loss per share would have been adjusted to the pro forma amounts indicated below (in thousands, except per share amounts):

 	  	Years Ended December 31,
	 	
 	  	2004
	 	 	2003
	 	 	2002
	 	
 	  	 	 	 	 	 	 	(Restated)	 	
Net loss as reported	  	$	(9,075	)	 	$	(6,295	)	 	$	(42,077	)	
Add: Stock-based compensation expense included in net loss, as reported	  	 	—  	 	 	 	313	 	 	 	1,921	 	
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects	  	 	(3,267	)	 	 	(3,997	)	 	 	(8,449	)	
 	  				 				 				
Pro forma net loss	  	$	(12,342	)	 	$	(9,979	)	 	$	(48,605	)	
 	  				 				 				
Net loss per share:	  	 	 	 	 	 	 	 	 	 	 	 	
Basic and diluted—as reported	  	$	(0.62	)	 	$	(0.45	)	 	$	(3.43	)	
 	  				 				 				
Basic and diluted—pro forma	  	$	(0.84	)	 	$	(0.72	)	 	$	(3.96	)	

The pro forma adjustments shown above are not indicative of future period pro forma adjustments when the calculation will reflect all applicable stock options. The fair value of Company options at the date of grant was estimated using the Black-Scholes option-pricing model with assumptions as follows:

Years Ended
	  	Risk-Free
Interest
Rate
	 	 	Dividend
Yield
	  	Volatility
Factor
	 	 	Weighted-
Average
Expected
Term
	
December 31, 2004	  	3.5	%	 	—  	  	52.0	%	 	4 Years	
December 31, 2003	  	3.3	%	 	—  	  	59.5	%	 	5 Years	
December 31, 2002	  	3.3	%	 	—  	  	68.4	%	 	5 Years	
 
Recent Accounting Pronouncements
 
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised 2004), Share-Based payment, or SFAS No. 123R, which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation, or SFAS No. 123. SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values and does not allow the previously permitted pro forma disclosure as an alternative to financial statement recognition. SFAS No. 123R supercedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations and amends SFAS No. 95, Statement of Cash Flows. SFAS No. 123R is scheduled to be effective beginning in the third quarter of fiscal 2005. SFAS No. 123R allows for either prospective recognition of compensation expense or retroactive recognition, which may date back to the original issuance of SFAS No. 123 or only to interim periods in the year of adoption. The Company is currently evaluating these transition methods.
 
The impact of adoption of SFAS No. 123R cannot be predicted at this time because that will depend on the method of adoption elected, the fair value and number of share-based payments granted in the future. However,
 
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had the Company adopted SFAS No. 123R in prior periods, the magnitude of the impact of that standard would have approximated the impact of SFAS No. 123 assuming the application of the Black-Scholes model as described in the disclosure of pro forma net loss and pro forma loss per share in Note 1 of the Notes to Consolidated Financial Statements. SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption.
 
In November 2004, the FASB issued SFAS No. 151, Inventory Costs an amendment of ARB No. 43, Chapter 4, requiring companies to treat idle facility costs, abnormal handling costs, freight and wasted materials as current period charges rather than as a portion of inventory costs. SFAS 151 is effective for the annual periods beginning after June 15, 2005. The Company has evaluated SFAS No. 151 and management believes it will not have an impact on the Company’s results of operations or financial position.
 
Accounting Change
 
Effective January 1, 2003, the Company adopted SFAS No. 87, Employers’ Accounting for Pensions, as amended, in accordance with Emerging Issues Task Force (EITF) 03-4, Determining the Classification and Benefit Attribution Method for a “Cash Balance” Pension Plan related to its Swiss pension plan. This statement required a standardization method for measuring net periodic pension cost and recognizing the compensation cost of an employee’s pension over the employee’s approximate service period by relating the cost more directly to the terms of the plan. This statement requires immediate recognition of a liability (the minimum liability) when the accumulated benefit obligation exceeds the fair value of plan assets. This statement also requires expanded disclosures about pension plan assets, obligations, benefits payments, contributions and net benefit cost.
 
The adoption of SFAS No. 87 on January 1, 2003 resulted in a cumulative effect of an accounting change, net of tax, of $878,000 (Note 12).
 
Business Enterprise Segments
 
The Company operates in one reportable operating segment, High Reliability. SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information , establishes standards for the way that public business enterprises report information about operating segments in annual consolidated financial statements. Although the Company had two operating segments at December 31, 2004, as determined by the two locations for which segment managers are responsible for operating results (San Diego, California and Rossens, Switzerland), under the aggregation criteria set forth in SFAS No. 131, the Company only operates in one reportable operating segment.
 
Note 2—Business Combinations
 
On July 5, 2002, the Company acquired Montena Components Ltd., or Montena, a Swiss corporation, with its principal facility in Rossens, Switzerland. In the transaction, the Company acquired all of the outstanding shares of capital stock of Montena from its parent company, Montena SA, a Swiss corporation, in exchange for (i) 2,250,000 shares of Maxwell common stock issued directly to Montena SA, (ii) an additional 300,000 shares of Maxwell common stock originally held by the Company as collateral for a $3 million loan to Montena SA and (iii) an additional 464,927 shares of Maxwell common stock issued based on Montena achieving revenues of at least $20 million for the four quarters ended June 30, 2003 and the value of the stock on September 1, 2003 as further described below.
 
The calculation of the third and final common stock issuance to Montena SA was calculated using the following formula: To the extent that each share of Maxwell stock issued as part of the purchase price and held by Montena SA on September 1, 2003 has a market value based on the average 30-day trading closing price ending on September 1, 2003 (the “30 Day Measurement Price”) of less than $9 per share, then the Company will
 
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provide to Montena SA additional consideration equal, in total value, to (i) the difference between $9 and the 30-Day Measurement Price multiplied by (ii) such number of shares held by Montena SA on September 1, 2003; provided , however , that such additional consideration will in no event be greater than 500,000 shares of Maxwell common stock (based on the 30-Day Measurement Price) or cash equal in value to 500,000 shares of Maxwell common stock valued at the 30-Day Measurement Price according to that formula. In September 2003, 464,927 shares of common stock were issued to Montena SA. As a result of the purchase transaction, Montena SA held approximately 16% and 18% of Maxwell common stock as of December 31, 2004 and 2003, respectively.
 
The results of operations of Montena have been included in the consolidated statements of operations since July 5, 2002, the date of the acquisition.
 
The purchase price was allocated as follows (in thousands):

Total acquisition cost:	  	 	 	 	
Cash and stock paid at acquisition	  	$	20,949	 	
Acquisition related expenses	  	 	340	 	
 	  				
 	  	$	21,289	 	
 	  				
Allocation to assets and liabilities as follows:	  	 	 	 	
Tangible assets	  	$	14,936	 	
Assumed liabilities	  	 	(10,153	)	
Acquired backlog	  	 	464	 	
Developed core technology	  	 	1,100	 	
Goodwill	  	 	14,942	 	
 	  				
 	  	$	21,289	 	

Note 3—Divestitures
 
The following divestitures occurred during the three years ended December 31, 2004. These divestitures did not meet the criteria to be accounted for as discontinued operations, except for the Winding Equipment business segment discussed below.
 
In June 2003, the Company decided to discontinue marketing and supporting a product line of electronic components testers and recorded charges in cost of sales of $444,000 primarily related to excess inventory and equipment, $393,000 primarily related to warranty buy-outs, and $259,000 related to expected future warranty returns in the quarters ended June 30, 2003, September 30, 2003 and December 31, 2003, respectively. Sales for accelerated life testers product line were immaterial in all periods presented.
 
In December 2003, the Company’s Maxwell Technologies, SA subsidiary sold all fixed assets, substantially all inventory except work in process inventory, and all warranty and employee agreement obligations of its Metar Winding Equipment business segment, located in Matran, Switzerland to Metar SA, a new company, whose principal shareholder is a former CEO of Montena SA. The Company received $324,000 cash and recognized a loss on sale, net of tax, of $529,000, which is included within “Income (loss) from discontinued operations” in the accompanying consolidated statements of operations. The new Metar company completed during January through June 2004 certain work in progress related to customer orders received by Maxwell Technologies, SA before the date of sale. The Company concluded its continuing involvement in the Winding Equipment business in the second quarter of 2004 with the shipment of the final Metar product order owned by the Company. In accordance with SFAS No. 144, the results of operations related to the Winding Equipment business which was recorded as continuing operations through the first quarter of 2004 have been reclassified as discontinued operations for fiscal 2004, 2003 and 2002 (Note 15).
 
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In December 2003, the Company sold the manufacturing and administrative facility in San Diego that contained the I-Bus/Phoenix operations. Proceeds from the sale of the facility were $9.0 million and closing expenses were $387,000, resulting in a net gain from the sale of the facility of $1.2 million. Net cash proceeds from the sale of the facility were $5.9 million after the payment of closing expenses and repayment of the $2.7 million term loan secured by a deed of trust on the facility.
 
On September 29, 2002, the Company’s I-Bus/Phoenix, Inc. subsidiary sold substantially all of the assets, liabilities and business operations of its applied computing business, located principally in San Diego, California and Tangmere, United Kingdom, to I-Bus Corporation, a new company, whose principal shareholders are former I-Bus/Phoenix senior managers. The applied computing business designs, manufactures and sells applied computing systems mainly to original equipment manufacturers serving the telecommunications, broadcasting and industrial automation markets. The business was sold for (i) an 8% Senior Subordinated Note in the aggregate principal amount of $7.0 million, under the terms of which $1.0 million was payable (plus 50% of all accrued interest) on March 30, 2004 and $3 million is payable (plus 100% of all accrued interest) on each of March 30, 2005 and March 30, 2006; (ii) a warrant to purchase up to 19.9% of the common stock of the new I-Bus Corporation exercisable any time after June 30, 2004 at the fair market value per share at the time of exercise; and (iii) an additional contingent purchase price payment of $1.0 million if the new I-Bus Corporation sells the computing business prior to the full payment of the 8% Senior Subordinated Note referred to above. I-Bus/Phoenix also agreed to reimburse I-Bus Corporation for certain shutdown and restructuring costs and to provide a back up working capital credit facility in the amount of $300,000 until September 2003. The Company had assigned no value to the subordinated debt as its collectability was uncertain and will record any collections on such note as a gain on the date of such collection. The table below details the loss recognized by the Company in 2002 related to the sale. In addition, the Company incurred related restructuring charges discussed in Note 13 and impairment charges discussed in Note 14.

Disposition of I-Bus/Phoenix, Inc. assets (in thousands):	  	 	 	 	
Subordinated note receivable	  	$	7,000	 	
Less reserve for note	  	 	(7,000	)	
Assets sold, net of liabilities assumed by buyer	  	 	(6,252	)	
Shutdown costs assumed by Maxwell	  	 	(762	)	
 	  				
Net loss on disposition of I-Bus/Phoenix, Inc.	  	$	(7,014	)	

During 2003, the Company received final settlement payments of $475,000 from the new I-Bus Corporation, which was a partial recovery of the $7.0 million subordinated note that was fully reserved for in 2002. This recovery is reflected in “(Gain) loss on sale of businesses” in the accompanying consolidated statements of operations.
 
On September 30, 2002, the Company sold substantially all of the assets, liabilities and business operations of its TeknaSeal glass-to-metal seals division in Minneapolis, Minnesota to a group of private investors. TeknaSeal designs, manufactures and sells hermetic glass-to-metal seals for vacuum components, battery headers, implantable medical devices and other specialty applications. The aggregate selling price was $5.5 million in cash, of which $1.0 million was held in an escrow account as of December 31, 2002.

Disposition of TeknaSeal assets (in thousands):	  	 	 	 	
Cash received	  	$	5,500	 	
Less amount held in escrow	  	 	(1,000	)	
Receivable due from escrow	  	 	253	 	
Assets sold net of liabilities assumed by buyer	  	 	(1,338	)	
Goodwill associated with TeknaSeal	  	 	(2,839	)	
Expenses related to sale	  	 	(340	)	
 	  				
Net gain on disposition of TeknaSeal	  	$	236	 	

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The Company’s involvement with TeknaSeal ended during the year ended December 31, 2003. During 2003, the Company recognized a gain of $695,000, which is included in “(Gain) loss on sale of businesses” in the accompanying consolidated statement of operations, upon the receipt of funds released through escrow. All amounts held in escrow  were released to the Company as of December 31, 2003.
 
Note 4—Balance Sheet Details (in thousands):

 	  	December 31,
	 	
 	  	2004
	 	 	2003
	 	
Trade and other accounts receivable, net:	  	 	 	 	 	 	 	 	
Accounts receivable	  	$	7,304	 	 	$	6,115	 	
Allowance for doubtful accounts	  	 	(393	)	 	 	(179	)	
 	  				 				
 	  	$	6,911	 	 	$	5,936	 	
 	  				 				
Inventory:	  	 	 	 	 	 	 	 	
Raw material and purchased parts	  	$	5,454	 	 	$	5,631	 	
Work-in-process	  	 	1,574	 	 	 	1,584	 	
Finished goods	  	 	5,104	 	 	 	3,248	 	
Inventory reserve	  	 	(4,027	)	 	 	(3,154	)	
 	  				 				
 	  	$	8,105	 	 	$	7,309	 	
 	  				 				
Property and equipment:	  	 	 	 	 	 	 	 	
Machinery, furniture and office equipment	  	$	18,126	 	 	$	16,453	 	
Computer hardware and software	  	 	5,826	 	 	 	7,183	 	
Leasehold improvements	  	 	2,901	 	 	 	2,524	 	
 	  				 				
 	  	 	26,853	 	 	 	26,160	 	
Less accumulated depreciation and amortization	  	 	(15,961	)	 	 	(15,391	)	
 	  				 				
 	  	$	10,892	 	 	$	10,769	 	
 	  				 				
Accounts payable and accrued liabilities	  	 	 	 	 	 	 	 	
Accounts payable	  	$	2,855	 	 	$	3,555	 	
Other accrued liabilities	  	 	4,083	 	 	 	3,204	 	
Customer deposits	  	 	353	 	 	 	599	 	
Advance payments	  	 	—  	 	 	 	891	 	
 	  				 				
 	  	$	7,291	 	 	$	8,249	 	

Warranty Reserve Analysis

 	  	Years Ended
December 31,
	 	
 	  	2004
	 	 	2003
	 	
Accrued Warranty:	  	 	 	 	 	 	 	 	
Beginning balance	  	$	1,262	 	 	$	1,154	 	
New product warranties	  	 	489	 	 	 	827	 	
Settlement of warranties	  	 	(746	)	 	 	(776	)	
Other changes/adjustments to warranties	  	 	(304	)	 	 	57	 	
 	  				 				
Ending balance	  	$	701	 	 	$	1,262	 	

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Note 5—Short-Term and Long-Term Borrowings
 
Short-term borrowings
 
Maxwell Technologies, SA has a 2.0 million Swiss Franc, or approximately $1.8 million, bank credit agreement with a Swiss bank which renews annually. Borrowings under the credit agreement bear interest at LIBOR plus 1.75% with repayment terms extending beyond one month from the date of funding. Borrowings under the credit agreement are secured by the assets of Maxwell Technologies, SA. As of December 31, 2004 and 2003, the full amount of the credit agreement was drawn. The interest rate on the funds borrowed at December 31, 2004 was 2.48%.
 
Approximately $334,000 and $400,000 of letters of guarantee primarily related to customer deposits were outstanding as of December 31, 2004 and 2003, respectively.
 
The Company entered into a U.S. loan and security agreement in February 2004, which provides an overall credit limit of $3.0 million, subject to a one-year repayment period. Borrowings are secured by eligible accounts receivable balances, which are calculated and reported on a monthly basis. In March 2005, the credit line was renewed on substantially the same terms as the prior credit line. Borrowings under the credit agreement bear interest at Prime Rate plus 1.75% provided that the rate is not less than 5.75%. The agreement requires the Company to maintain a minimum tangible net worth of $20.5 million plus 50% of any consideration from future equity and debt transactions plus 50% of net income in each fiscal quarter after the date of the agreement. At December 31, 2004, the Company was required to maintain 85% of their banking activities and investment balances with its bank which provides the U.S. loan. At December 31, 2004 the Company had reduced its investment balance at its bank to less than 70% of the Company’s total investment value. On March 7, 2005 the U.S. loan and security agreement was amended to require that only 50% of the Company’s total investment balance be maintained at the bank. No amounts were drawn on this credit line as of December 31, 2004 and 2003.
 
Long-term borrowings
 
Maxwell Technologies, SA has a term loan with a maximum draw of 1.15 million Swiss Francs, or approximately $1.0 million, for financing specific capital equipment expenditures. Borrowings under the term loan are secured by the equipment being purchased. This credit agreement bears interest at the Swiss inter-bank borrowing rate plus 2.0%. The term loan can be borrowed in quarterly advances up to the maximum limit and repaid over one to five years. As of December 31, 2004, the full amount of the term loan has been drawn. The weighted average interest rate on the funds borrowed at December 31, 2004 was 3.76%.
 
Maxwell Technologies, SA had a loan from the Montena SA pension plan for 300,000 Swiss Francs, or approximately $265,000, that was paid off during 2004.
 
Payments due on borrowings during each of the five years subsequent to December 31, 2004 are as follow (in thousands):

2005	  	$	1,970	
2006	  	 	204	
2007	  	 	203	
2008	  	 	203	
2009	  	 	203	
 	  			
 	  	$	2,783	

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Note 6—Stock Activity and Stock Plans
 
Stock Sale
 
In November 2004, the Company raised approximately $10.1 million after deduction of expenses and fees through the sale of approximately 1.2 million shares of common stock to institutional investors. The Company sold the shares directly to the investors in a negotiated transaction in which no underwriters were used for placement. The shares had previously been registered under the Securities Act of 1933, as amended, pursuant to a shelf registration statement filed on Form S-3 with the Securities and Exchange Commission in September 2004. Approximately $5.5 million of securities are available for future issuance under this registration statement as of December 31, 2004.
 
Stock Option Plans
 
In December 1995, the Company adopted the 1995 Stock Option Plan under which, as amended, 3,340,000 shares of common stock were reserved for future grant. The Company’s 1999 Director Stock Option Plan, under which 75,000 shares were reserved for future grant, was adopted in 1999 and approved by the Company’s shareholders in January 2000. The plans provide for granting either Incentive Stock Options or Non-Qualified Stock Options to employees and non-employee members of the Company’s board of directors, respectively. In December 1999, the Company granted 294,030 non-qualified options to the Company’s then new President and Chief Executive Officer, Mr. Eibl, outside of the Company’s other option plans. In April 2002, in conjunction with the purchase of shares of its I-Bus/Phoenix and Electronic Components Group subsidiaries not already owned (see Note 7), the Company issued options to purchase approximately 520,000 shares of Maxwell common stock in exchange for options to purchase subsidiary common stock. This issuance of stock options was outside of the Company’s option plans. Options are also outstanding under expired stock option plans that were superceded by the current plans. Options granted under all stock option plans are for the purchase of common stock of the Company at not less than the stock’s fair market value at the date of grant. Employee options are generally exercisable in cumulative annual installments of 20–30 percent, while options in the 1999 Director Stock Option Plan are fully exercisable one year from date of grant. The options have terms of five to ten years. As of December 31, 2004, the Company has 380,933 shares available for future grant under its stock option plans.
 
In November 2002, the Board of Directors approved, and the Company established, a program to restore equity incentives for key employees and outside directors. In November 2002, options to purchase 853,461 shares of common stock with strike prices above $10, which were held by senior management and outside directors, were voluntarily cancelled by the option holders in exchange for the future issuance in late May 2003 of substitute stock options with a strike price equal to the then-prevailing market price of the common stock.
 
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The following table summarizes total aggregate stock option activity for the period January 1, 2002 through December 31, 2004:

 	  	Number of
Shares
	 	 	Weighted
Average
Exercise
Price
	
Balance at January 1, 2002	  	2,043,697	 	 	$	15.29	
Granted	  	1,111,557	 	 	$	8.54	
Exercised	  	(220,873	)	 	$	3.71	
Forfeited	  	(916,498	)	 	$	12.58	
Expired	  	(821,443	)	 	$	19.22	
 	  			 	 	 	
Balance at December 31, 2002	  	1,196,440	 	 	$	10.50	
Granted	  	1,860,316	 	 	$	6.73	
Exercised	  	(124,455	)	 	$	4.78	
Forfeited	  	(208,318	)	 	$	9.14	
Expired	  	(165,610	)	 	$	16.17	
 	  			 	 	 	
Balance at December 31, 2003	  	2,558,373	 	 	$	7.81	
Granted	  	271,502	 	 	$	11.04	
Exercised	  	(144,772	)	 	$	6.35	
Forfeited	  	(39,502	)	 	$	8.29	
Expired	  	(30,300	)	 	$	10.76	
 	  			 	 	 	
Balance at December 31, 2004	  	2,615,301	 	 	$	8.18	

The following table summarizes information concerning outstanding and exercisable Company common stock options at December 31, 2004:

Range of Exercise Prices
	  	Shares Under
Options
Outstanding
	  	Weighted
Average
Remaining
Contractual
Life (in years)
	  	Weighted
Average
Exercise
Price
	  	Shares
Under
Options
Exercisable
	  	Weighted
Average
Exercise
Price
	
$1.92 to $2.88	  	40,200	  	1.9	  	$	2.45	  	40,200	  	$	2.45	
$2.89 to $4.33	  	4,000	  	0.9	  	$	4.25	  	4,000	  	$	4.25	
$4.34 to $6.20	  	945,029	  	6.7	  	$	6.18	  	682,266	  	$	6.18	
$6.21 to $8.00	  	544,900	  	8.7	  	$	7.44	  	499,850	  	$	7.47	
$8.01 to $10.00	  	553,870	  	6.3	  	$	8.67	  	419,270	  	$	8.76	
$10.01 to $15.00	  	484,802	  	8.1	  	$	11.55	  	192,202	  	$	12.36	
$15.01 to $22.51	  	21,500	  	4.6	  	$	17.40	  	20,400	  	$	17.48	
$22.52 to $32.75	  	21,000	  	3.4	  	$	29.29	  	21,000	  	$	29.29	
 	  		  	 	  	 	 	  		  	 	 	
 	  	2,615,301	  	7.2	  	$	8.18	  	1,879,188	  	$	8.03	

The number of shares under options exercisable at December 31, 2004, 2003 and 2002 were 1,879,188, 1,202,931 and 732,745, respectively, with weighted average exercise prices of $8.03, $8.31 and $10.62, respectively. The estimated weighted average fair value at grant date for Company options granted during the years ended December 31, 2004, 2003 and 2002 was $4.93, $8.31 and $6.23 per share, respectively.
 
Stock Purchase Plans
 
In December 1994, the Company established the 1994 Employee Stock Purchase Plan and a Director Stock Purchase Plan. The employee plan 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-
 
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month offering period. The director plan permits non-employee directors to purchase common stock at 100% of the trading price of the stock on the date a request for purchase is received. In the years ended December 31, 2004, 2003 and 2002, aggregate shares of 22,160, 23,404 and 44,660, respectively, were issued under the two plans for aggregate proceeds to the Company of $120,000, $117,000 and $353,000 respectively. At December 31, 2004, 234,316 shares are reserved for future issuance under these plans.
 
In June 2002 and as part of completing the consolidation of ownership by the Company of I-Bus/Phoenix, four employees and one consultant of I-Bus/Phoenix were granted 19,500 shares of the Company’s common stock subject to certain restrictions. The shares granted vest over the next two years and had a fair market value of $182,000 at the date of grant. As a result of the divestiture of the applied computing business operations completed in the 2002 third fiscal quarter, vesting was accelerated and the balance of the deferred compensation was fully amortized.
 
In January 2000, the Board adopted, and the Company’s stockholders subsequently approved, the Company’s Management Equity Ownership Program (the “Program”). Under the Program, executive officers of the Company and other members of senior management selected by the Committee were offered full-recourse loans from the Company to be used to purchase stock of the Company. The loans bear interest and must be repaid in annual installments of principal and interest over a four-year period. Repayment of the loans were secured by the shares purchased with the loan proceeds. On February 1, 2000, loans in the aggregate amount of $900,000, bearing interest at 6.56%, were made in connection with the aggregate purchase of 74,995 newly issued shares of the Company’s common stock at $12.00 per share, the closing market price on the date of purchase. On January 29, 2002 loans in the aggregate amount of $75,000, bearing interest at 4.85%, were made in connection with the aggregate purchase of 9,258 newly issued shares of the Company’s common stock at $8.10 per share, the closing market price on the date of purchase. In June 2002 the Company decided to extinguish the program and cancelled the 74,000 shares and $970,000 loan balance outstanding under the plan. The Company recorded expense of $116,000 related to the cancellation of these notes during 2002.
 
Deferred Compensation
 
In 2003, the Company and its former Chairman of the Board entered into a services agreement whereby the former Chairman received an option to acquire 94,251 shares at the fair market value as of the date of the grant. The options are fully vested and have a fixed life of four years. Accordingly, the Company recorded compensation expense of $313,000 representing the fair value of the options pursuant to the Black-Scholes valuation model.
 
Stockholder Rights Plan
 
In November 1999, the Company adopted a Stockholder Rights Plan as a successor to its previous plan, which expired in June 1999. In accordance with the plan, the Company distributed one non-voting common stock purchase right (“Right”) for each outstanding share of common stock. The Rights are not exercisable and will not trade separately from the common stock unless a person or group acquires, or makes a tender offer for, 20% or more of the Company’s common stock. Initially, each Right entitles the registered holder to purchase one share of Company common stock at a price of $75 per share, subject to certain anti-dilution adjustments. If the Rights become exercisable and certain conditions are met, then each Right not owned by the acquiring person or group will entitle its holder to receive, upon exercise, Company common stock having a market value of twice the exercise price of the Right. In addition, the Company may redeem the Rights at a price of $0.01 per Right, subject to certain restrictions. The Stockholder Rights Plan expires on October 21, 2009.
 
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Note 7—Consolidation of Subsidiary Ownership
 
In February 2002, PacifiCorp Energy Ventures, Inc., the largest minority shareholder in the Company’s Electronic Components Group (“ECG Group”) subsidiary, exchanged its preferred shares of the Electronic Components Group for 518,000 common shares of Maxwell pursuant to its right under the original investment agreement.
 
On April 15, 2002, the Company completed merger transactions with the Electronic Components Group subsidiary and the I-Bus/Phoenix subsidiary whereby all of the remaining minority shareholdings and options in such subsidiaries were converted to shares and options of Maxwell. The conversion ratio was established through the Company’s analysis of the fair market value of the subsidiaries and an average trading price of Maxwell’s stock at the time of the analysis. The Company issued 86,000 shares to Electronic Components Group minority shareholders in exchange for their ownership. The value of this stock issuance was determined to be $795,000 based on the closing price of Maxwell shares on the day of the merger. As a result of these transactions relating to the ECG Group, the Company recorded $3.8 million of excess purchase price based on the value of Maxwell common shares above the minority interest on the balance sheet, $2.8 million was allocated as goodwill related to the TeknaSeal Division which was sold in September 2002 and $987,000 was allocated to ultracapacitor intellectual property (patents). In addition, the Company issued 479,000 shares to I-Bus/Phoenix minority shareholders in exchange for their ownership. The value of this stock issuance was determined to be $4.4 million based on the closing price of Maxwell shares on the day of the merger. The Company recorded $1.1 million excess purchase price based on the value of Maxwell’s common shares above the minority interest on the balance sheet; $422,000 was allocated as goodwill associated with the I-Bus Computing Systems business and was considered impaired and written off in conjunction with its sale in September 2002. The balance was allocated as goodwill related to the Power Systems business.
 
In connection with the merger transactions, the Company assumed all outstanding vested and unvested options to purchase shares of common stock of these subsidiaries. Each such option assumed by the Company continued to have, and be subject to, the same terms and conditions as were generally applicable immediately prior to the merger, provided that (A) such option shall be exercisable for that number of whole shares of the Company’s common stock equal to the product of the number of shares of the subsidiary’s common stock that were issuable upon exercise of such assumed option immediately prior to the merger multiplied by the conversion ratio, and (B) the per share exercise price for the shares of the Company’s common stock issuable upon exercise of such assumed option was equal to the quotient determined by dividing the exercise price per subsidiary option share by the conversion ratio. As a result, options to purchase approximately 302,505 shares and 982,761 shares of common stock of the ECG and I-Bus/Phoenix subsidiaries, respectively, assumed in the mergers became options to purchase 127,052 and 393,104 shares of Maxwell’s common stock, respectively. The weighted-average exercise prices of the modified options was $5.01 and $7.98, respectively. As a result, stock-based compensation expense totaling $1.9 million was recorded in connection with the assumption and exchange of vested subsidiary stock options based on the difference between the fair market value of the Company’s common stock on the respective merger date and the exercise price of the modified stock option. The unvested stock options, all of which had no intrinsic value on the date of the exchange, were forfeited prior to vesting.
 
Note 8—Goodwill and Other Intangibles
 
The Company has implemented SFAS No. 142 and began applying the rules on accounting for goodwill and other intangible assets effective January 1, 2002. The SFAS No. 142 goodwill impairment test is a two-step process. The first step consists of estimating the fair value of each reporting unit and comparing those estimated fair values with the carrying values, which includes the allocated goodwill. If the fair value is less than the carrying value, a second step is performed to compute the amount of the impairment by determining an implied fair value of goodwill. The implied fair value of goodwill is the residual fair value derived by deducting the fair value of a reporting unit’s assets and liabilities from its estimated fair value, which was calculated in step one. The impairment charge represents the excess of the carrying amount of the reporting unit’s goodwill over the
 
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implied fair value of their goodwill. SFAS No. 142 requires goodwill to be tested annually at the same time every year and when an event occurs or circumstances change such that it is reasonably possible that an impairment may exist. The Company selected December 31 as its annual testing date. As a result of the Company’s annual assessment as of December 31, 2004 and 2003, using the market and discounted cash flow approaches, no impairment was indicated.
 
In assessing the recoverability of goodwill during 2002, the Company made assumptions regarding future cash flows and other factors to determine the fair value. Goodwill associated with the I-Bus Computing Systems business was written off in conjunction with the disposition of that business (Note 14). The remaining goodwill is mainly attributable to the acquisition of Montena, which was completed in July 2002.
 
The change in the carrying amount of goodwill from January 1, 2003 to December 31, 2004 is as follows (in thousands):

Balance at January 1, 2003	  	$	17,577	
Foreign currency translation adjustments	  	 	1,901	
 	  			
Balance at December 31, 2003	  	 	19,478	
Foreign currency translation adjustments	  	 	1,623	
 	  			
Balance at December 31, 2004	  	$	21,101	

Acquired intangible assets subject to amortization at December 31, 2004, and 2003 were as follows (in thousands):

 	  	Useful
Life
	  	Gross
Carrying
Value
	  	Accumulated
Amortization
	 	 	Foreign
Currency
Adjustment
	  	Net
Carrying
Value
	
As of December 31, 2004:	  	 	  	 	 	  	 	 	 	 	 	 	  	 	 	
Developed core technology	  	10 years	  	$	1,100	  	$	(302	)	 	$	276	  	$	1,074	
Patents	  	13 years	  	 	988	  	 	(171	)	 	 	—  	  	 	817	
 	  	 	  			  				 			  			
 	  	 	  	$	2,088	  	$	(473	)	 	$	276	  	$	1,891	
 	  	 	  			  				 			  			
As of December 31, 2003:	  	 	  	 	 	  	 	 	 	 	 	 	  	 	 	
Developed core technology	  	10 years	  	$	1,100	  	$	(181	)	 	$	190	  	$	1,109	
Acquired backlog	  	6 months	  	 	464	  	 	(464	)	 	 	—  	  	 	—  	
Patents	  	13 years	  	 	988	  	 	(95	)	 	 	—  	  	 	893	
 	  	 	  			  				 			  			
 	  	 	  	$	2,552	  	$	(740	)	 	$	190	  	$	2,002	

Amortization expense for intangible assets was $197,000, $197,000 and $543,000 for the years ended December 31, 2004, 2003 and 2002, respectively. The estimated amortization for each of the next five years ended December 31 is as follows (in thousands):

Fiscal Years
	  	 	
2005	  	$	197	
2006	  	 	197	
2007	  	 	197	
2008	  	 	197	
2009	  	 	197	
Thereafter	  	 	906	
 	  			
 	  	$	1,891	

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Actual amortization expense to be reported in future periods could differ from these estimates as a result of foreign currency translation adjustments, impairments and other factors.
 
Note 9—Income Taxes
 
The provision (benefit) for income taxes based on loss from continuing operations is as follows (in thousands):

 	  	Years Ended December 31,
	 	
 	  	2004
	 	 	2003
	 	 	2002
	 	
Federal:	  	 	 	 	 	 	 	 	 	 	 	 	
Current	  	$	—  	 	 	$	—  	 	 	$	(213	)	
Deferred	  	 	(3,837	)	 	 	(3,315	)	 	 	(10,408	)	
 	  				 				 				
 	  	 	(3,837	)	 	 	(3,315	)	 	 	(10,621	)	
State:	  	 	 	 	 	 	 	 	 	 	 	 	
Current	  	 	—  	 	 	 	3	 	 	 	2	 	
Deferred	  	 	(581	)	 	 	104	 	 	 	(2,537	)	
 	  				 				 				
 	  	 	(581	)	 	 	107	 	 	 	(2,535	)	
Foreign:	  	 	 	 	 	 	 	 	 	 	 	 	
Current	  	 	—  	 	 	 	(8	)	 	 	(63	)	
Deferred	  	 	712	 	 	 	(91	)	 	 	160	 	
 	  				 				 				
 	  	 	712	 	 	 	(99	)	 	 	97	 	
Valuation allowance	  	 	4,418	 	 	 	3,211	 	 	 	12,945	 	
 	  				 				 				
 	  	$	712	 	 	$	(96	)	 	$	(114	)	

The provision (benefit) for income taxes in the accompanying consolidated statements of operations differs from the amount calculated by applying the statutory income tax rate to loss from continuing operations before income taxes. The primary components of such difference are as follows (in thousands):

 	  	Years Ended December 31,
	 	
 	  	2004
	 	 	2003
	 	 	2002
	 	
Taxes at federal statutory rate	  	$	(3,092	)	 	$	(2,511	)	 	$	(12,055	)	
State taxes, net of federal benefit	  	 	(523	)	 	 	(460	)	 	 	(794	)	
Effect of tax rate differential for foreign subsidiary	  	 	885	 	 	 	(334	)	 	 	(52	)	
Adjustment of federal and state net operating losses	  	 	(794	)	 	 	—  	 	 	 	—  	 	
Impact of asset basis difference in acquisitions	  	 	43	 	 	 	26	 	 	 	2,278	 	
Tax credits	  	 	(225	)	 	 	(249	)	 	 	(2,081	)	
Valuation allowance, including tax benefits of stock activity	  	 	4,418	 	 	 	3,245	 	 	 	12,945	 	
Other items not reflected in consolidated statements of operations	  	 	—  	 	 	 	187	 	 	 	(355	)	
 	  				 				 				
Tax provision (benefit)	  	$	712	 	 	$	(96	)	 	$	(114	)	

The Company has established a valuation allowance against its deferred tax assets due to the uncertainty surrounding the realization of such assets as evidenced by the cumulative losses from operations through December 31, 2004. Management periodically evaluates the recoverability of the deferred tax assets. At such time as it is determined that it is more likely than not that deferred assets are realizable, the valuation allowance will be reduced accordingly. The Company has recorded a valuation allowance of $39.4 million as of December 31, 2004 to reflect the estimated amount of deferred tax assets that may not be realized. The Company increased its valuation allowance by $4.4 million for the year ended December 31, 2004. The valuation allowance includes stock option deductions, the benefit of which will eventually be credited to equity.
 
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Pursuant to Internal Revenue Code Sections 382 and 383, use of the Company’s federal net operating loss and credit carryforwards may be limited due to a cumulative change in ownership of more than 50% within a three-year period.
 
As of December 31, 2004, the Company had net operating loss carryforwards for federal and state income tax purposes of approximately $84.5 million and $35.9 million, respectively. The federal loss carryforward begins to expire in calendar year 2011, while the state loss carryforwards will continue to expire in 2005 through 2014. In addition, the Company has research and development and other tax credit carryforwards for federal and state income tax purposes as of December 31, 2004 of $3.5 million and $2.4 million, respectively, which begin to expire in 2005. The Company also has foreign net operating carryforwards of approximately $150,000.
 
Unremitted earnings of foreign subsidiaries have been included in the consolidated financial statements without giving effect to the United States taxes that may be payable on distribution to the United States because it is not anticipated such earnings will be remitted to the United States. If remitted, the additional United States taxes paid would not be material.
 
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The primary components of the Company’s deferred tax assets and liabilities within continuing operations are as follows (in thousands):

 	  	December 31,
	 	
 	  	2004
	 	 	2003
	 	
Deferred tax assets:	  	 	 	 	 	 	 	 	
Tax loss carryforwards	  	$	30,812	 	 	$	26,858	 	
Research and development and other tax credit carryforwards	  	 	5,901	 	 	 	5,625	 	
Uniform capitalization, contract and inventory related reserves	  	 	2,133	 	 	 	2,044	 	
Environmental and restructuring provisions	  	 	242	 	 	 	241	 	
Asset impairment	  	 	—  	 	 	 	23	 	
Accrued vacation	  	 	207	 	 	 	215	 	
Allowance for doubtful accounts	  	 	138	 	 	 	40	 	
Other	  	 	39	 	 	 	136	 	
 	  				 				
 	  	 	39,472	 	 	 	35,182	 	
Deferred tax liabilities:	  	 	 	 	 	 	 	 	
Tax depreciation in excess of book depreciation	  	 	(57	)	 	 	(151	)	
Inventory deduction	  	 	(261	)	 	 	(145	)	
Intangible assets	  	 	(264	)	 	 	(227	)	
Pension assets	  	 	(944	)	 	 	(473	)	
Other	  	 	(55	)	 	 	—  	 	
 	  				 				
 	  	 	(1,581	)	 	 	(996	)	
 	  				 				
Net deferred tax assets before valuation allowance	  	 	37,891	 	 	 	34,186	 	
Valuation allowance	  	 	(39,415	)	 	 	(34,998	)	
 	  				 				
Net deferred tax liabilities	  	$	(1,524	)	 	$	(812	)	

Note 10—Commitments and Contingencies
 
The Company is the subject of government audits of two businesses sold or discontinued in 2001. A contract, not assumed by the acquirers of the Company’s former defense contract business, entered into in 1990 and completed in the late 1990s is currently being audited by the Defense Department’s auditing services. The Company has submitted documentation supporting approximately $550,000 of costs charged to the contract. The Company believes that such costs were properly charged.
 
The Internal Revenue Service (IRS) has assessed the Company with a penalty of approximately $262,000 for failure to file Form W-2s for a business sold in 2001. The acquiring company of the Company’s former
 
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business did write the IRS stating that they would be responsible for the filing of 2001 Form W-2s. The Company has submitted this documentation to the IRS.
 
While there can be no assurance that the Defense Department’s auditing services and the IRS will accept the documentation submitted or that the matters will be resolved in favor of the Company, management believes the resolution of these matters will not have a significant adverse effect on the Company’s financial position, results of operations, or cash flows.
 
The Company enters into indemnification agreements in the ordinary course of business in which the indemnified party is held harmless and is reimbursed for losses incurred from claims by third parties. In connection with divestitures of certain assets or businesses, the Company often provides indemnities to the buyer with respect to certain matters including, for example, environmental liabilities and unidentified liabilities related to periods prior to the disposition. Due to the uncertain nature of the indemnities, the maximum liability cannot be quantified. Liabilities for obligations are recorded where appropriate and when they are probable and can be reasonably estimated. Historically, the Company has not made significant payments for these obligations.
 
Note 11—Leases
 
Rental expense amounted to $1.4 million, $1.5 million and $1.9 million in the years ended December 31, 2004, 2003 and 2002, respectively, and was incurred primarily for facility rental. The Company’s facilities leases expire in July 2007 for its San Diego, California facility and June 2009 for its Rossens, Switzerland facility. Future annual minimum rental commitments and automobile leases as of December 31, 2004 are as follows (in thousands):

Fiscal Years
	  	 	
2005	  	$	1,669	
2006	  	 	1,646	
2007	  	 	1,331	
2008	  	 	866	
2009	  	 	433	
 	  			
 	  	$	5,945	

Note 12—Pension and Other Postretirement Benefit Plans
 
Foreign Plans
 
In July 2002, the Company acquired Montena, including its pension plan covering its Swiss employees (Note 2). The plan provides pension benefits to employees under the terms of the plan as required by Swiss law and regulations. The plan has characteristics of defined benefit, defined contribution and cash balance plans. For the year ended December 31, 2002, this plan was treated as a defined contribution plan; however, for the year ended December 31, 2003 in accordance with EITF 03-4, the plan has been classified as a defined benefit pension plan. The adoption of EITF 03-4 is being accounted for as the effect of adopting a new accounting principle as of the beginning of the year, January 1, 2003, and resulted in a cumulative effect of an accounting change, net of tax, of $878,000 for the year ended December 31, 2003.
 
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 the amount required by Swiss law, using the required percentage applied to the employee’s compensation. In addition, the employee is required to contribute an identical amount to the pension plan. The Company made pension contributions of $296,000 and $302,000 in 2004 and 2003, respectively. This plan has a measurement date of December 31.
 
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During 2003, approximately 46 former employees of Montena left the plan and were paid out their participant balances in accordance with the terms of the plan. This resulted in a settlement gain of $154,000 in 2003. This amount is shown in the development of the change in benefit obligation.
 
In December 2003, the Company sold its Winding Equipment business segment. As a result, approximately 50 employees have left the Company. This resulted in a curtailment gain of approximately $2.0 million. The Company was obligated during fiscal 2004 to pay the obligation to the employees based upon their participant balances at the date of termination plus any other amounts that were allocable to them as a result of the plan operating results prior to the settlement. The curtailment gain amount is shown in the development of the change in benefit obligation for fiscal 2003.

 	  	Pension Benefits
	 	
 	  	Year ended
December 31,
	 	
 	  	2004
	 	 	2003
	 	
 	  	(in thousands)	 	
Change in benefit obligation:	  	 	 	 	 	 	 	 	
Benefit obligation at beginning of year	  	$	14,320	 	 	$	18,185	 	
Service cost	  	 	216	 	 	 	545	 	
Interest cost	  	 	426	 	 	 	567	 	
Plan participant contributions	  	 	296	 	 	 	302	 	
Benefits paid	  	 	(3,371	)	 	 	(5,080	)	
Actuarial (gain)	  	 	(797	)	 	 	—	 	
Administrative expenses paid	  	 	(66	)	 	 	—	 	
Curtailments	  	 	—	 	 	 	(2,023	)	
Special termination benefits / asset transfers in	  	 	—	 	 	 	158	 	
Effect of foreign currency translation	  	 	1,075	 	 	 	1,666	 	
 	  				 				
Benefit obligation at end of year	  	 	12,099	 	 	 	14,320	 	
 	  				 				
Changes in plan assets:	  	 	 	 	 	 	 	 	
Fair value of plan assets at beginning of year	  	 	18,971	 	 	 	19,536	 	
Actual return on plan assets	  	 	1,277	 	 	 	1,688	 	
Special termination benefits / asset transfers in	  	 	—	 	 	 	158	 	
Company contributions	  	 	296	 	 	 	302	 	
Plan participant contributions	  	 	296	 	 	 	302	 	
Benefits paid	  	 	(3,371	)	 	 	(5,080	)	
Administrative expenses paid	  	 	(66	)	 	 	—	 	
Effect of currency translation	  	 	1,698	 	 	 	2,065	 	
 	  				 				
Fair value of plan assets at end of year	  	 	19,101	 	 	 	18,971	 	
 	  				 				
Funded status at end of year	  	 	7,002	 	 	 	4,651	 	
Unrecognized net actuarial gain	  	 	(1,942	)	 	 	(689	)	
 	  				 				
Net amount recognized	  	$	5,060	 	 	$	3,962	 	
 	  				 				
Amounts recognized in the consolidated balance sheet consist of:	  	 	 	 	 	 	 	 	
Prepaid benefit cost	  	$	4,314	 	 	$	3,617	 	
Accumulated other comprehensive income	  	 	746	 	 	 	345	 	
 	  				 				
Net amount recognized	  	$	5,060	 	 	$	3,962	 	
 	  				 				
Components of net periodic benefit cost:	  	 	 	 	 	 	 	 	
Service cost	  	$	216	 	 	$	545	 	
Interest cost	  	 	426	 	 	 	567	 	
Expected return on plan assets	  	 	(938	)	 	 	(899	)	
Net (gain) amortization	  	 	(56	)	 	 	—	 	
Curtailments	  	 	—	 	 	 	(2,023	)	
Settlements	  	 	—	 	 	 	(154	)	
 	  				 				
Net periodic income	  	$	(352	)	 	$	(1,964	)	

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 	  	Pension Benefits
	 	
 	  	Year ended
December 31,
	 	
 	  	2004
	 	 	2003
	 	
 	  	(in thousands)	 	
Weighted-average assumptions used to determine benefit obligations:	  	 	 	 	 	 	
Discount rate	  	3.25	%	 	3.50	%	
Rate of compensation increase	  	1.50	%	 	1.50	%	
Weighted-average assumptions used to determine net periodic benefit cost:	  	 	 	 	 	 	
Discount rate	  	3.50	%	 	3.50	%	
Expected long-term return on plan assets	  	5.00	%	 	5.00	%	
Rate of compensation increase	  	1.50	%	 	1.50	%	

 	  	December 31,
	 	
 	  	2004
	 	 	2003
	 	
 	  	(in thousands)	 	
			
Percentage of the fair value of total plan assets held in each major category of plan assets:	  	 	 	 	 	 	
Equity securities	  	15	%	 	15	%	
Debt securities	  	26	%	 	21	%	
Real estate	  	50	%	 	54	%	
Other	  	9	%	 	10	%	
 	  			 			
Total	  	100	%	 	100	%	

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid (in thousands):

2005	  	$	734	
2006	  	 	759	
2007	  	 	748	
2008	  	 	738	
2009	  	 	797	
Years 2010 through 2014	  	 	3,987	
 
The accumulated benefit obligation was $12.1 million and $14.3 million as of December 31, 2004 and 2003, respectively.
 
The Company expects to contribute $289,000 to its foreign pension plan in fiscal 2005.
 
U.S. Plans
 
The Company has other post retirement benefit plans covering substantially all of its employees in the United States. Substantially all U.S. employees are eligible to elect coverage under contributory employee savings plans which provide for Company matching contributions based on one-half of employee contributions up to certain plan limits. The Company’s matching contributions under these plans totaled $157,000, $190,000 and $283,000 for the years ended December 31, 2004, 2003 and 2002, respectively.
 
Note 13—Restructuring Charges
 
The restructuring charges balance at January 1, 2002 relates to various restructuring actions undertaken during 1999 and 2000. In 2003, restructuring reserves were fully utilized and the Company paid $216,000 for severance and $42,000 for taxes. No remaining restructuring liability was outstanding at December 31, 2003 and 2004.
 
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In the first half of 2002, I-Bus/Phoenix introduced new applied computing products that had been developed in 2001. However, the market for applied computing products, particularly in telecommunications, deteriorated throughout 2002. The Company responded to the poor market conditions for computing systems and other capital goods by restructuring I-Bus/Phoenix. In June 2002, the Company began implementing the restructuring plan and recorded restructuring charges of $707,000 which is included in “Asset impairment and restructuring charges” in the accompanying consolidated statements of operations during 2002, which was comprised of i) severance payments and other employee related expenses of $269,000 and ii) impairment of assets that will no longer be used, facility lease terminations and other closure cost related to certain facilities in Europe totaling $438,000. In addition, the Company also determined that certain components in inventory had been adversely impacted. Accordingly, the Company recorded an inventory charge of $3.0 million for certain excess and obsolete raw material components and finished goods. This charge is classified in “Cost of Sales” in the accompanying consolidated statements of operations.
 
During the third fiscal quarter of 2002, the Company decided to sell the applied computing business of I-Bus/Phoenix to a new company organized by former I-Bus/Phoenix senior managers. In preparation for the sale and to configure the I-Bus/Phoenix computing business to be self-supporting, I-Bus/Phoenix consolidated all production of the applied computing products to its facility in Tangmere, United Kingdom, and reduced worldwide personnel. As a result of this plan, the Company recorded restructuring charges of $922,000 during 2002 which is included in “Asset impairment and restructuring charges” in the accompanying consolidated statements of operations. As of the date of sale, $245,000 of restructuring reserves were disposed as part of the sale.
 
The following table summarizes the restructuring charges recorded, and the activity related to such charges, in the years ended December 31, 2002 and 2003 (in thousands):

 	  	Severance Costs
for Involuntary
Employee
Terminations
	 	 	Costs to Exit
Certain Contractual
and Lease
Obligations
	 	 	Other Costs
Related to
Consolidation of
Facilities
	 	 	Other
	 	 	Total
Restructuring
Charges
	 	
Balance January 1, 2002	  	$	225	 	 	$	33	 	 	$	—  	 	 	$	—  	 	 	$	258	 	
Reserves established	  	 	1,191	 	 	 	215	 	 	 	223	 	 	 	—  	 	 	 	1,629	 	
Utilization of reserves:	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cash	  	 	(1,068	)	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	(1,068	)	
Non-cash	  	 	—  	 	 	 	—  	 	 	 	(223	)	 	 	—  	 	 	 	(223	)	
I-Bus disposition	  	 	(44	)	 	 	(201	)	 	 	—  	 	 	 	—  	 	 	 	(245	)	
 	  				 				 				 				 				
Balance December 31, 2002	  	 	304	 	 	 	47	 	 	 	—  	 	 	 	—  	 	 	 	351	 	
Reserves established	  	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	135	 	 	 	135	 	
Utilization of reserves:	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cash	  	 	(216	)	 	 	—  	 	 	 	—  	 	 	 	(42	)	 	 	(258	)	
Non-cash	  	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	(93	)	 	 	(93	)	
Reserves recovered	  	 	(88	)	 	 	(47	)	 	 	—  	 	 	 	—  	 	 	 	(135	)	
 	  				 				 				 				 				
Balance December 31, 2003	  	$	—  	 	 	$	—  	 	 	$	—  	 	 	$	—  	 	 	$	—  	 	

Note 14—Impairment Charges
 
In 2002, in connection with the sale of the I-Bus/Phoenix, Inc. business (Notes 3 and 8), the Company recorded $7.6 million of impairment charges related to long lived-assets. The write down of impaired assets consisted of $5.3 million of goodwill associated with the computing systems business. The Company conducted an extensive review of fixed assets supporting multiple businesses including the computing systems business. As part of these reviews, the Company determined the carrying values of the related long-lived assets was in excess of fair market value and as a result, an asset impairment charge of $2.3 million was recorded.
 
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Investment impairment of $500,000 was recorded in 2001 relating to Maxwell’s ownership of approximately 1% of a privately held company involved in support services in the areas of information technology, system and software integration and engineering and technical services under contract with various government agencies. In late 2003, Maxwell sold its stock in this company for a gain of $184,000.
 
Note 15—Discontinued Operations
 
In March 2001, the Company sold the assets of its defense contracting business in separate transactions with two buyers, for an aggregate sales price of approximately $20.7 million, the proceeds of which were recorded in 2001. The buyers assumed certain liabilities and ongoing contractual obligations of the business and hired most of the employees of the business. The Company retained certain leases and lease obligations expiring in 2006 and certain assets and liabilities of the business, including estimated amounts provided at closing for the expenses of the transaction and the net costs of winding up any remaining activities of the business. The Company recorded a gain, net of tax, of approximately $3.9 million in 2001, representing the net gain on the disposition of the assets and the net income from the operations of this discontinued business. Based on current and projected vacancies at leased facilities, the Company has revised previously estimated costs and has written off related leasehold improvements. These charges, which totaled $2.8 million, were recorded in 2001 and are included in the loss from discontinued operations. As of December 31, 2004, the net lease obligations are $650,000 and run through 2006, of which $608,000 has been reserved.
 
The Company increased the reserves for net lease obligations by $720,000 in 2003 and $485,000 in 2004, which covers lease payments through 2005. The owner of the vacant facility is actively marketing the property for sale or lease and additional reserves may be required if these marketing activities do not result in a sale or lease before the end of 2005.
 
In September 2002, the Company decided to suspend the operations of its PurePulse Technologies, Inc. subsidiary. PurePulse had been designing and developing systems that generate extremely intense, broad-spectrum, pulsed light to purify water and inactivate viruses and other pathogens that contaminate vaccines and products sourced from human or animal tissues, such as plasma derivatives, transfusion blood components and biopharmaceuticals. The Company plans to preserve its intellectual property and certain other technology assets for a possible future sale of such assets. The carrying value of the assets at December 31, 2004 was zero.
 
In December 2003, the Company’s Maxwell Technologies, SA subsidiary sold all fixed assets, substantially all inventory except work in process inventory, and all warranty and employee agreement obligations of its Metar Winding Equipment business segment, located in Matran, Switzerland to Metar SA, a new company, whose principal shareholder is a former CEO of Montena SA. The Company received $324,000 cash and recognized a loss on sale, net of tax, of $529,000, which is included in “Loss on disposal, net of tax” in the accompanying 2003 consolidated statements of operations. The new Metar company completed during January through June 2004 certain work in progress related to customer orders received by Maxwell Technologies, SA before the date of sale. The Company concluded its continuing involvement in the Winding Equipment business in the second quarter of 2004 with the shipment of the final Metar product order owned by the Company. In accordance with SFAS No. 144, the results of operations related to the Winding Equipment business which was recorded as continuing operations through the first quarter of 2004 have been reclassified as discontinued operations for fiscal 2004, 2003 and 2002.
 
Operating results of the discontinued operations are shown separately, net of tax, in the accompanying consolidated statements of operations. The businesses included in discontinued operations had sales aggregating $1.1 million, $10.2 million and $4.3 million in the years ended December 31, 2004, 2003 and 2002, respectively. These amounts are not included in net sales in the accompanying consolidated statements of operations.
 
Net liabilities of discontinued operations have been separately classified in the accompanying consolidated balance sheets as of December 31, 2004 and 2003 in the amounts of $1.0 million and $1.5 million, respectively.
 
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The net liability balances of discontinued operations were comprised of $608,000 for lease obligations and $437,000 for minority interest in PurePulse as of December 31, 2004. As of December 31, 2003, the net liability balance was comprised of $600,000 for lease obligations and $894,000 for minority interest.
 
Results for discontinued operations, by business unit, consisted of the following (in thousands):

 	  	Years Ended December 31,
	 	
 	  	2004
	 	 	2003
	 	 	2002
	 	
Discontinued operations, net of tax:	  	 	 	 	 	 	 	 	 	 	 	 	
Income (loss) from operations:	  	 	 	 	 	 	 	 	 	 	 	 	
Winding Equipment	  	$	949	 	 	$	(426	)	 	$	(105	)	
PurePulse Technologies and Government Systems	  	 	(216	)	 	 	(6	)	 	 	(4,832	)	
 	  				 				 				
 	  	 	733	 	 	 	(432	)	 	 	(4,937	)	
Loss on disposal:	  	 	 	 	 	 	 	 	 	 	 	 	
Winding Equipment	  	 	—  	 	 	 	(529	)	 	 	—  	 	
 	  				 				 				
 	  	$	733	 	 	$	(961	)	 	$	(4,937	)	

Note 16—Related Party Transactions
 
The Company’s Chief Executive Officer received a $120,000 loan on his date of hire in August 1999, which was forgivable 36 months thereafter provided that he did not resign or was not terminated for cause from the Company prior to that time. The loan and its forgiveness were extended on July 1, 2002 to June 30, 2004. The loan was forgiven on June 22, 2004. The Company had previously expensed this loan receivable in 2001 as it was likely that the loan would be forgiven.
 
Montena SA, the former parent company of Montena and a significant shareholder of Maxwell Technologies, Inc., is the lessor for the Company’s headquarters in Rossens, Switzerland. During the years ended December 31, 2004, 2003 and 2002, the Company paid $795,000, $809,000 and $346,000, respectively, in rental fees to Montena SA. Future rental commitments as of December 31, 2004 are $3.9 million.
 
Maxwell Technologies, SA had a loan from Montena SA pension plan for 300,000 Swiss Francs, or approximately $265,000, that was paid off during 2004.
 
Note 17—Legal Proceedings
 
The Company’s subsidiary I-Bus/Phoenix, Inc. has been named as a defendant in a suit filed on March 4, 2004 in the Superior Court of the State of California for the County of San Luis Obispo. This suit, Edmonds vs. I-Bus/Phoenix, Inc. , was filed by the plaintiff on his behalf and alleges damages concerning the repurchase of I-Bus/Phoenix, Inc. shares. While the Company’s legal counsel cannot express an opinion on this matter, management believes that any liability of the Company that may arise out of or with respect to this matter will have no significant adverse effect on the consolidated financial position, results of operations or cash flows of the Company.
 
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Note 18—Unaudited Quarterly Results of Operations (in thousands, except per share amounts)
 
During the year ended December 31, 2004, we completed the discontinuation of the Company’s Winding Equipment business segment. Therefore, the following financial information for fiscal 2004 and 2003 include the reclassification of the Winding Equipment business to discontinued operations.

 	  	Quarter Ended
	 	
 	  	March 31
	 	 	June 30
	 	 	September 30
	 	 	December 31
	 	
Year ended December 31, 2004:	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total revenue	  	$	9,873	 (A)	 	$	7,136	 	 	$	6,716	 	 	$	8,487	 	
Gross profit	  	 	2,958	 (B)	 	 	1,861	 	 	 	1,518	 (B)	 	 	574	 (B)	
Loss from continuing operations	  	 	(975	)	 	 	(1,392	)	 	 	(2,380	)(D)	 	 	(5,061	)(D)	
Discontinued operations, net of tax	  	 	390	 	 	 	397	 (C)	 	 	(34	)	 	 	(20	)(C)	
Net loss	  	 	(585	)	 	 	(995	)	 	 	(2,414	)	 	 	(5,081	)	
Basic and diluted net loss per share:	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loss from continuing operations	  	$	(0.07	)	 	$	(0.10	)	 	$	(0.17	)	 	$	(0.33	)	
Discontinued operations, net of tax	  	 	0.03	 	 	 	0.03	 	 	 	—  	 	 	 	—  	 	
 	  				 				 				 				
Net loss per share	  	$	(0.04	)	 	$	(0.07	)	 	$	(0.17	)	 	$	(0.33	)	
 	  				 				 				 				
Year ended December 31, 2003:	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total revenue	  	$	7,833	 	 	$	7,915	 	 	$	8,297	 	 	$	11,121	 (H)	
Gross profit	  	 	600	 	 	 	1,088	 (F)	 	 	1,126	 (F)	 	 	3,798	 	
(Loss) income from continuing operations	  	 	(3,540	)(G)	 	 	(3,269	)(G)	 	 	(2,268	)	 	 	2,865	 (I)	
Discontinued operations, net of tax	  	 	(821	)(E)	 	 	(170	)	 	 	195	 	 	 	(165	)	
Cumulative effect of change in accounting	  	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	878	 	
Net (loss) income	  	 	(4,361	)	 	 	(3,439	)	 	 	(2,073	)	 	 	3,578	 	
Basic and diluted net (loss) income per share:	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
(Loss) income from continuing operations	  	$	(0.26	)	 	$	(0.24	)	 	$	(0.16	)	 	$	0.21	 	
(Loss) income from discontinued operations	  	 	(0.06	)	 	 	(0.01	)	 	 	0.01	 	 	 	(0.01	)	
Cumulative effect of change in accounting	  	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	0.06	 	
 	  				 				 				 				
Net (loss) income per share	  	$	(0.32	)	 	$	(0.25	)	 	$	(0.15	)	 	$	0.26	 	

(A)	Includes license fees of $1 million.	
(B)	Includes charges of $500,000, $440,000 and $1.4 million for customer orders received in the first, third and fourth quarters of 2004, respectively, which were priced below the Company’s production cost, as well as charges of $450,000 and $159,000 in the third and fourth quarters, respectively, for slow moving small cell BOOSTCAP ® inventory and $733,000 in the fourth quarter for excess and obsolete inventory.	
(C)	Includes charges of $250,000 and $235,000 in the second and fourth quarters, respectively, for lease obligations related to vacant facilities of discontinued operations.	
(D)	Includes charges of $1.0 million for audit and consulting fees related to compliance activities pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 in the fourth quarter, charges of $150,000 for bad debt provisions in the third quarter.	
(E)	Includes charge of $720,000 for lease obligations related to vacant facilities of discontinued operations.	
(F)	Includes charge of $444,000 to write off inventory and equipment in the second quarter and a charge of $393,000 in the third quarter for warranty buy-outs, both of which relate to the discontinuation of the accelerated life testers product line.	
(G)	Includes charge of $327,000 for severance payable to a former Chief Executive Officer in the first quarter, and a charge of $313,000 for compensation expense related to options provided to a former Chairman of the Board in the second quarter.	
(H)	Includes a license fee of $4 million.	
(I)	Includes gain on sale of property of $1.2 million, gain on sale of business of $475,000 for recovery of I-Bus note receivable, gain on sale of business of $695,000 for payments received from the sale of TeknaSeal, and pension curtailment and settlement gain of $2.2 million.	
 
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 Schedule II
Valuation and Qualifying Accounts (in thousands)

 	  	Balance at the
Beginning of
the Year
	  	Charged to
Expense
	  	Acquisitions/
Transfers
and Other
	 	 	Write-offs
Net of
Recoveries
	 	 	Balance at
the End of
the Period
	
Allowance for Doubtful Accounts:	  	 	 	  	 	 	  	 	 	 	 	 	 	 	 	 	 	
December 31, 2002	  	$	831	  	$	576	  	$	(238	)	 	$	(485	)	 	$	684	
December 31, 2003	  	 	684	  	 	241	  	 	17	 	 	 	(763	)	 	 	179	
December 31, 2004	  	 	179	  	 	212	  	 	5	 	 	 	(3	)	 	 	393	
Inventory Reserve:	  	 	 	  	 	 	  	 	 	 	 	 	 	 	 	 	 	
December 31, 2002	  	 	3,896	  	 	8,011	  	 	1,047	 	 	 	(10,928	)	 	 	2,026	
December 31, 2003	  	 	2,026	  	 	3,070	  	 	74	 	 	 	(2,016	)	 	 	3,154	
December 31, 2004	  	 	3,154	  	 	3,190	  	 	32	 	 	 	(2,349	)	 	 	4,027	
 
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 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
None.
 
 Item 9A. Controls and Procedures
 
Management’s Annual Report on Internal Control Over Financial Reporting
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
 
A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Based on our evaluation under the framework in Internal Control—Integrated Framework , our management has concluded that, as of December 31, 2004, our internal control over financial reporting was not effective due to the existence of two material weaknesses. The material weaknesses existing as of December 31, 2004 relate to a lack of adequate review of our financial close procedures surrounding accrued expenses and accounting for stock based compensation in the 2002 financial statements. The material weaknesses resulted in adjustments to our 2004 financial statements with respect to accrued employee compensation expense and professional fees and in a restatement of our 2002 financial statements related to stock based compensation.
 
McGladrey & Pullen, LLP, our independent registered public accounting firm, has audited management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2004 as stated in their report which is included in this Annual Report on Form 10-K.
 
Management’s Response and Plan for Improvement
 
Management has responded to the identification of material weaknesses related to our internal control over financial reporting and accounting for stock based compensation in the 2002 financial statements by performing additional accounting, financial analysis and managerial review of procedures in order to ensure that the financial information contained in our Annual Report on Form 10-K is reliable. Detailed validation work was performed by internal personnel with respect to all of our financial close procedures surrounding accrued expenses in order to verify the financial information and to substantiate the disclosures contained in our Annual Report on Form 10-K.
 
In addition, management has further responded by approving a plan to increase internal accounting staff at our San Diego, California location from four to six persons, and at our Rossens, Switzerland location from two to three persons. Management believes that these measures will address the identified weaknesses in our system of internal control over financial reporting. Management will, on an ongoing basis, monitor the implementation of the plan to improve the effectiveness of our internal control over financial reporting, and will take action as appropriate.
 
Changes in Internal Controls During Fourth Quarter of 2004
 
In the fourth quarter of 2004, we implemented certain improvements to both our business and information technology internal controls surrounding financial reporting. Management believes that these improvements will increase the efficiency and effectiveness of our internal control.
 
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Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
 
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we concluded an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act). Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were ineffective as of December 31, 2004 because of the material weaknesses identified above.
 
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Attestation Report of McGladrey & Pullen, LLP
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors
Maxwell Technologies, Inc.
San Diego, California
 
We have audited management’s assessment, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting appearing under Item 9A, that Maxwell Technologies, Inc. did not maintain effective internal control over financial reporting as of December 31, 2004, because of the effect of two material weaknesses relating to a lack of adequate review of the Company’s financial close procedures surrounding accrued expenses, and accounting for stock based compensation, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Maxwell Technologies, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following material weaknesses have been identified and included in management’s assessment: As of December 31, 2004, the Company did not maintain adequate review of the Company’s financial close procedures related to accrued expenses and did not properly account for stock based compensation in the 2002 financial statements. These material weaknesses resulted in adjustments to the Company’s 2004 financial statements with respect to accrued employee compensation expense and professional fees and in a restatement to the Company’s 2002 financial statements related to stock based compensation. These material
 
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weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2004 consolidated financial statements, and this report does not affect our report dated March 15, 2005 on those consolidated financial statements.
 
In our opinion, management’s assessment that Maxwell Technologies, Inc. did not maintain effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, because of the effect of the material weaknesses described above on the achievement of the objectives of the control criteria, Maxwell Technologies, Inc. has not maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
 
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Maxwell Technologies, Inc. as of December 31, 2004, and the related consolidated statements of operations, stockholders’ equity and comprehensive loss and cash flows for the year then ended and our report dated March 15, 2005 expressed an unqualified opinion thereon.
 
/s/    MCGLADREY & PULLEN, LLP
 
San Diego, California
March 15, 2005
 
 Item 9B. Other Information
 
None.
 
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PART III
 
 Item 10. Directors and Executive Officers of the Registrant
 
The information required by this item will be contained in our definitive Proxy Statement with respect to our Annual Meeting of Stockholders, to be held on May 5, 2005, under the captions “Election of Directors,” “Board of Directors Meetings and Committees,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Executive Compensation” and “Code of Business Ethics and Conduct,” and is incorporated by reference herein.
 
 Item 11. Executive Compensation
 
The information required by this item will be contained in our definitive Proxy Statement with respect to our Annual Meeting of Stockholders, to be held on May 5, 2005, under the caption “Executive Compensation,” and is incorporated by reference herein.
 
 Item 12. Security Ownership of Certain Beneficial Owners and Management
 
The information required by this item will be contained in our definitive Proxy Statement with respect to our Annual Meeting of Stockholders, to be held on May 5, 2005, under the caption “Security Ownership of Certain Beneficial Owners and Management,” and is incorporated by reference herein.
 
Item 13. Certain  Relationships and Related Transactions
 
The information required by this item will be contained in our definitive Proxy Statement with respect to our Annual Meeting of Stockholders, to be held on May 5, 2005, under the caption “Certain Transactions,” and is incorporated by reference herein.
 
 Item 14. Principal Accountant Fees and Services
 
The information required by this item will be contained in our definitive Proxy Statement with respect to our Annual Meeting of Stockholders, to be held on May 5, 2005, under the caption “Ratification of Independent Auditor,” and is incorporated by reference herein.
 
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PART IV
 
 Item 15. Exhibits and Financial Statement Schedules
 
(a) Documents filed as part of this report.
 
1. Financial Statements . The consolidated financial statements required by this item are submitted in a separate section beginning on page 45 of this Annual Report on Form 10-K.
 
2. Financial Statement Schedules . The financial statement schedule entitled “Valuation and Qualifying Accounts” required by this item is submitted in a separate section beginning on page 79 of this Annual Report on Form 10-K.
 
3. Exhibits .

Exhibit
Number
	  	Description of Document

  2.1	  	Asset Purchase Agreement dated December 10, 2003 between Registrant and Metar SA en constitution. (1)	
		
  2.2	  	Purchase and Sale Agreement and Joint Escrow Instructions dated August 15, 2003 by and between Registrant and Horizon Christian Fellowship. (1)	
		
  2.3	  	First Amendment to Purchase and Sale Agreement and Joint Escrow Instructions by and between Registrant and Horizon Christian Fellowship, dated September 26, 2003. (1)	
		
  2.4	  	Second Amendment to Purchase and Sale Agreement and Joint Escrow Instructions by and between Registrant and Horizon Christian Fellowship, dated October 13, 2003. (1)	
		
  2.5	  	Third Amendment to Purchase and Sale Agreement and Joint Escrow Instructions by and between Registrant and Horizon Christian Fellowship, dated December 23, 2003. (1)	
		
  3.1	  	Restated Certificate of Incorporation of Registrant. (14)	
		
  3.2	  	Certificate of Amendment of Restated Certificate of Incorporation of Registrant, dated November 22, 1996. (8)	
		
  3.3	  	Certificate of Amendment of Restated Certificate of Incorporation of Registrant, dated February 9, 1998. (2)	
		
  3.4	  	Amended and Restated Bylaws of Registrant. (3)	
		
  4.1	  	Rights Agreement dated November 5, 1999 between Registrant and Chase Mellon Shareholders Services, LLC, as Rights Agent. (13)	
		
  4.2	  	Amendment of Rights Agreement dated as of July 5, 2002. (15)	
		
10.1	  	1995 Stock Option Plan of Registrant. (9)	
		
10.2	  	Amendment No. One to Registrant’s 1995 Stock Option Plan dated March 19, 1997. (8)	
		
10.3	  	Amendment No. Two to Registrant’s 1995 Stock Option Plan dated February 13, 1998. (17)	
		
10.4	  	Amendment No. Three to Registrant’s 1995 Stock Option Plan dated January 28, 1999. (2)	
		
10.5	  	Amendment No. Four to Registrant’s 1995 Stock Option Plan dated Nov. 22, 1999. (4)	
		
10.6	  	Amendment No. Five to Registrant’s 1995 Stock Option Plan dated August 14, 2000. (16)	
		
10.7	  	Stock Option Agreement under 1995 Stock Option Plan by and between Registrant and Kenneth Potashner, dated as of May 19, 2003. (15)	
		
10.8	  	1999 Director Stock Option Plan of Registrant. (4)	
		
10.9	  	Registrant’s 1994 Employee Stock Purchase Plan. (9)	
		
10.10	  	Amendment Number One to Registrant’s 1994 Employee Stock Purchase Plan, effective as of April 30, 1997. (8)	
 
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Exhibit
Number
	  	Description of Document

10.12	  	PurePulse Technologies, Inc. 1994 Stock Option Plan. (10)	
		
10.13	  	Shareholder Agreement among Registrant, PurePulse Technologies, Inc., Sanyo E&E Corporation and Three Oceans Inc., dated January 28, 1999. (2)	
		
10.14	  	Seventh Amendment to Loan and Security Agreement dated June 30, 2003, among Registrant, Maxwell Electronic Components Group, Inc., I-Bus/Phoenix, Inc., PurePulse Technologies, Inc., MML Acquisition Corp. and Comerica Bank—California. (15)	
		
10.15	  	Stock Purchase and Barter Agreement by and between Registrant and Montena SA dated May 30, 2002. (5)	
		
10.16	  	Amendment Number One to Stock Purchase and Barter Agreement by and between Registrant and Montena SA dated June 28, 2002. (5)	
		
10.17	  	Amendment Number Two to the Stock Purchase and Barter Agreement by and between Registrant and Montena SA dated August 12, 2002. (6)	
		
10.18	  	Asset Purchase Agreement dated as of September 30, 2002 between Maxwell Electronic Components Group, Inc. and TeknaSeal L.L.C. (7)	
		
10.19	  	Services Agreement dated April 4, 2003 between Registrant and Carlton Eibl. (11)	
		
10.20	  	Separation Agreement and General Release of Claims effective as of May 8, 2003 between Registrant and Kenneth Potashner. (12)	
		
10.21	  	Employment Agreement dated August 1, 2003 between Registrant and Richard D. Balanson. (12)	
		
10.22	  	Employment Agreement dated December 22, 2003 between Registrant and Tesfaye Hailemichael. (15)	
		
10.23	  	Employment Agreement dated December 22, 2003 between Registrant and Richard Smith. (15)	
		
10.24	  	Separation Agreement and General Release of All Claims effective as of October 31, 2003 between Registrant and James Baumker. (15)	
		
10.25	  	Indemnity Agreement for Directors of Registrant dated December 2004. (15)	
		
10.26	  	Loan and Security Agreement dated February 4, 2004 between Registrant and Silicon Valley Bank. (15)	
		
10.27	  	Schedule to Loan and Security Agreement dated February 4, 2004 between Registrant and Silicon Valley Bank. (15)	
		
10.28	  	Loan and Security Agreement (Exim Program) dated February 4, 2004 between Registrant and Silicon Valley Bank. (15)	
		
10.29	  	Schedule to Loan and Security Agreement (Exim Program) dated February 4, 2004 between Registrant and Silicon Valley Bank. (15)	
		
10.30	  	Export-Import Bank of the United States Agreement Executed by Borrower dated February 4, 2004 between Registrant, Export-Import Bank of the United States and Silicon Valley Bank. (15)	
		
10.31	  	Intellectual Property Security Agreement dated February 4, 2004 between Registrant and Silicon Valley Bank. (15)	
		
10.32	  	Securities Account Control Agreement dated February 4, 2004 between Registrant and Silicon Valley Bank. (15)	
		
10.33	  	Stock Purchase Agreement dated November 5, 2004 between Registrant and each of MassMutual Strategic Balanced Fund, Citi FCP CitiEquity US Value Fund, ING Salomon Brothers All Cap Portfolio, Salomon Brothers Global Horizons US Fundamental Value Fund, GS Series Fundamental Value Fund, TA Idex Salomon All Cap Fund, ING Salomon Brothers Fundamental Value Portfolio, Salomon Brothers All Cap Value Fund, ATSF Salomon All Cap, Salomon Brothers Variable All Cap Value Fund, Smith Barney Fundamental Value Fund, GS Series Salomon Brothers Variable All Cap Value Fund, State of New Mexico State Investment Council. *	
 
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Exhibit
Number
	  	Description of Document

10.34	  	Amendment No. 1 to Stock Purchase Agreement dated November 5, 2004 between Registrant and each of MassMutual Strategic Balanced Fund, Citi FCP CitiEquity US Value Fund, ING Salomon Brothers All Cap Portfolio, Salomon Brothers Global Horizons US Fundamental Value Fund, GS Series Fundamental Value Fund, TA Idex Salomon All Cap Fund, ING Salomon Brothers Fundamental Value Portfolio, Salomon Brothers All Cap Value Fund, ATSF Salomon All Cap, Salomon Brothers Variable All Cap Value Fund, Smith Barney Fundamental Value Fund, GS Series Salomon Brothers Variable All Cap Value Fund, State of New Mexico State Investment Council. *	
		
10.35	  	Separation Agreement and General Release of Claims effective as of November 10, 2004 between Registrant and Tesfaye Hailemichael. *	
		
10.36	  	Employment Agreement dated November 10, 2004 between Registrant and David H. Russian. *	
		
10.37	  	Firm-Fixed-Price Subcontract Purchase Order dated February 14, 2005 between Registrant and Northrop Grumman Space and Mission Systems Corp. *	
		
10.38	  	Purchase Order dated March 9, 2005 between Registrant and United States Advanced Battery Consortium. *	
		
21.1	  	List of subsidiaries of Registrant. *	
		
23.1	  	Consent of Independent Registered Public Accounting Firm, McGladrey & Pullen, LLP *	
		
23.2	  	Consent of Independent Registered Public Accounting Firm, Deloitte & Touche LLP *	
		
23.3	  	Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm *	
		
31.1	  	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) (Section 302 Certification) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *	
		
31.2	  	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) (Section 302 Certification) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *	
		
32.1	  	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *	
		
32.2	  	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *	

*	Filed herewith.	
(1)	Incorporated herein by reference to Registrant’s Current Report on Form 8-K filed with the SEC on January 15, 2004.	
(2)	Incorporated herein by reference to Registrant’s Annual Report on Form 10-K for the fiscal year ended July 31, 1999 (SEC file no. 000-10964).	
(3)	Incorporated herein by reference to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 (SEC file no. 001-15477).	
(4)	Incorporated herein by reference to Registrant’s Transition Report on Form 10-K for the transition period from August 1, 1999 to December 31, 1999 (SEC file no. 001-15477).	
(5)	Incorporated herein by reference to Registrant’s Current Report on Form 8-K filed with the SEC on July 19, 2002.	
(6)	Incorporated herein by reference to Registrant’s Current Report on Form 8-K filed with the SEC on September 18, 2002.	
(7)	Incorporated herein by reference to Registrant’s Current Report on Form 8-K filed with the SEC on October 15, 2002.	
(8)	Incorporated herein by reference to Registrant’s Annual Report on Form 10-K for the fiscal year ended July 31, 1997 (SEC file no. 000-10964).	
(9)	Incorporated herein by reference to Registrant’s Annual Report on Form 10-K for the fiscal year ended July 31, 1995 (SEC file no. 000-10964).	
 
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(10)	Incorporated herein by reference to Registrant’s Annual Report on Form 10-K for the fiscal year ended July 31, 1996 (SEC file no. 000-10964).	
(11)	Incorporated herein by reference to Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003.	
(12)	Incorporated herein by reference to Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003.	
(13)	Incorporated herein by reference to Registrant’s Form 8-A filed November 18, 1999 (SEC file no. 001-15477).	
(14)	Incorporated herein by reference to Registrant’s Annual Report on Form 10-K for the fiscal year ended July 31, 1987 (SEC file no. 000-10964).	
(15)	Incorporated herein by reference to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003.	
(16)	Incorporated herein by reference to Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000.	
(17)	Incorporated herein by reference to Registrant’s Annual Report on Form 10-K for the fiscal year ended July 31, 1998 (SEC file no. 000-10964).	
 
(b) See the exhibits required by this item under Item 15(a)(3) above.
 
(c) See the financial statement schedule required by this item under Item 15(a)(2) above.
 
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SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) 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, on this 22 nd day of March 2005.

M AXWELL T ECHNOLOGIES , I NC .	
		
By: 	 	/ S /    R ICHARD D. B ALANSON        	
 	 	Richard D. Balanson
President and Chief Executive Officer	
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature
	  	Title
	 	Date

/ S /    R ICHARD D. B ALANSON        

Richard D. Balanson	  	President, Chief Executive Officer and Director	 	March 22, 2005	
			
/ S /    D AVID H. R USSIAN        

David H. Russian	  	Vice President, Finance, Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer)	 	March 22, 2005	
			
/ S /    C ARLTON J. E IBL        

Carlton J. Eibl	  	Director	 	March 22, 2005	
			
/ S /    M ARK R OSSI        

Mark Rossi	  	Director	 	March 22, 2005	
			
/ S /    J EAN L AVIGNE        

Jean Lavigne	  	Director	 	March 22, 2005	
			
/ S /    R OBERT G UYETT        

Robert Guyett	  	Director	 	March 22, 2005	
			
/ S /    J OSÉ C ORTES        

José Cortes	  	Director	 	March 22, 2005	
			
/ S /    T HOMAS R INGER        

Thomas Ringer	  	Director	 	March 22, 2005	
			
/ S /    E DWARD C AUDILL        

Edward Caudill	  	Director	 	March 22, 2005	

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EXHIBIT 10.33
 
STOCK PURCHASE AGREEMENT
 
THIS STOCK PURCHASE AGREEMENT (“ Agreement ”) is made effective as of November 5, 2004, by and between Maxwell Technologies, Inc., a Delaware corporation (the “ Company ”), and the several purchasers named in Schedule I hereto (the “ Purchasers ”), with respect to the following facts:
 
R ECITALS
 
WHEREAS, the Company proposes to issue and sell to the Purchasers, and the Purchasers, and each of them, desire to purchase from the Company, that certain number of shares of the Company’s Common Stock, $0.10 par value per share (the “ Shares ”), nearest to the whole number of Shares able to be purchased by the Purchasers for Eleven Million Dollars ($11,000,000.00) at a per share price of Nine and 25/100 Dollars ($9.25);
 
WHEREAS, the Company has filed with the Securities and Exchange Commission (the “ Commission ”) a registration statement on Form S-3 (the “ Registration Statement ”), including a prospectus (the “ Original Prospectus ”), under the Securities Act of 1933, as amended (the “ Securities Act ”), relating to the Shares, which Registration Statement has become effective;
 
WHEREAS, the Company intends to file with the Commission a prospectus supplement (the “ Supplement ”) pursuant to Rule 424(b)(5) promulgated under the Securities Act, which Supplement shall supplement the Original Prospectus;
 
WHEREAS, the Original Prospectus, together with the Supplement, is hereinafter referred to as the “ Prospectus .”
 
A GREEMENT
 
NOW, THEREFORE, in consideration of the foregoing, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
 
1. Purchase and Sale of Shares . The Company hereby agrees to issue and sell to the Purchasers at the Closing (as hereinafter defined), and the Purchasers, and each of them, upon the basis of the representations and warranties herein contained and the information set forth in the Prospectus, but subject to the conditions hereinafter stated, hereby agree, severally and not jointly, to purchase from the Company the number of Shares that bears the same proportion to the number of Shares to be sold by the Company as the number of Shares set forth in Schedule I hereto opposite the name of such Purchaser bears to the total number of Shares. The aggregate purchase price of the Shares shall be Eleven Million Dollars ($11,000,000.00) (the “ Aggregate Purchase Price ”), at Nine and 25/100 Dollars ($9.25) per share of the Company’s Common Stock (the “ Per Share Price ”), subject to adjustment to eliminate fractional shares as the Company may reasonably determine. The Aggregate Purchase Price shall be paid in cash at the Closing.

2. Payment and Delivery .
 
a. Payment for the Shares to be sold by the Company will take place at the corporate offices of the Company, located at 9244 Balboa Avenue, San Diego, California 92123, and shall be made to the Company in immediately available United States Dollars against delivery of such Shares for the account(s) of the Purchasers not later than 9:00 a.m., Pacific Standard Time, on November 8, 2004. The Aggregate Purchase Price to be paid by the Purchasers shall be in the form of a wire transfer(s) of funds to the Company’s account. The time and date of such payment are hereinafter referred to as the “ Closing .”
 
b. The Shares shall be registered in such names and in such denominations as requested in writing by each of the Purchasers, not later than one (1) full business day prior to the Closing. The Shares shall be delivered through the book-entry facilities of the Depository Trust Company at the Closing for the account of each Purchaser, with any transfer taxes payable in connection with the transfer of the Shares to such Purchaser duly paid, against payment of the Aggregate Purchase Price therefor.
 
3. Representations and Warranties of the Company . The Company represents and warrants to and agrees with the Purchasers that:
 
a. The Registration Statement has become effective; no stop order suspending the effectiveness of the Registration Statement is in effect, and no proceedings for such purpose are pending before or, to the Company’s knowledge, threatened by the Commission.
 
b. (i) The Registration Statement, when it became effective, did not contain and, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; (ii) the Registration Statement and the Prospectus comply and, as amended or supplemented, if applicable, will comply in all material respects with the Securities Act and the applicable rules and regulations of the Commission thereunder; and (iii) the Prospectus does not contain and, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading.
 
c. The Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has the corporate power and authority to own or lease its property and to conduct its business as described in the Prospectus and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not have a material adverse effect on the Company and its subsidiaries, taken as a whole.
 
d. This Agreement has been duly authorized, executed and delivered by the Company.
 
2

e. The authorized capital stock of the Company conforms as to legal matters to the description thereof contained in the Prospectus.
 
f. The shares of Common Stock outstanding prior to the issuance of the Shares to be sold by the Company have been duly authorized by the Company and are validly issued, fully paid and non-assessable.
 
g. The Shares to be sold by the Company have been duly authorized by the Company and, when issued and delivered in accordance with the terms of this Agreement, will be validly issued, fully paid and non-assessable, and the issuance of such Shares will not be subject to any preemptive or similar rights.
 
h. The execution and delivery by the Company of, and the performance by the Company of its obligations under, this Agreement will not contravene: (i) any provision of applicable law (except for such contraventions of applicable law that would not, individually or in the aggregate, have a material adverse effect on the Company and its subsidiaries, taken as a whole, or on the power or ability of the Company to perform its obligations under this Agreement); (ii) the certificate of incorporation or bylaws of the Company or any agreement or other instrument binding upon the Company or any of its subsidiaries that is material to the Company and its subsidiaries, taken as a whole; or (iii) any judgment, order or decree of any governmental body, agency or court having jurisdiction over the Company or any subsidiary (except for contraventions of any such judgment, order or decree that would not, individually or in the aggregate, have a material adverse effect on the Company and its subsidiaries, taken as a whole, or on the power or ability of the Company to perform its obligations under this Agreement), and no consent, approval, authorization or order of, or qualification with, any governmental body or agency is required for the performance by the Company of its obligations under this Agreement, except as may be required by the securities or “blue sky” laws of the various states or other jurisdictions in connection with the offer and sale of the Shares.
 
i. There has not occurred any material adverse change, or any development involving a prospective material adverse change, in the condition, financial or otherwise, or in the earnings, business or operations of the Company and its subsidiaries, taken as a whole, from that set forth in the Prospectus (exclusive of any amendments or supplements thereto subsequent to the date of this Agreement).
 
j. There are no legal or governmental proceedings pending or, to the Company’s knowledge, threatened to which the Company or any of its subsidiaries is a party or to which any of the properties of the Company or any of its subsidiaries is subject that are required to be described in the Registration Statement or the Prospectus and are not so described or any statutes, regulations, contracts or other documents that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not described or filed as required.
 
k. The Original Prospectus filed as part of the Registration Statement on September 7, 2004, and each supplement (including the Supplement) filed as part of any subsequent amendment to the Registration Statement or filed pursuant to Rule 424 under the Securities Act, complied as to form when so filed in all material respects with the Securities Act and the applicable rules and regulations of the Commission thereunder.
 
3

l. The Company’s Quarterly Report on Form 10-Q for the quarters ended March 31 and June 30, 2004 complied as to form when so filed in all material respects with the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”) and the applicable rules and regulations of the Commission thereunder.
 
m. The Company and its subsidiaries: (i) are in compliance with any and all applicable foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants (“ Environmental Laws ”); (ii) have received all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses; and (iii) are in compliance with all terms and conditions of any such permit, license or approval, except where such noncompliance with Environmental Laws, failure to receive required permits, licenses or other approvals or failure to comply with the terms and conditions of such permits, licenses or approvals would not, singly or in the aggregate, have a material adverse effect on the Company and its subsidiaries, taken as a whole.
 
n. There are no costs or liabilities associated with Environmental Laws (including, without limitation, any capital or operating expenditures required for clean-up, closure of properties or compliance with Environmental Laws or any permit, license or approval, any related constraints on operating activities and any potential liabilities to third parties) which would, singly or in the aggregate, have a material adverse effect on the Company and its subsidiaries, taken as a whole.
 
o. Except as disclosed in the Prospectus, there are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Securities Act with respect to any securities of the Company or to require the Company to include such securities with the Shares registered pursuant to the Registration Statement.
 
p. Except as described in the Prospectus, subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus: (i) the Company and its subsidiaries have not incurred any material liability or obligation, direct or contingent, nor entered into any material transaction not in the ordinary course of business; (ii) the Company has not purchased any of its outstanding capital stock (except for acquisitions of capital stock by the Company pursuant to agreements that permit the Company to repurchase such shares upon termination of service to the Company or in exercise of the Company’s right of first refusal upon a proposed transfer), nor declared, paid or otherwise made any dividend or distribution of any kind on its capital stock other than ordinary and customary dividends; and (iii) there has not been any material change in the capital stock, short-term debt or long-term debt of the Company and its subsidiaries, except in each case as described in the Prospectus.
 
q. The Company and its subsidiaries have good and marketable title in fee simple to all real property and good and marketable title to all personal property owned by them, in each case, which is material to the business of the Company and its subsidiaries, taken as a
 
4

whole, in each case free and clear of all liens, encumbrances and defects except such as are described in the Prospectus or such as do not materially affect the value of such property and do not materially interfere with the use made and proposed to be made of such property by the Company and its subsidiaries, taken as a whole; and any real property and buildings held under lease by the Company and its subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as are not material and do not materially interfere with the use made and proposed to be made of such property and buildings by the Company and its subsidiaries, in each case except as described in the Prospectus.
 
r. To the knowledge of the Company or except as disclosed in the Prospectus, the Company and its subsidiaries own or possess, or can acquire on reasonable terms, all material patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks and trade names currently employed by them in connection with the business now operated by them, except where the failure to own, possess or acquire any of the foregoing would not result in a material adverse effect on the Company and its subsidiaries, taken as a whole; and, except as described in the Prospectus, neither the Company nor any of its subsidiaries has received any notice of infringement of or conflict with asserted rights of others with respect to any of the foregoing that, individually or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would have a material adverse effect on the Company and its subsidiaries, taken as a whole.
 
s. No material labor dispute with the employees of the Company or any of its subsidiaries exists, except as described in the Prospectus, or, to the knowledge of the Company, is imminent.
 
t. The Company and its subsidiaries, taken as a whole, are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as the Company believes are prudent and customary in the businesses in which they are engaged; and neither the Company nor any of its subsidiaries has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not have a material adverse effect on the Company and its subsidiaries, taken as a whole, except as described in the Prospectus.
 
u. The Company and its subsidiaries possess all certificates, authorizations and permits issued by the appropriate federal, state or foreign regulatory authorities necessary to conduct their respective businesses except for such certificates, authorizations and permits, the failure of which to obtain, would not have a material adverse effect on the Company and its subsidiaries, taken as a whole, and neither the Company nor any of its subsidiaries has received any notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit which, individually or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would have a material adverse effect on the Company and its subsidiaries, taken as a whole, except as described in the Prospectus.
 
v. The Company and each of its subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that: (i) transactions are executed
 
5

in accordance with management’s general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (iii) access to assets is permitted only in accordance with management’s general or specific authorization; and (iv) amounts reflected on the Company’s balance sheet for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.
 
w. The Company is aware of no reason that its Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 would not be accompanied by the certifications required to be filed or submitted by the Company’s chief executive officer and chief financial officer pursuant to the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated thereunder.
 
4. Representations and Warranties of the Purchasers . In connection with the purchase of the Shares, the Purchasers, severally and not jointly, hereby make the following representations and warranties, each of which is true and correct as of the date of this Agreement and shall be true and correct as of the Closing:
 
a. All actions on the part of the Purchasers for the authorization, execution, delivery and performance by the Purchasers of this Agreement have been taken, and this Agreement constitutes a valid and binding obligation of the Purchasers, and each of them.
 
b. The Purchasers have not incurred and will not incur, directly or indirectly, as a result of any action taken by it or the Company, any liability for brokerage or finders’ fees or agents’ commissions or any similar charges in connection with this Agreement.
 
c. Each Purchaser has reviewed with the their own respective tax advisors the foreign and domestic federal, state and local tax consequences of this investment and the transactions contemplated by this Agreement. Each Purchaser is relying solely on such advisors and not on any statements or representations of the Company or any of its agents. Each Purchaser understands that the Purchaser (and not the Company) shall be responsible for the Purchaser’s own tax liability that may arise as a result of this investment or the transactions contemplated by this Agreement.
 
d. The Purchasers, and each of them, acknowledge that they have had an opportunity to discuss the Company’s business, management and financial affairs with management of the Company. The Purchasers, and each of them, have had an opportunity to conduct due diligence and ask questions of management of the Company concerning these matters, which due diligence was completed and questions were answered to the satisfaction of each Purchaser.
 
5. Conditions to Closing . The obligation of each party to complete the purchase and sale of the Shares is conditioned upon: (i) the Supplement having been delivered to the Purchasers as of the Closing; (ii) the demonstration, to the reasonable satisfaction of both parties, that the other party is prepared to perform the other party’s obligations set forth in this Agreement; and (iii) the truth and accuracy of the representations and warranties of the other party made in this Agreement.
 
6

The several obligations of the Purchasers are subject to the following further conditions:
 
a. Subsequent to the execution and delivery of this Agreement and prior to the Closing there shall not have occurred any change, or any development involving a prospective change, in the condition, financial or otherwise, or in the earnings, business or operations of the Company and its subsidiaries, taken as a whole, from that set forth in the Prospectus (exclusive of any amendments or supplements thereto subsequent to the date of this Agreement) that, in the Purchasers’ reasonable judgment, is material and adverse.
 
b. The Purchasers shall have received at the Closing a certificate, dated as of the Closing and signed by an executive officer of the Company, to the effect set forth in Section 5.a. above and to the effect that the representations and warranties of the Company contained in this Agreement are true and correct as of the Closing and that the Company has complied with all of the agreements and satisfied all of the conditions on its part to be performed or satisfied hereunder on or before the Closing.
 
6. Covenants of the Company . In further consideration of the agreements of the Purchasers herein contained, the Company covenants with the Purchasers that before amending or supplementing the Registration Statement or the Prospectus, the Company will furnish a copy of each such proposed amendment or supplement to the Purchasers, and the Company will file with the Commission, within the applicable period specified in Rule 424(b) under the Securities Act, any Prospectus required to be filed pursuant to such Rule.
 
7. Indemnity and Contribution .
 
a. The Company, agrees to indemnify and hold harmless the Purchasers, and each of them, and every affiliate of the Purchasers within the meaning of Rule 405 under the Securities Act, from and against (a) any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) arising from or in connection with any violation by the Company of the terms of this Agreement or gross negligence or willful misconduct by the Company in the performance of the terms of this Agreement, (b) any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment thereof, the Prospectus, including the appendices thereto (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto) or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and (c) any breach of this Agreement.
 
b. The Purchasers jointly and severally agree to indemnify and hold harmless the Company, the officers and directors of the Company, and each person, if any, who controls the Company within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act from and against (a) any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending
 
7

or investigating any such action or claim) that result from any Purchaser making a false statement, or any omission or alleged omission to state a material fact required to be stated herein or necessary to make the statements herein not misleading, in connection with its obligations hereunder or its representations and warranties set forth herein, and (b) any breach of this Agreement.
 
c. In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to Section 7.a. or 7.b., such person (the “ indemnified party ”) shall promptly notify the person against whom such indemnity may be sought (the “ indemnifying party ”) in writing and the indemnifying party, upon request of the indemnified party, shall retain counsel reasonably satisfactory to the indemnified party to represent the indemnified party and any others the indemnifying party may designate in such proceeding and shall pay the reasonable fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel, or (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is understood that the indemnifying party shall not, in respect of the legal expenses of any indemnified party in connection with any proceeding or related proceedings in the same jurisdiction, be liable for (i) the fees and expenses of more than one separate firm (in addition to any local counsel) for the Purchasers and all persons who are affiliates of the Purchasers within the meaning of Rule 405 under the Securities Act, and (ii) the fees and expenses of more than one separate firm (in addition to any local counsel) for the Company, its directors and officers, and each person, if any, who controls the Company within the meaning of either such Section, and that all such fees and expenses shall be reimbursed as they are incurred. In the case of any such separate firm for the Company, and such directors, officers and control persons of the Company, such separate firm shall be designated in writing by the Company. The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel as contemplated by the second and third sentences of this paragraph, the indemnifying party agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 30 days after receipt by such indemnifying party of the aforesaid request, and (ii) such indemnifying party shall not have reimbursed the indemnified party in accordance with such request prior to the date of such settlement. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such proceeding.
 
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d. To the extent the indemnification provided for in Sections 7.a. or 7.b. is unavailable to an indemnified party or insufficient in respect of any losses, claims, damages or liabilities referred to therein, then each indemnifying party under such paragraph, in lieu of indemnifying such indemnified party thereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities: (i) in such proportion as is appropriate to reflect the relative benefits received by the indemnifying party or parties on the one hand and the indemnified party or parties on the other hand from the offering of the Shares; or (ii) if the allocation provided by clause 7.d.(i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause 7.d.(i) above, but also the relative fault of the indemnifying party or parties on the one hand and of the indemnified party or parties on the other hand in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative fault of the Company on the one hand and the Purchasers on the other hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or by the Purchasers and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission.
 
e. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The remedies provided for in this Section 7 are not exclusive and shall not limit any rights or remedies which may otherwise be available to any indemnified party at law or in equity.
 
f. The indemnity and contribution provisions contained in this Section 7 and the representations, warranties and other statements of the Company contained in this Agreement shall remain operative and in full force and effect regardless of: (i) any termination of this Agreement; (ii) any investigation made by or on behalf of the Purchasers or any affiliate of the Purchasers, or the Company, its officers or directors or any person controlling the Company; and (iii) acceptance of and payment for any of the Shares.
 
8. Termination .
 
a. The Purchasers may jointly terminate this Agreement by notice given to the Company if, after the execution and delivery of this Agreement and prior to the Closing: (i) trading generally shall have been suspended or materially limited on, or by, as the case may be, any of the New York Stock Exchange, the American Stock Exchange, the Nasdaq National Market, the Chicago Board of Options Exchange, the Chicago Mercantile Exchange or the Chicago Board of Trade; (ii) trading of any securities of the Company shall have been suspended on any exchange or in any over-the-counter market; (iii) a material disruption in securities settlement, payment or clearance services in the United States shall have occurred; (iv) any moratorium on commercial banking activities shall have been declared by Federal or New York State authorities; or (v) there shall have occurred any outbreak or escalation of hostilities, or any change in financial markets or any calamity or crisis that, in the reasonable judgment of the parties, is material and adverse and which, singly or together with any other
 
9

event specified in this clause (v), makes it impracticable or inadvisable to proceed with the offer, sale or delivery of the Shares on the terms and in the manner contemplated in the Prospectus.
 
b. The Company may terminate this Agreement, without liability on its part, if, at the Closing, the Purchasers shall fail or refuse to purchase the Shares, or any portion thereof. If this Agreement shall be terminated by the Company pursuant to this Section 8.b. because of any failure or refusal on the part of the Purchasers, and each of them, to comply with the terms or to fulfill any of the conditions of this Agreement, or if for any reason the Purchasers, and each of them, shall be unable to perform their obligations under this Agreement, except as provided in Section 8.a. above, the Purchasers shall reimburse the Company for all out-of-pocket expenses (including the fees and disbursements of their counsel) reasonably incurred by the Company in connection with this Agreement, the Supplement, and the offering contemplated hereunder.
 
9. Defaulting Purchaser(s) . If, at the Closing, any one or more of the Purchasers shall fail or refuse to purchase the Shares that it has or they have agreed to purchase on such date, and the aggregate number of Shares which such defaulting Purchaser or Purchasers failed or refused to purchase is not more than one-tenth (1/10) of the aggregate number of Shares to be purchased on such date, the other Purchasers shall be obligated severally in the proportions that the number of Shares set forth opposite their respective names in Schedule I bears to the aggregate number of Shares set forth opposite the names of all such non-defaulting Purchasers, or in such other proportions as the Purchasers shall reasonably specify, to purchase the Shares which such defaulting Purchaser or Purchasers agreed but failed or refused to purchase on such date; provided that in no event shall the number of Shares that any Purchaser has agreed to purchase pursuant to this Agreement be increased pursuant to this Section 9 by an amount in excess of one-ninth (1/9) of such number of Shares without the written consent of such Purchaser. Any action taken under this paragraph shall not relieve any defaulting Purchaser from liability in respect of any default of such Purchaser under this Agreement.
 
10. Headings . The headings of the sections of this Agreement have been inserted for convenience of reference only and shall not be deemed a part of this Agreement.
 
11. Effectiveness . This Agreement shall become effective upon the execution and delivery hereof by the parties hereto.
 
12. Public Statements . The Company shall, on the second business day following execution of the Agreement, issue a press release disclosing all material terms of this Agreement. Within two (2) business days after the Closing, the Company shall file a Current Report on Form 8-K with the SEC (the “ 8-K Filing ”) describing the terms of this Agreement and including as exhibits to the 8-K Filing this Agreement in the form required by the Exchange Act. Thereafter, the Company shall timely make any filings and notices required by the SEC or applicable law with respect to this Agreement and provide copies thereof to the Purchasers promptly after filing. The Company shall not publicly disclose the names of the Purchasers, or include the names of the Purchasers in any press release without the prior written consent of the Purchasers, which consent is hereby given.
 
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13. Notices . All notices, requests, consents and other communications hereunder shall be in writing, shall be delivered by first-class registered or certified airmail, or nationally recognized overnight express courier, postage prepaid, or by facsimile, and shall be addressed as follows, or to such other address or addresses as may have been furnished in writing by a party to another party pursuant to this paragraph:
 
 	a.	If to the Company :	
 
Maxwell Technologies, Inc.
9244 Balboa Avenue
San Diego, California 92123
Attn: Richard D. Balanson
Facsimile: (858) 277-6754
 
With a copy to:
 
Foley & Lardner LLP
420 W. Broadway, Suite 2300
San Diego, California 92101
Attn: Kenneth D. Polin
Facsimile: (619) 234-3510
 
and
 
Foley & Lardner LLP
2029 Century Park East, 35 th Floor
Los Angeles, California 90067
Attn: Deepak Nanda
Facsimile: (310) 557-8475
 
 	b.	If to a Purchaser :	
 
To the address on the signature page of this Agreement.
 
With a copy to :
 
________________________________
________________________________
________________________________
Attn: ____________________________
Facsimile: ________________________
 
14. Amendments; Waiver . This Agreement may not be modified or amended except pursuant to an instrument in writing signed by the Company and the Purchasers, and each of them. Any waiver of a provision of this Agreement must be in writing and executed by the party against whom enforcement of such waiver is sought.
 
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15. Entire Agreement; Severability . This Agreement sets forth the entire agreement and understanding of the parties relating to the subject matter hereof and supersedes all prior and contemporaneous agreements, negotiations and understandings between the parties, both oral and written relating to the subject matter hereof. If any provision contained in this Agreement is determined to be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby.
 
16. Governing Law . This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of Delaware, without giving effect to the principles of conflicts of law.
 
17. Counterparts; Facsimiles . This Agreement may be executed in two or more counterparts, each of which shall constitute an original, but all of which, when taken together, shall constitute but one instrument, and shall become effective when one or more counterparts have been signed by each party hereto and delivered to the other parties. Signatures may be delivered by facsimile and such signatures shall be deemed originals so long as the original signature page is sent via first-class registered or certified airmail, or nationally recognized overnight express courier, postage prepaid, within seventy-two (72) hours of the time on the confirmation sheet for such facsimile.
 
[Remainder of this Page Intentionally Left Blank]

12

IN WITNESS WHEREOF, the parties hereto have entered into this Agreement effective as of the date first above written.

“Company”	
	
M AXWELL T ECHNOLOGIES , I NC .,
a Delaware corporation	
		
By:	 	 
	
Name:	 	 
	
Title:	 	 

			
Accepted as of the date hereof by,	
	
“Purchaser”	
	
D AVIS S KAGG I NVESTMENT M ANAGEMENT ,	
a Division of Smith Barney Fund Management LLC,
acting severally on behalf of itself and the several
Purchasers named in Schedule I hereto.	
		
By:	 	 
	
Name:	 	John G. Goode	
Title:	 	Chairman and Chief Investment Officer	
		
Notice:	 	Davis Skagg Investment Management	
 	 	One Sansome Street, 35 th Floor	
 	 	San Francisco, California 94104	
 	 	Attn: John G. Goode	
 	 	Facsimile: (415) 984-6572	
 
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SCHEDULE I

Purchaser Name:
	  	Number of Shares
To Be Purchased:

(1)	  	MassMutual Strategic Balanced Fund	  	19,470	
			
(2)	  	Citi FCP CitiEquity US Value Fund	  	23,436	
			
(3)	  	ING Salomon Brothers All Cap Portfolio	  	71,170	
			
(4)	  	Salomon Brothers Global Horizons US Fundamental Value Fund	  	5,573	
			
(5)	  	GS Series Fundamental Value Fund	  	117,301	
			
(6)	  	TA Idex Salomon All Cap Fund	  	93,883	
			
(7)	  	ING Salomon Brothers Fundamental Value Portfolio	  	9,234	
			
(8)	  	Salomon Brothers All Cap Value Fund	  	1,705	
			
(9)	  	ATSF Salomon All Cap	  	87,864	
			
(10)	  	Salomon Brothers Variable All Cap Value Fund	  	661	
			
(11)	  	Smith Barney Fundamental Value Fund	  	663,868	
			
(12)	  	GS Series Salomon Brothers Variable All Cap Value Fund	  	46,877	
			
(13)	  	State of New Mexico State Investment Council	  	48,147	
		
Total Number of Shares to be Purchased:	  	1,189,190	
 
14
 
EXHIBIT 10.34
 
AMENDMENT NO. 1 TO STOCK PURCHASE AGREEMENT
 
THE STOCK PURCHASE AGREEMENT (the “Agreement”) made effective as of November 5, 2004, by and between Maxwell Technologies, Inc., a Delaware corporation (the “ Company ”), and the several purchasers named in Schedule I attached thereto (the “ Purchasers ”), is hereby amended as follows:
 
1. All of the capitalized terms used, but not defined, herein shall have the respective meanings ascribed to them in the Agreement.
 
2. Section 2.a. of the Agreement is hereby amended and restated to read as follows:
 
2. Payment and Delivery .
 
a. Payment for the Shares to be sold by the Company will take place at the corporate offices of the Company, located at 9244 Balboa Avenue, San Diego, California 92123, and shall be made to the Company in immediately available United States Dollars against delivery of such Shares for the account(s) of the Purchasers not later than 1:30 p.m., Pacific Time, on November 9, 2004. The Aggregate Purchase Price to be paid by the Purchasers shall be in the form of a wire transfer(s) of funds to the Company’s account. The time and date of such payment are hereinafter referred to as the “ Closing .”
 
3. In accordance with Section 5.b. of the Agreement, at the Closing the Company shall deliver to the Purchasers a certificate, dated as of the Closing and signed by an executive officer of the Company, to the effect set forth in Section 5.a. of the Agreement and to the effect that the representations and warranties of the Company contained in the Agreement are true and correct as of the Closing and that the Company has complied with all of the agreements and satisfied all of the conditions on its part to be performed or satisfied thereunder on or before the Closing.
 
4. Davis Skagg Investment Management, a Division of Smith Barney Fund Management LLC, acting severally on behalf of itself and the Purchasers, represents that it has obtained all necessary authorization to act on behalf of the Purchasers and to enter into the Agreement and this Amendment No. 1 to Stock Purchase Agreement.
 
5. All remaining provisions of the Agreement shall remain unchanged and in full force and effect.
 
6. This Amendment No. 1 to Stock Purchase Agreement shall enter into effect as of November 8, 2004 (the “Effective Date”).
 
[Remainder of this Page Intentionally Left Blank]

1

IN WITNESS WHEREOF, the parties have entered into this Amendment No. 1 to Stock Purchase Agreement as of the Effective Date.

“Company”	
	
M AXWELL T ECHNOLOGIES , I NC .,
a Delaware corporation	
		
By:	 	 
	
Name:	 	Tesfaye Hailemichael	
Title:	 	Vice President, Finance, Treasurer,
and Chief Financial Officer	

“Purchaser”	
	
D AVIS S KAGG I NVESTMENT M ANAGEMENT ,
a Division of Smith Barney Fund Management LLC,
acting severally on behalf of itself and the several
Purchasers named in Schedule I to the Agreement.	
		
By:	 	 
	
Name:	 	John G. Goode	
Title:	 	Chairman and Chief Investment Officer	
 
2
 
EXHIBIT 10.35
 
SEPARATION AGREEMENT AND GENERAL
RELEASE OF ALL CLAIMS
 
This Separation Agreement and General Release of All Claims (“Agreement”) is made by and between Tesfaye Hailemichael (“Employee”) on the one hand, and Maxwell Technologies, Inc . (“The Company”) on the other. (Collectively, Employee and the Company shall be referred to as “the Parties.”)
 
1. Employee is a former employee of the Company. Employee’s last day of active employment with the Company was November 30, 2004 (Effective Date). The Parties desire to resolve any and all differences related to Employee’s employment with the Company and/or the cessation of that employment. Additionally, the Parties desire to resolve any known or unknown claims between them, neither party admitting any liability or fault. For these reasons, the Parties have entered into this Agreement.
 
2. a. Without entering into this Agreement, Employee is entitled to a severance payment equal to two weeks pay at Employee’s original annual rate of pay of $200,000.00, less payroll tax deductions. This amount will be paid in one lump sum on the Effective Date. All vacation accrual and other fringe benefits of Employee will cease on the Effective Date.
 
b. If Employee enters into this Agreement and does not revoke this Agreement within the time period provided below in Section 15, the Company will provide Employee with continuation pay for a 26 week period at Employee’s original annual rate of pay of $200,000.00 less payroll tax deductions. This amount will be paid in equal bi-weekly installments following the expiration of 10 business days after Employee signs this Agreement. All benefits continue through May 31, 2005 with the exception of vacation accrual, which ceases on November 30, 2004. If the Employee chooses to take the cash equivalent of the employer’s contribution to the medical and dental benefit plans, he will be given additional income in that amount on a biweekly basis.
 
c. In addition, notwithstanding anything to the contrary contained herein or in the applicable stock option agreements, all of the stock options then held by Executive shall continue to vest in accordance with their terms until the six month anniversary of the date the Company terminates Executive’s employment and shall be exercisable to the extent so vested by Executive on or prior to the 60 th day following May 31, 2005.
 
d. Additionally, the Employee may continue to live in the company apartment at 3382 Daley Center Dr. Unit #609 San Diego, CA 92123 with the same items paid by the company as when he was employed by the company through May 31, 2005. The Employee will continue Employer paid cell phone service for the six month continuation period and will be allowed to keep his company issued laptop and printer.
 
3. In consideration of and in return for the promises and covenants undertaken herein by the Company, including the payments Employee will receive under paragraph 2 herein, and for other good and valuable consideration, receipt of which is hereby acknowledged, Employee does hereby acknowledge full and complete satisfaction of and
 
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does hereby release, absolve and discharge the Company and the Company’s parents, subsidiaries, affiliates, related companies and business concerns, past and present, and each of them, as well as each of their partners, trustees, directors, officers, agents, attorneys, servants and employees, past and present, and each of them (hereinafter collectively referred to as “Releasees”) from any and all claims, demands, liens, agreements, contracts, covenants, actions, suits, causes of action, grievances, severance payments, obligations, debts, expenses, damages, judgments, orders and liabilities of whatever kind or nature in state or federal law, equity or otherwise, whether known or unknown to Employee which Employee now owns or holds or has at any time owned or held as against Releasees, or any of them, including specifically but not exclusively and without limiting the generality of the foregoing, any and all claims, demands, grievances, agreements, obligations and causes of action, known or unknown, suspected or unsuspected by Employee: (1) arising out of Employee’s employment with the Company or the ending of that employment; or (2) arising out of or in any way connected with any claim, loss, damage or injury whatever, known or unknown, suspected or unsuspected, resulting from any act or omission by or on the part of the Releasees, or any of them, committed or omitted on or before the Effective Date. Also without limiting the generality of the foregoing, Employee specifically releases the Releasees from any claim for attorneys’ fees and/or costs of suit. EMPLOYEE SPECIFICALLY AGREES AND ACKNOWLEDGES EMPLOYEE IS WAIVING ANY RIGHT TO RECOVERY BASED ON STATE OR FEDERAL AGE, SEX, PREGNANCY, RACE, COLOR, NATIONAL ORIGIN, MARITAL STATUS, RELIGION, VETERAN STATUS, DISABILITY, SEXUAL ORIENTATION, MEDICAL CONDITION, OR OTHER ANTI-DISCRIMINATION LAWS, INCLUDING, WITHOUT LIMITATION, TITLE VII OF THE CIVIL RIGHTS ACT OF 1964, THE AGE DISCRIMINATION IN EMPLOYMENT ACT, THE AMERICANS WITH DISABILITIES ACT AND THE CALIFORNIA FAIR EMPLOYMENT AND HOUSING ACT, OR BASED ON THE EMPLOYEE RETIREMENT INCOME SECURITY ACT, ALL AS AMENDED, WHETHER SUCH CLAIM BE BASED UPON AN ACTION FILED BY EMPLOYEE OR BY A GOVERNMENTAL AGENCY.
 
4. It is the intention of Employee in executing this Agreement that it shall be effective as a bar to each and every claim, demand, grievance and cause of action hereinabove specified. In furtherance of this intention, Employee hereby expressly waives any and all rights and benefits conferred upon Employee by the provisions of Section 1542 of the California Civil Code and expressly consents that this Agreement shall be given full force and effect according to each and all of its express terms and provisions, including those relating to unknown and unsuspected claims, demands and causes of action, if any, as well as those relating to any other claims, demands and causes of action hereinabove specified. Section 1542 provides:
 
“A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor.”
 
Having been so apprised, Employee nevertheless hereby voluntarily elects to and does waive the rights described in Civil Code Section 1542 and elects to assume all risks for claims that now exist in Employee’s favor, known or unknown, that are released under this Agreement.
 
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5. The Company expressly denies any violation of any federal, state or local statute, ordinance, rule, regulation, policy, order or other law. The Company also expressly denies any liability to Employee. This Agreement is the compromise of disputed claims and nothing contained herein is to be construed as an admission of liability on the part of the parties hereby released, or any of them, by whom liability is expressly denied. Accordingly, while this Agreement resolves all issues regarding the Company referenced herein, it does not constitute an adjudication or finding on the merits of any allegations and it is not, and shall not be construed as, an admission by the Company of any violation of federal, state or local statute, ordinance, rule, regulation, policy, order or other law, or of any liability. Moreover, neither this Agreement nor anything in it shall be construed to be or shall be admissible in any proceeding as evidence of or an admission by the Company of any violation of any federal, state or local statute, ordinance, rule, regulation, policy, order or other law, or of any liability. This Agreement may be introduced, however, in any proceeding to enforce the Agreement. Such introduction shall be pursuant to an order protecting its confidentiality.
 
6. Employee acknowledges that during Employee’s employment, Employee had access to trade secrets and confidential information about the Company, including but not limited to the Company’s products and services, research and development of new products and services, customers, and methods of doing business. Employee agrees that Employee shall not use or disclose any information relating to the trade secrets or confidential information of the Company or its customers, which has not already been disclosed to the general public.
 
7. Employee agrees the terms and conditions of this Agreement are confidential, and shall not be disclosed, discussed or revealed by Employee to any other person or entity, excepting Employee’s spouse, tax advisor or attorney, all of whom are also obligated to maintain the confidentiality of this Agreement.
 
8. Each party expressly agrees that such party will not in any way disparage or otherwise cause to be published or disseminated any negative statements, remarks, comments or information regarding the other party.
 
9. This Agreement shall be construed in accordance with, and be deemed governed by, the laws of the State of California.
 
10. If any provision of this Agreement or application thereof is held invalid, the invalidity shall not affect other provisions or applications of the Agreement which can be given effect without the invalid provision or application. To this end, the provisions of this Agreement are severable.
 
11. The Parties hereto acknowledge each has read this Agreement, that each fully understands its rights, privileges and duties under the Agreement, and that each enters this Agreement freely and voluntarily. Each party further acknowledges each has had the opportunity to consult with an attorney of its choice to explain the terms of this Agreement and the consequences of signing it.
 
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12. The undersigned each acknowledge and represent that no promise or representation not contained in this Agreement has been made to them and acknowledge and represent that this Agreement contains the entire understanding between the Parties and contains all terms and conditions pertaining to the compromise and settlement of the subjects referenced herein. The undersigned further acknowledge that the terms of this Agreement are contractual and not a mere recital.
 
13. Employee acknowledges Employee may hereafter discover facts different from, or in addition to, those Employee now knows or believes to be true with respect to the Claims herein released, and agrees the release herein shall be and remain in effect in all respects as a complete and general release as to all matters released herein, notwithstanding any such different or additional facts.
 
14. The Company hereby advises Employee that this release includes a waiver of any rights that the Employee may have under the Age Discrimination in Employment Act. Employee is advised to discuss this Agreement with his attorney before executing it. Employee acknowledges that the Company has provided Employee at least twenty-one (21) days within which to review and consider this Agreement before signing it. Should Employee decide not to use the full twenty-one days, then Employee knowingly and voluntarily waives any claim that Employee was not in fact given that period of time or did not use the entire twenty-one days to consult an attorney and/or consider this Agreement.
 
15. Within three calendar days of signing and dating this Agreement, Employee shall deliver the executed original of the Agreement to Rich Balanson, Maxwell Technologies, Inc., 9244 Balboa Avenue, San Diego, California 92123. However, Employee acknowledges that Employee may revoke this Agreement for up to seven (7) calendar days following Employee’s execution of this Agreement and that it shall not become effective or enforceable until the revocation period has expired. Employee acknowledges that such revocation must be in writing addressed to Rich Balanson, Chief Executive Officer, Maxwell Technologies, Inc., 9244 Balboa Avenue, San Diego, California 92123, and received not later than midnight on the seventh day following execution of this Agreement by Employee. If Employee revokes this Agreement under this paragraph, the Agreement shall not be effective or enforceable and Employee will not receive the payments described in paragraph 2b above.
 
16. If Employee does not revoke this Agreement in the time frame specified in the preceding paragraph, the Agreement shall be effective at 12:01 a.m. on the eighth day after it is signed by Employee.
 
17. Employee acknowledges that, despite the cessation of Employee’s employment with the Company, Employee may continue to be subject to Section 16 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Employee further acknowledges that the Company has advised him to consult independent counsel regarding the applicability of Section 16 of the Exchange Act.

-4-

I have read the foregoing Separation Agreement and General Release of All Claims and I accept and agree to the provisions contained therein and hereby execute it voluntarily and with full understanding of its consequences.
 
PLEASE READ CAREFULLY. THIS AGREEMENT
CONTAINS A GENERAL RELEASE OF ALL KNOWN AND
UNKNOWN CLAIMS.

/s/ Tesfaye Hailemichael
	 	Date: November 10, 2004	
Tesfaye Hailemichael	 	 	
		
Maxwell Technologies, Inc.	 	 	
			
By:	 	/s/ Richard Balanson
	 	Date: November 10, 2004	
 	 	Richard Balanson	 	 	
 	 	Chief Executive Officer	 	 	
 
-5-
 
EXHIBIT 10.36
 
MAXWELL TECHNOLOGIES, INC.
EMPLOYMENT AGREEMENT
 
This Employment Agreement (the “Agreement”) is made as of this 10th day of November 2004, by and between MAXWELL TECHNOLOGIES, INC. a Delaware corporation, (“Company”) and David Russian, Vice President, Chief Financial Officer and Treasurer of Maxwell Technologies (“Executive”). The parties agree with each other as follows:
 
1. Term of Employment . Subject to the terms and conditions set forth in this Agreement, the Company hereby agrees to employ Executive, and Executive agrees to be employed by the Company, for the period commencing on the date of this Agreement and ending on the first to occur of (i) the date on which Executive first qualifies for or elects to receive retirement benefits in accordance with the Company’s normal retirement policies and (ii) the date on which this Agreement is terminated by either the Company or Executive pursuant to any subsection of Section 4 hereof.
 
2. Duties of Executive .
 
(a) Executive shall serve as Vice President, CFO and Treasurer of the Company. In such capacities, Executive shall report to the CEO of the Company and Executive shall perform the duties and render the services for and on behalf of the Company associated with the positions he shall hold and as may be set forth from time to time in resolutions of, or other directives issued by, the CEO.
 
(b) Executive agrees to perform such duties and render such services to the best of his ability, devoting thereto his entire professional time, attention and energy exclusively to the business and affairs of the Company and its affiliates, as its business and affairs now exist and as they hereafter may be changed, and shall not during the term of his employment hereunder be engaged in any other business activity, whether or not such business activity is pursued for gain or profit; provided, however, that Executive may serve (i) on civic or charitable boards or committees and (ii) with the prior written approval of the Board, boards of corporations or business enterprises, in each case so long as such activities do not interfere with the performance of Executive’s obligations under this Agreement.
 
3. Compensation of Executive . As compensation for the services to be performed under this Agreement:
 
(a) Base Salary . Effective as of the date of this Agreement, Executive shall be paid a base salary at the initial annual rate of $200,000, payable in installments consistent with the Company’s payroll practices, and subject to normal withholding. Executive’s base salary shall be reviewed annually prior to each anniversary of this Agreement by the Board or its Compensation Committee and if the Board or Committee determines, in its discretion, that Executive’s base salary is to be increased, such increase shall be effective as of such anniversary date.

(b) Annual Bonus . Executive shall be entitled to an annual bonus which shall be determined as provided in this subsection (b):
 
(i) Commencing with the Company’s current fiscal year ending December 31, 2004 and for each subsequent fiscal year of the Company, the Board will set specific financial performance targets and the amount of Executive’s bonus will range $0 to a maximum amount equal to 50% of Executive’s annual base salary as in effect for such fiscal year (with a target bonus of 50% of the then effective base salary) depending on the CEO’s determination of Executive’s success in achieving the specified targets. The financial performance targets for fiscal year 2005 will be established in January 2005 as part of the Company’s annual financial plan.
 
(ii) The bonus payable to Executive for each fiscal year, if any is due, shall be paid to Executive, subject to normal withholding, promptly after the completion of the audit of the Company’s financial statements for such fiscal year.
 
(c) Options . Executive is eligible for, and has received, the grant of stock options under the Company’s stock option programs. The Board or its Stock Option Committee will from time to time consider making additional grants to Executive, but the Company shall not be obligated to make any particular grant or grants thereof.
 
(d) Benefits . Executive shall be entitled to participate in the Company’s insurance, health, life insurance, long-term disability, dental and medical, and automobile programs as the same may exist from time to time on the terms and conditions applicable to other senior officers of the Company. Nothing in this Agreement shall preclude the Company from terminating or amending any employee benefit plan or program from time to time. The Company will reimburse Executive for the reasonable cost of an annual physical examination, if Executive elects to have the same.
 
(e) Vacation . Executive shall be entitled to vacation according to the prevailing rules in effect during this employment contract. Such vacation shall be taken at such times as the Company and Executive shall mutually agree, acting reasonably, having regard to the performance of Executive’s essential duties to the Company pursuant to the terms of this Agreement. Executive may accumulate unused vacation time from year to year to the extent permitted under the Company’s vacation policy for executives as in effect from time to time.
 
(f) Expenses . Executive shall be reimbursed for all travel and other reasonable out-of-pocket expenses actually incurred by him in connection with the performance of his duties hereunder, subject the Company’s expense reimbursement policies as in effect from time to time and to the receipt by the Company of receipts and statements in a form reasonably satisfactory to it.
 
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4. Termination .
 
(a) Termination by the Company for Cause . Notwithstanding anything to the contrary herein contained, the Company may terminate immediately the employment of Executive without notice and without pay in lieu of notice:
 
(i) if Executive commits an act of theft, fraud or material dishonesty or misconduct involving the property or affairs of the Company or the carrying out of Executive’s duties; or
 
(ii) if Executive commits a material breach or material non-observance of any of the terms or conditions of this Agreement provided that Executive is given written notice of any such breach or non-observance and fails to remedy the same within 15 days of receipt of such notice; or
 
(iii) if Executive is convicted of a felony; or
 
(iv) if Executive refuses or fails to implement any reasonable directive issued by the Company’s Board of Directors and Executive fails to remedy the refusal or failure within 15 days of receipt of written notice thereof; or
 
(v) if Executive or any member of his family makes any personal profit arising out of or in connection with a transaction to which the Company or any of its subsidiaries is a party or with which it is associated without making disclosure to and obtaining prior written consent of the Company.
 
Upon the termination of Executive’s employment pursuant to this Subsection (a), this Agreement and the employment of Executive hereunder shall be wholly terminated. Upon any such termination, Executive shall have no claim against the Company in respect of his employment for damages or otherwise except in respect of payment of base salary earned, due and owing and unused vacation time to the date of termination.
 
(b) Termination by the Company Without Cause . Notwithstanding anything herein to the contrary, the Company may terminate Executive’s employment hereunder at any time, for any reason or no reason, on not less than 30 days’ prior written notice. In the event of termination pursuant to this Subsection (b), Executive will be paid an amount equal to one half of Executive’s annual base salary in effect on the date of such termination of employment. Such amount will be paid in equal monthly installments following the date of termination of employment.
 
In addition, notwithstanding anything to the contrary contained herein or in the applicable stock option agreements, all of the stock options then held by Executive shall continue to vest in accordance with their terms until the six month anniversary of the date the Company terminates Executive’s employment under this subsection (b) and shall be exercisable to the extent so vested by Executive on or prior to the 60 th day following such anniversary date of termination
 
(c) Termination by Executive . Executive may terminate his employment hereunder at any time, for any reason, upon the giving of not less than 15 days’ prior written notice to the CEO. In the event of termination by Executive under this clause (c),
 
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Executive shall be entitled to receive only his base salary and unused vacation time due him through the effective date of termination. Upon the termination of Executive’s employment pursuant to this Subsection (a), this Agreement and the employment of Executive hereunder shall be wholly terminated. Upon any such termination, Executive shall have no claim against the Company in respect of his employment for damages or otherwise except in respect of payment of base salary earned, due and owing and unused vacation time to the date of termination.
 
(d) Termination by the Company Due to Death or Disability . The employment of Executive shall, at the option of the Company, terminate immediately in the event of his death or permanent disability, in which case notice in writing from the Company shall be sent to Executive or his legal representative. In the event of termination under this clause (d), in addition to any disability benefit coverage to which he may be entitled under any disability insurance programs maintained by the Company in which he is a participant, Executive will be paid an amount equal to six months salary at Executive’s annual base salary rate as in effect on the date of the termination under this clause (d). Except as provided in the preceding sentence, Executive shall be entitled to no additional compensation under this Agreement following the date of termination under this clause (d), other than base salary earned but not paid, and unused vacation time accrued, through the date of termination. For purposes of this Agreement “permanent disability” shall mean an illness, disease, mental or physical disability or other causes beyond Executive’s control which makes Executive incapable of discharging his duties or obligations hereunder, or causes Executive to fail in the performance of his duties hereunder, for six consecutive months, as determined in good faith by the Board based on a report of a physician selected in good faith by the CEO.
 
(e) Termination by Executive Upon a Change of Control . In the event that (x) a Change of Control (as hereinafter defined) occurs and (y) at any time prior to the third anniversary of such Change of Control a Triggering Event (as hereinafter defined) shall occur, then unless the Executive shall have given his express written consent to the contrary, Executive may, upon 30 days’ written notice to the Company, terminate his employment hereunder. In such event, Executive shall be entitled to the following:
 
(i) Following the date of the Triggering Event, Executive shall be paid two cash payments, each to be equal to one half of the Executive’s annual base salary in effect on the date of the Triggering Event, with the first of such payment to be paid within 30 days of the Triggering Event and the second of such payments to be paid on the six month anniversary of the date of the Triggering Event, in each case subject to normal withholding.
 
(ii) As of the date of the Triggering Event, notwithstanding the vesting schedule of any stock options then held by Executive, all stock options then held by Executive shall thereupon become fully vested; and
 
(iii) For a six-month period following the date of the Triggering Event, Executive shall be provided with employee benefits substantially identical to those to which Executive was entitled immediately prior to the Triggering Event, subject to any
 
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changes or modifications (including reductions or terminations) to the Company’s employee benefit and welfare plans that are made generally for all of the Company’s senior executives.
 
In the event that the benefits provided for in this Subsection 4(e) to be paid Executive constitute “parachute payments” within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the “Code”), and will be subject to the excise tax imposed by Section 4999 of the Code, then Executive shall receive (a) a payment from the Company sufficient to pay such excise tax and (b) an additional payment from the Company sufficient to pay the Federal and California income tax arising from the payment made under clause (a) of this sentence. Unless the Company and Executive otherwise agree, the determination of Executive’s excise tax liability and the Federal and California income tax resulting from the payment under clause (a) above shall be made by the Company’s independent accountants (the “Accountants”), whose determination shall be conclusive and binding upon the Company and Executive for all purposes. For purposes of making the calculations required by this Subsection 4(e), the Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on interpretations of the Code for which there is a “substantial authority” tax reporting position. The Company and Executive shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make the determinations required by this Subsection 4(e). The Company shall bear the expenses of the Accountants under this Subsection 4(e).
 
For purposes of this Subsection 4(e):
 
(a) “Change of Control” means the occurrence of any one of the following: (i) any transaction or series of transactions (as a result of a tender offer, merger, consolidation or otherwise) that results in any person, entity or group acting in concert, acquiring “beneficial ownership” (as defined in rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of such percentage of the aggregate voting power of all classes of common equity stock of the Company as shall exceed 50% of such aggregate voting power; or (ii) a merger or consolidation of the Company, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 50% of the voting power represented by the voting securities of the Company or such entity outstanding immediately after such merger or consolidation; or (iii) the shareholders approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all, or substantially all, of the Company’s assets (other than in connection with a sale or disposition to subsidiaries of the Company or in connection with a reorganization or restructuring of the Company); or (iv) there occurs a change in the composition of the Board as a result of which fewer than a majority of the directors are Incumbent Directors (as hereinafter defined). “Incumbent Directors” shall mean directors who either (A) are directors of the Company as of the Commencement Date or (B) are elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the Incumbent Directors casting votes at the time of such election or nomination.
 
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(b) “Triggering Event” means any of the following: (i) the termination by the Company without Cause of Executive’s employment pursuant to Subsection 4(a) hereof; (ii) the reduction of Executive’s annual base salary or annual incentive bonus formula from that in effect on the date of the Change of Control; (iii) the removal of Executive as the Company’s Vice President, CFO and Treasurer or a reduction in his duties and responsibilities; or (iv) the relocation of Executive’s principal place of employment to a location outside San Diego County, California.
 
(f) Payments . Any amounts payable to Executive under this Section 4 shall be paid, unless otherwise specified hereunder, within 30 days of the date the payment obligation accrues and shall be subject to normal withholding.
 
(g) Exclusive Rights . In connection with any termination under Subsection 4(b) or 4(e), Executive shall have no claim against the Company in respect of his employment for damages or otherwise except in respect of the payments and other provisions specified in such Subsections.
 
(h) Cooperation . Upon any termination of employment by the Company or by Executive hereunder, Executive shall cooperate with the Company, as reasonably requested by the Company, to effect a transition of Executive’s responsibilities and to ensure that the Company is aware of all matters being handled by Executive.
 
5. Resolution of Disputes . The parties recognize that claims, controversies and disputes may arise out of this Agreement with respect to Executive’s employment, termination of employment, or other terms of this Agreement or based on common law or statute, either during the existence of the employment relationship or afterwards. The parties agree that should any such claim, controversy or dispute arise, the parties will use their best efforts to resolve such dispute informally, between them. In the event that any such claim, controversy or dispute between Company and Executive cannot be resolved within thirty (30) days after either party first gives notice in writing that any such claim, controversy or dispute exists, either party may then refer the matter to arbitration before JAMS/ENDISPUTE pursuant to its rules for resolution of employment disputes.
 
The parties hereby agree that referral to arbitration shall be the sole recourse of either party under this Agreement with respect to any such claim, controversy or dispute and that the decision of the arbitrator shall be binding on the parties in accordance with applicable law; provided, however, that nothing in this Section 5 shall be construed as precluding either party from bringing an action for injunctive relief or other equitable relief. The parties shall keep confidential the existence of each such the claim, controversy or dispute from third parties (other than arbitrator), and the determination thereof, unless otherwise required by law. Except as provided in the following sentence, such decision rendered by the arbitrator shall be final and conclusive and may be entered in any court having jurisdiction thereof as a basis of judgment and of the issuance of execution for its collection. In rendering his or her decision, the arbitrator shall be bound to follow California or Federal law, as applicable, in the same manner as would a court of law. Any claim that the arbitrator made a mistake or error in determining or applying the appropriate law shall be subject to judicial review.
 
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The parties further agree that the party prevailing in the arbitration shall be entitled to its reasonable attorney’s fees and that the arbitration itself shall take place within the County of San Diego, California, and that the internal laws of the State of California shall apply.
 
6. General Obligations of Executive .
 
(a) Executive agrees and acknowledges that he owes a duty of loyalty, fidelity and allegiance to act at all times in the best interests of the Company, to not knowingly become involved in a conflict of interest and to not knowingly do any act or knowingly make any statement, oral or written, which would injure the Company’s business, its interest or its reputation unless required to do so in any legal proceeding by a competent court with proper jurisdiction.
 
(b) Executive agrees to comply at all times with all applicable policies, rules and regulations of the Company, including, without limitation, the Company’s policy regarding trading in the Common Stock, as is in effect from time to time.
 
7. No Solicitation . Executive agrees that in the event he is no longer employed by the Company, for any reason, he shall not hire, solicit or otherwise cause to be solicited for employment elsewhere, either directly or indirectly, for a period of one year from his termination of employment, any employee, officer or director of the Company or any individual who chooses not to join the Company, provided that Executive participated actively in the recruiting of such individual.
 
8. Non-competition . Executive agrees that for a period of one year following termination of his employment with the Company for any reason, he will not, nor will he permit any entity or other person under his control to, directly or indirectly, own, manage, operate or control, or participate in the ownership, management, operation or control of, or be connected with or have any interest in, as a shareholder, director, officer, employee, agent, consultant, partner, creditor or otherwise, any business or activity which is competitive with any business or activity engaged in by the Company or any of its subsidiaries or affiliates anywhere within (i) the State of California, or (ii) any other state of the United States and the District of Columbia in which the Company engages in or has engaged in business during the past five years.
 
9. Entire Agreement . This Agreement constitutes the entire Agreement between the parties and contains all agreements between them with the exception of the 1995 Stock Option Plan (and any stock option agreements issued there under) the other employee benefit and welfare programs maintained by the Company, and the Invention and Secrecy Agreement dated the date of this Agreement signed by Executive, which are supplementary to this Agreement and are each deemed to be incorporated herein by reference. Each party to this Agreement acknowledges that no representations, inducements, promises or agreements, orally or otherwise, have been made by any party, or anyone acting on behalf of any party, which are not embodied in this Agreement, and that no agreement, statement or promise not contained in this Agreement shall be valid or binding. Except for the other agreements, plans and programs referred to in this Section 9, this Agreement also supersedes any and all other agreements and contracts whether verbal or in writing relating to the subject matter hereof.
 
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10. Amendment . Except as otherwise specifically provided herein, the terms and conditions of this Agreement may be amended at any time by mutual agreement of the parties; provided that before any amendment shall be valid or effective, it shall have been reduced to writing and signed by the CEO on behalf of the Company and by Executive.
 
11. Invalidity . The invalidity or unenforceability of any particular provision of this Agreement shall not affect its other provisions, and this contract shall be construed in all respects as if such invalid or unenforceable provision has been omitted.
 
12. Binding Nature . Executive’s rights and obligations under this Agreement shall not be assignable, transferable or delegable by assignment or otherwise, and any purported assignment, transfer or delegation thereof shall be void. This Agreement shall inure to the benefit of, and be enforceable by, any purchaser of substantially all of the Company’s assets, any corporate successor to the Company or any assignee thereof.
 
13. Assistance in Litigation . Executive shall, during and after termination of employment, upon reasonable notice, furnish such information and proper assistance to the Company as may reasonably be required by the Company in connection with any litigation in which it or any of its subsidiaries or affiliates is, or may become a party. Except where Executive is a named defendant, Executive shall be paid a reasonable hourly fee to be mutually agreed upon.
 
14. Indemnification . The Company shall indemnify Executive in accordance with its standard indemnification policy for officers and directors of the Company and as required by applicable law.
 
15. No Duty to Mitigate . Executive shall not be required to mitigate the amount of any payment contemplated by this Agreement (whether by seeking new employment or in any other manner), nor shall any such payment be reduced by any earnings that Executive may receive from any other source not paid for by the Company.
 
16. Choice of Law . The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California except for Sections 7 and 8 hereof which shall be governed by, and interpreted and construed in accordance with, the internal laws (without giving effect to choice of law principles) of the jurisdiction in which either of said Sections is being sought to be enforced.
 
17. Notices . All notices and other communications required or permitted hereunder or necessary or convenient in connection herewith shall be in writing and, if given by telegram, telecopy or telefax, shall be deemed to have been validly served, given or delivered when sent, if given by personal delivery, shall be deemed to have been validly served, given or delivered upon actual delivery and, if mailed, shall be deemed to have been validly served, given or delivered three business days after deposit in the United States mail, as registered or certified mail, with proper postage prepaid and addressed to the party or parties to be notified, at the following addresses:

8

If to Executive to:
 
David Russian
1050 Emerald Street Unit B
San Diego, CA 92109
 
If to the Company to:
 
Maxwell Technologies Inc.
9244 Balboa Avenue
San Diego, California 92123
Attn: Chairman of the Board
Telephone: (858) 503-3300
Fax: (858) 503-3301
 
18. Injunctive Relief . The Company and Executive agree that a breach of any term of this Agreement by Executive would cause irreparable damage to the Company and that, in the event of such breach, the Company shall have, in addition to any and all remedies of law, the right to any injunction, specific performance and other equitable relief to prevent or to redress the violation of Executive’s duties or responsibilities hereunder.
 
19. Release . If Executive’s employment hereunder shall terminate under Subsection 4 (b) or 4(e), Executive agrees, as a condition to his entitlement to receive the amounts specified in such Subsections to be due to him, to execute and deliver to the Company a release in the form attached hereto as Exhibit A . Such release shall be delivered by Executive at the time of termination, but shall become effective only after Executive has received all payments specified in this Agreement to be due to him from the Company in respect of his termination.

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20. Counterparts . This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument and either of the parties to this Agreement may execute this Agreement by signing any such counterpart.
 
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the 10 th day of November, 2004.

“Company”	
	
MAXWELL TECHNOLOGIES, INC.	
		
By:	 	/s/ Richard Balanson
	
 	 	Richard Balanson	
		
 	 	/s/ David Russian
	
 	 	David Russian	
 
10
  
EXHIBIT 10.37
 
Title Page
 
Firm-Fixed-Price Subcontract

		
Subcontract between	 	Subcontract No. 65096QDM5S	
		
Northrop Grumman Space Technology
One Space Park	 	Sales No. 1E163	
		
Redondo Beach, CA 90278	 	Prime Contract No. F04701-02-C-0502	
		
And	 	Higher-Tier Subcontract No. N/A	
		
Maxwell Technologies, Inc.
9244 Balboa Avenue
San Diego, CA 92133	 	Priority Rating DX-A2	
		
 	 	Security Classification Unclassified	
		
Subcontract Title	 	Discount Terms Net 30 days	
		
Single Board Computer	 	x Resale Tax Permit # SR OHA 30-634362	
		
 	 	¨ Not for Resale	
		
 	 	Quality Document 1991 Q Clauses Q1, Q36A, Q49	
					
Subcontract Administrator	 	Type of Inspection:	  	Buyer	  	Govt	 	 	
					
M. Holguin	 	 	  	x        Source	  	¨         Source	 	 	
					
Mail Station R10/2327C	 	 	  	x        Receipt	  	¨         Other 	 	 

This SUBCONTRACT is entered into as of 04 February 2005, between Northrop Grumman Space & Mission Systems Corp., an Ohio corporation, by and through Space Technology sector, with an office at One Space Park, Redondo Beach, California 90278 (hereinafter also called “the Buyer”) and Maxwell Technologies, Inc., a Delaware corporation, with an office at 9244 Balboa Avenue, San Diego, California 92133 (hereinafter also called “the Seller”, “the Contractor”, or “the Subcontractor”).
 
In consideration of the mutual promises, covenants, and agreements herein set forth, the parties agree that the Seller shall furnish and deliver to the Buyer all the supplies and perform all the services set forth in this Subcontract, for the consideration stated herein.
 
The rights and obligations of the parties to this Subcontract shall be subject to, and governed by, the Schedule, the Subcontract clauses of Systems 3392, and other documents or specifications attached hereto or referenced herein.
 
This Subcontract sets forth the entire agreement and supersedes any and all prior agreements of the parties, whether written or oral, concerning the subject matter hereof.
 
Note: Article XXV hereof contains information concerning seller’s obligations with regard to prohibited materials in products to be delivered hereunder.
 
This Subcontract shall not be varied or changed in its terms or conditions by any oral agreement or representation, or otherwise than by an instrument in writing of even or subsequent date thereto, properly executed.
 
The subcontract title used hereinabove and the article titles used hereinbelow are for convenience only and shall in no way be construed as an indication of meaning for interpretive purposes.

Subcontract No. 65096QDM5S
 
Schedule

Applicability
	  	Article No.
	  	Article Title
	
x	  	I	  	Scope of Work	
x	  	II	  	Period of Performance	
x	  	III	  	Place of Performance, Inspection and Acceptance	
x	  	IV	  	Packaging, Packing, FOB Point, and Shipping	
x	  	V	  	Type of Subcontract	
x	  	VI	  	Key Personnel	
x	  	VII	  	Subcontract Reports	
x	  	VIII	  	Consideration and Payment	
x	  	IX	  	Funds Allocated to Subcontract	
x	  	X	  	Priority Rating	
x	  	XI	  	Notice of Delay	
x	  	XII	  	Termination for Convenience	
x	  	XIII	  	Buyer Itinerant or Resident Representatives and Government Visits	
x	  	XIV	  	Invoicing	
x	  	XV	  	Exercise of Options	
x	  	XVI	  	Subcontract Management	
x	  	XVII	  	Release of News Information	
x	  	XVIII	  	Representations, Certifications, and Other Statements	
x	  	XIX	  	Subcontract Cost Accounting Standards	
¨	  	XX	  	Reserved	
x	  	XXI	  	Submission of Notice, Consent, Demand, or Request	
¨	  	XXII	  	Reserved	
x	  	XXIII	  	Not-to-Exceed Agreement	
¨	  	XXIV	  	Reserved	
x	  	XXV	  	Prohibited Materials	
x	  	XXVI	  	Subcontract Content and Order of Precedence	
 
Article I—Scope of Work
 
A. The Seller, as an independent contractor and not as an agent of the Buyer, shall, in conformance with the terms and conditions more particularly set forth herein, provide the necessary personnel, material, and facilities and do all things necessary or incidental to accomplish the effort set forth in the Statement of Work identified and made a part of this Subcontract under Article No. XXVI hereof.
 
B. The Buyer was issued the prime contract or higher-tier subcontract identified on the title page of this Subcontract (hereinbelow called the aforementioned contract). The Seller’s supplies and services deliverable under this Subcontract will be utilized by the Buyer as part of the basis on which the Buyer intends to fulfill its obligations under the aforementioned contract.
 
The Buyer is relying on the Seller’s agreement as set forth in this Subcontract and on the Seller’s performance of same by timely delivery or performance and may be unable to fulfill its obligations under the aforementioned contract if the Seller should fail to do so.
 
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Subcontract No. 65096QDM5S
 
Article II—Period of Performance
 
The Seller shall perform the work under this Subcontract during the period 04 February 2005 to 31 August 2007 and shall deliver the required supplies or any services in accordance with the delivery schedule set forth in the Statement of Work or elsewhere within this Subcontract. Time is of the essence in the Seller’s performance of this Subcontract.
 
Article III—Place of Performance, Inspection, and Acceptance
 
A. The Seller shall perform the work under this Subcontract at 9244 Balboa Avenue, San Diego California or at such other substitute or supplemental locations as may be agreed to in writing by the parties.
 
B. Final inspection and the Buyer’s acceptance of all supplies and services and other effort described herein as deliverable shall be made at Buyer’s facility in Redondo Beach, California.
 
Article IV—Packaging, Packing, FOB Point, and Shipping
 
A. The supplies to be delivered hereunder are to be packaged and packed in accordance with the Statement of Work.
 
B. The supplies to be delivered hereunder are to be shipped FOB Destination in accordance with the following:
 
NGST, One Space Park, Redondo Beach, CA 90278
 
Article V—Type of Subcontract
 
The subcontract work is to be performed on a firm-fixed-price (FFP) (FAR 16.202) basis (except to any extent that may be otherwise expressly provided for herein).
 
Article VI—Key Personnel
 
The Seller’s employees identified below are key personnel, important to the successful performance of the work under this Subcontract. The Seller agrees to assign these employees to the performance of the work. Whenever, for any reason, one or more of these employees becomes unavailable for assignment for work under this Subcontract, the Seller shall replace each such employee with a person of comparable ability as acceptable to the Buyer. The Seller shall inform the Buyer in advance, in writing, whenever such an employee change becomes necessary.
 
Robert Hillman – Electrical Engineer
 
Mark Conrad – Software Engineer
 
Janet Patterson – Mechanical Engineer Manager
 
Article VII—Subcontract Reports
 
The Seller shall furnish reports, data, and other documentation as identified in the Statement of Work.
 
Article VIII—Consideration and Payment
 
A.	The Buyer shall, upon submission of proper invoices or vouchers and subject to any funding limitation, withholding, set-off, or adjustment provisions contained herein, pay the Seller a firm-fixed-price of Five Million Nine Hundred Fourteen Thousand Seven Hundred Ninety-Four Dollars and no Cents ($5,914,729.00) as full and complete consideration for the satisfactory performance of all the requirements of this Subcontract designated as falling under that type of subcontract. If this Subcontract provides separate line item prices and payments shall be made following delivery of such lines items. In computing any discount time, such time shall commerce upon the Buyer’s receipt of a proper invoice or voucher and receipt of the items delivered.	
 
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Subcontract No. 65096QDM5S
 
SLIN 001- Basic (Flight 1 and 2)

Milestone
Item
	  	Description
	  	Quantity
	  	Milestone
Payment
	  	Funded
	  	Milestone
Date
	  	Completion Criteria
	
01	  	Initial Contract Review & Program Management Months February & March ‘05	  	1	  	$	600,000.00	  	$	600,000.00	  	03/21/05	  	Completion of ICR & Buyer approved Action Item Closure	
02	  	Program Management Months April & May ‘05	  	1	  	$	100,000.00	  	$	100,000.00	  	05/16/05	  	PMR Report Submittal	
03	  	Breadboard Delivery, PDR, & Program Management Months June & July ‘05	  	2	  	$	600,000.00	  	$	200,000.00	  	06/24/05	  	Delivery of Hardware & End Item Data Package (EIDP), and Completion of PDR & Buyer approved Action Item Closure	
04	  	Program Management
Months August & September ‘05	  	1	  	$	100,000.00	  	 	 	  	09/15/05	  	PMR Report Submittal	
05	  	Program Management
Months October & November ‘05	  	1	  	$	100,000.00	  	 	 	  	11/15/05	  	PMR Report Submittal	
06	  	Program Management
Months December ‘05 & January ‘06	  	1	  	$	100,000.00	  	 	 	  	01/16/06	  	PMR Report Submittal	
07	  	Program Management
Months February & March ‘06	  	1	  	$	100,000.00	  	 	 	  	03/31/06	  	PMR Report Submittal	
08	  	Program Management Months April & May ‘06	  	1	  	$	100,000.00	  	 	 	  	05/15/06	  	PMR Report Submittal	
 
3

Subcontract No. 65096QDM5S

Milestone
Item
	  	Description
	  	Quantity
	  	Milestone
Payment
	  	Funded
	  	Milestone
Date
	  	Completion Criteria
	
09	  	Engineering Qualification Model Program Management Months June & July ‘06	  	1	  	$	600,000.00	  	 	  	07/19/06	  	Delivery of Hardware & End Item Data Package (EIDP)	
10	  	Engineering Model Delivery	  	6	  	$	499,980.00	  	 	  	08/28/06	  	Delivery of Hardware & End Item Data Package (EIDP)	
11	  	Critical Design Review & Manufacturing Readiness Review & Program Management Months August & September ‘06	  	1	  	$	600,000.00	  	 	  	09/15/06	  	Completion of CDR/MRR & Buyer approved Action Item Closure	
12	  	Program Management Months October & November ‘06	  	1	  	$	100,000.00	  	 	  	11/15/06	  	PMR Report Submittal	
13	  	Program Management Months December ‘06 & January ‘07	  	1	  	$	100,000.00	  	 	  	01/15/07	  	PMR Report Submittal	
14	  	Program Management Months February & March ‘07	  	1	  	$	100,000.00	  	 	  	03/15/07	  	PMR Report Submittal	
15	  	Flight I Units & Program Management Months April & May ‘07	  	7	  	$	999,990.00	  	 	  	04/02/07	  	Delivery of Hardware & End Item Data Package (EIDP)	
16	  	Flight 2 Units and Spares & Program Management Months June & July ‘07	  	7	  	$	999,990.00	  	 	  	07/02/07	  	Delivery of Hardware & End Item Data Package (EIDP)	
17	  	Subcontract Closeout – August ‘07	  	1	  	$	114,769.00	  	 	  	08/31/07	  	Delivery and Buyer approval of closeout documentation per SOW SDRL	
 
4

Subcontract No. 65096QDM5S
 
SLIN 002 - Flight 3 Option
 
Option may be exercised on or before 01 December 2009

Line
Item
	 	Description
	 	Quantity
	 	Payment
	 	Delivery
Date
	 	Completion
Criteria
	 	Subcontract
Type
	
17	 	Flight 3 Units	 	8	 	$2,216,712.00	 	30 June 2011	 	Delivery of Hardware & End Item Data Package (EIDP)	 	FFP	
 
SLIN 003 - Flight 4 Option
 
Option may be exercised on or before 01 December 2010

Line
Item
	 	Description
	 	Quantity
	 	Payment
	 	Delivery
Date
	 	Completion
Criteria
	 	Subcontract
Type
	
18	 	Flight 4 Units	 	6	 	$1,684,440.00	 	30 June 2012	 	Delivery of Hardware & End Item Data Package (EIDP)	 	FFP	
 
SLIN 004 - Flight 5 Option
 
Option may be exercised on or before 01 December 2010

Line
Item
	 	Description
	 	Quantity
	 	Payment
	 	Delivery
Date
	 	Completion
Criteria
	 	Subcontract
Type
	
19	 	Flight 5 Units	 	6	 	$1,684,440.00	 	30 June 2012	 	Delivery of Hardware & End Item Data Package (EIDP)	 	FFP	
 
SLIN 005 - Flight 6 Option
 
Option may be exercised on or before 01 December 2011

Line
Item
	 	Description
	 	Quantity
	 	Payment
	 	Delivery
Date
	 	Completion
Criteria
	 	Subcontract
Type
	
20	 	Flight 6 Units	 	8	 	$2,275,536.00	 	30 June 2013	 	Delivery of Hardware & End Item Data Package (EIDP)	 	FFP	
 
Article IX—Funds Allocated to Subcontract
 
A. Pursuant to the Limitation of Government’s Obligation clause of Systems 3392, hereby identified as applicable to all Line Item(s), of this Subcontract, the total sum available for payment and allotted to this Subcontract is $900,000.00. It is contemplated that such sum will cover the work to be performed through 24 June 2005.
 
5

Subcontract No. 65096QDM5S
 
Article X—Priority Rating
 
This is a rated order certified for national defense use, and the Contractor [Seller] shall follow all the requirements of the Defense Priorities and Allocation System Regulation (15 CFR Part 700). See the title page hereof.
 
Article XI—Notice of Delay
 
In addition to its obligations under the Notice to the Government of Labor Disputes clause hereof, whenever any other actual or potential event is delaying or threatening to delay performance of the services under this Subcontract, the Seller shall give the Buyer timely written notice thereof.
 
Article XII— Termination for Convenience
 
The performance of work under this order may be terminated in whole or in part if, for the convenience of the Buyer. Under such condition, Buyer will give written termination notice to Seller. Buyer shall pay Seller an amount computed in accordance with FAR Clause 52.249-2.
 
Article XIII—Buyer Itinerant or Resident Representatives and Government Visits
 
A. The Buyer shall have the right to assign representatives on an itinerant or resident basis at the Seller’s facilities, or those of lower-tier subcontractors or vendors, for the purpose of maintaining surveillance activities, including the right to witness any or all tests performed as part of the requirements of this Subcontract. The Seller shall provide the Buyer’s representatives with reasonable facilities and equipment, and reasonable access to all areas essential to the proper conduct of the aforementioned activity, throughout all phases of any engineering, manufacturing, testing, packaging, and shipping. In addition, the Seller shall make available to the Buyer’s representatives pertinent planning, status, and forecast information, and such other technical and management reporting information as may be necessary for the Buyer’s representatives to carry out their responsibilities.
 
B. The Seller agrees, upon request of the Buyer, to allow the U.S. Government contracting officer under the prime contract or his/her authorized representatives, to visit the Seller’s facilities to review progress and witness testing pertaining to the requirements of this Subcontract. The Seller shall furnish the contracting officer and his/her representatives all reasonable facilities and assistance for the safe and convenient performance of the actions described.
 
C. The Seller shall insert, and require its subcontractors and vendors to insert, the substance of this article, including this paragraph, in each lower-tier subcontract hereunder.
 
Article XIV—Invoicing
 
A. Invoices shall include the following information:
 
 	•	 	Subcontract number	
 
 	•	 	Buyer name	
 
 	•	 	Subcontractor name	
 
 	•	 	Subcontractor remittance address	
 
 	•	 	Invoice number (designated by the subcontractor)	
 
 	•	 	Invoice date of issuance	
 
 	•	 	Total amount claimed for payment	
 
 	•	 	Subcontract line items against which payments is claimed along with the claim amount by the line item	
 
6

Subcontract No. 65096QDM5S
 
B. Original invoices (or vouchers) for payments hereunder shall be submitted in either one of two ways:

1.	  	By Email	
		
 	  	Via PDF Format to sas-ap-sub@ngc.com with a copy to maria.holguin@ngc.com	

2.	  	By Mail	
		
 	  	Northrop Grumman Space Technology, Accounts Payable	
 	  	P.O. Box 922	
 	  	El Segundo, CA 90245	
 
C. Copy of invoices (or vouchers) shall be submitted either by mail (or fax), or by e-mail to the following address:

 	  	NGST	
 	  	One Space Park	
 	  	Redondo Beach, CA 90278	
 	  	Attn: Maria Holguin (R10/2327C)	
		
 	  	maria.holguin@ngc.com	
 
Article XV—Exercise of Options
 
The Seller shall perform and deliver to the Buyer the additional work specified in Article I and identified as Options, if Buyer elects at its sole discretion to exercise such option(s) by written notice to Seller on or before the option date specified for each option. The Contract Price for such Work shall be as specified in Article VIII, which amount shall be paid as provided in Article VIII.
 
The Buyer reserves the right to exercise any option as a separate subcontract at the time of exercise. In such case, the appropriate terms and conditions of this subcontract will be included in the new subcontract. The Buyer intends to use the terms and conditions as written in this Subcontract.
 
Article XVI—Subcontract Management
 
A. The Buyer’s subcontract manager for this Subcontract is designated on the title page hereof. The Buyer may, by written notice to the Seller, change such subcontract manager designation at any time.
 
B. No change notice, order, direction, authorization, notification, nor request (hereinafter collectively called a “change request” for brevity) of the Buyer shall (1) be binding upon either the Seller or the Buyer nor (2) serve as the basis of any Seller claim for any Buyer change or waiver relating to the Subcontract clauses, Statement of Work or specification(s), delivery schedule, or any other provision of this Subcontract (hereinafter collectively called “Subcontract terms and conditions” for brevity), unless such change request was issued in writing or confirmed in writing by the Buyer’s subcontract manager.
 
C. The Seller shall immediately notify the Buyer’s subcontract manager in writing whenever it is perceived that such a change request (1) has been received by the Seller other than in writing by the Buyer’s subcontract manager and (2) constitutes a change or waiver relating to certain Subcontract terms and conditions, so that the Buyer’s subcontract manager may promptly respond in writing to confirm, countermand, or deny such perceived change request.
 
D. The Buyer’s subcontract manager may designate authorized representatives and specify the extent of their authority, by providing a written document to the Seller. Individuals may be so designated as technical representatives, to oversee technical aspects of the Subcontract work. No such authorized representative, including any technical representative, shall be authorized to issue any binding change request causing any Buyer change or waiver relating to any Subcontract terms and conditions.
 
7

Subcontract No. 65096QDM5S
 
E. Any and each person identified below by name or by virtue of occupying a position shown is hereby designated as an alternate Buyer’s subcontract manager for this Subcontract, and is authorized to perform the same functions and with the same extent of authority as the primary Buyer’s subcontract manager identified hereinabove.
 
1. Paul Nakamoto – Subcontract Manager
 
Article XVII—Release of News Information
 
No news release, including photographs and films, public announcements, or confirmation of same, on any part of the subject matter of this Subcontract or any phase of any program hereunder, shall be made without the prior written consent of the Buyer.
 
Article XVIII—Representations, Certifications, and Other Statements
 
All written representations, certifications, and other statements that the Seller has submitted to the Buyer in connection with the award of this Subcontract are hereby incorporated herein and made a part hereof by this reference, and such have been relied upon by the Buyer in issuing this Subcontract. The Seller agrees to advise the Buyer promptly in writing should there be any change in the Seller’s status with respect thereto.
 
Article XIX—Subcontract Cost Accounting Standards
 
A. This Subcontract is ¨ is not x subject to the Cost Accounting Standards clause hereof. If clause is indicated to be applicable, date thereof is ¨ Aug 1992 ¨ Sep 1987 ¨ Other             
 
B. This Subcontract is ¨ is not x subject to the Disclosure and Consistency of Cost clause hereof. If clause is indicated to be applicable, date thereof is ¨ Nov 1993 ¨ Aug 1992 ¨ Sep 1987 ¨ Other             
 
C. If this Subcontract is indicated above to be subject to either the Cost Accounting Standards clause or the Disclosure and Consistency of Cost Accounting Practices clause:
 
 	1.	The corresponding Administration of Cost Accounting Standards clause hereof also applies. If clause is indicated to be applicable, date thereof is ¨ Dec 1994 ¨ Aug 1992 ¨ Sep 1987 ¨ Other             	
 
 	2.	The Seller shall comply with all applicable standards in effect on the date of final agreement on the subcontract price as shown in the Seller’s signed certificate of cost and pricing data or on the date of award of this Subcontract, whichever is earlier, except where the Seller has been granted written authorization for deviation.	
 
 	3.	Award of this Subcontract does not constitute a determination that the Seller’s disclosed and applied accounting practices used in pricing this Subcontract are in compliance with the Cost Accounting Standards (CAS). The Buyer retains the right to adjust the subcontract price per the CAS clauses, and other applicable provisions of this Subcontract, if a subsequent final determination of noncompliance is made by the contracting officer under the prime contract from which this Subcontract stems.	

Article XX—Reserved
 
Article XXI—Submission of Notice, Consent, Demand, or Request
 
Any notice, consent, demand, or request required or permitted by this Subcontract shall be in writing and shall be deemed to have been sufficiently given when personally delivered or deposited in the United States mail, postage prepaid, addressed as follows:

If to Buyer	 	If to Seller	
		
Northrop Grumman Space & Mission Systems Corp.	 	Maxwell Technologies, Inc.	
One Space Park
Redondo Beach, CA 90278	 	9244 Balboa Avenue
San Diego, CA 92123	
Attention:    M. Holguin (R10/2327C)	 	Attention    B. Eichler	
 
8

Subcontract No. 65096QDM5S
 
Article XXII—Reserved
 
Article XXIII—Not-To-Exceed Agreement
 
Prior to the issuance of a change notice under this Subcontract pursuant to the Changes clause hereof, and upon any properly detailed written request by the Buyer, the Seller shall provide the Buyer a written proposal as to the maximum adjustment to be made in the Subcontract price, and in the delivery schedule (or time of performance), by reason of the proposed change. The Buyer may also solicit such proposal on limitations on the adjustments to any other provisions of the Subcontract which may be subject to equitable adjustment by reason of the proposed change. Any such written proposal that is agreed to by the Buyer shall then be cited in the change notice and, upon issuance of the change notice, shall be a binding part of this Subcontract. In no event shall the definitive equitable adjustment exceed nor otherwise be inconsistent with any adjustment limitations so established. Except with respect to such adjustment limitations, nothing contained in this article shall affect the rights of the parties regarding equitable adjustment by reason of such change notice.
 
Article XXIV—Reserved
 
Article XXV—Prohibited Materials
 
Seller acknowledges that Seller has read and understood the Prohibited Materials Certification (SYSTEMS 8130). In addition to the certifications contained in the Prohibited Materials Certification, Seller further covenants to take all steps necessary to ensure that no products delivered hereunder will contain any prohibited materials in accordance with the applicable Program Parts Material and Processes Plan or Mission Assurance Requirement document or their equivalent identified in the Statement of Work. Seller agrees that this covenant goes to the essence of this contract and any breach of this covenant or the Prohibited Materials Certification is grounds for termination for default. To the extent that any products delivered by Seller hereunder contain any of the Prohibited Materials, notwithstanding any other provision herein (or any attachment hereto) to the contrary except the Prohibited Materials Certification itself, Seller agrees to indemnify and hold harmless Buyer, Buyer’s customer and their respective affiliates, employees, officers, directors and agents from any internal and external cost, claim, damage, loss or other expense or liability whatsoever (including without limitation all in-house and outside attorneys’ costs, fees and expenses) (collectively, “Costs”) resulting from Seller’s delivery of products hereunder containing any of the Prohibited Materials. Seller acknowledges that such Costs may include, without limitation, (i) any penalties, loss of fee or additional costs that Buyer suffer as a result of (a) the inclusion of Prohibited Materials in Seller’s products or (b) the delay caused by Buyer remediating such Prohibited Materials, (ii) Buyer’s internal costs incurred in testing components to determine if Prohibited Materials were included in Seller’s products, in disassembling any component that includes Seller’s product containing Prohibited Materials and in reassembling and retesting the remediated component and (iii) any excess reprocurement costs to replace Seller’s product that includes any Prohibited Material. To the extent that any of Seller’s products delivered hereunder contains a Prohibited Materials, Buyer may deem all of Seller’s products to be suspect and all costs incurred in testing, disassembling, reassembling and retesting such products, even if they are ultimately determined not to contain Prohibited Materials, shall be deemed Costs and subject to reimbursement herein. Seller agrees that Seller shall be fully responsible for all such Costs even if Seller is unaware of the existence of any of the Prohibited Materials in its products. To the extent that Buyer incurs any costs or expenses (including without limitation all in-house and outside attorneys’ costs, fees and expenses) in obtaining reimbursement of any of the Costs, such costs and expenses shall be considered Costs and shall similarly be reimbursed by Seller.
 
9

Subcontract No. 65096QDM5S
 
Seller Acknowledgment of Article XXV:                                                                  
 
Seller agrees that, notwithstanding any provision herein (or in any attachment hereto) to the contrary, the Costs for which Seller is responsible shall not be limited by any limitation of liability or cap on damages. Further, Seller agrees that any waiver of consequential, indirect, special, punitive, incidental or similar damages contained elsewhere in this contract or any attachment hereto shall not apply to Costs incurred pursuant to this Article XXV.
 
Article XXVI—Subcontract Content and Order of Precedence
 
This Subcontract consists of the physically incorporated documents identitied below, and additionally such documents as have been incorporated into this Subcontract by reference thereunder. Any inconsistency among such physically incorporated documents, including the documents which they individually incorporate by reference, shall be resolved by giving precedence per the ordering thereof below (except that any Contract Security Classification Specification [DD Form 254] shall be given precedence over all other such documents).

1.	  	Title Page, consisting of one page.	
		
2.	  	Schedule, consisting of 10 pages.	
		
3.	  	Signature Page, consisting of one page.	
		
4.	  	NPOESS Special and Additional Clauses, dated 05 January 2005.	
		
5.	  	Systems 3392, Subcontract Clauses—Fixed-Price Subcontract for Supplies, Research and Development, and Services, Rev. 02-03.	
		
6.	  	Systems 1C, Patent and Data Rights Clauses—Subcontracts and Purchase Orders, Rev. 02-03, the applicable clauses of which are identified as follows (subject to any scoping provisions):	

PR-01F	 	PR-02F	 	PR-12F	 	DR-13D	 	DR-13DI	 	DR-14D	
DR-16D	 	DR-19D	 	DR-25D	 	DR-30D	 	DR-36D	 	DR-37D	
 
a. In addition, 5352.227-9000, 5352.227.9002, and Maxwell’s Identification and Assertion of Restrictions on the Government’s Use, Release, or Disclosure of Computer Software and Technical Date are applicable.

7.	  	Systems 1992, Supplemental Clauses—Purchase Orders/Subcontracts, Rev. 02-03, the applicable clauses of which are identified as follows:	

    106	 	109	 	 	 	 	 	 	

8.	  	Quality document 1991, Q Clauses, Procurement Quality Requirements, Rev. 02-04, the applicable clauses of which are identified on the title page of this Subcontract.	
		
9.	  	Statement of Work No. NP-EMD.04.K251.001 Rev. A, dated 27 January 2005.	
		
10.	  	Single Board Computer EQ Specification No. EQ4-5956 as modified by Attachment 1 “EQ-Spec No. EQ4-5956 Amendments”, dated 26 January 2005.	
 
10

Signature Page
 
IN WITNESS WHEREOF, the parties hereto have executed this Subcontract to be effective as of the day and year first above written.

Seller	 	Buyer	
		
 	 	Space Technology sector	
Name	 	 	 	Northrop Grumman Space & Mission Systems
Corp.	
				
By:	 	 
	 	By	 	 
	
 	 	Richard D. Balanson	 	 	 	Maria Holguin                                                          Date	
				
Title:	 	President and Chief Executive Officer	 	Title:	 	Sr. Subcontract Administrator	
				
 	 	 	 	By	 	 
	
 	 	 	 	 	 	Edward H. Mitchell                                                  Date	
				
 	 	 	 	Title:	 	NPOESS Program Subcontract Manager	
  
Exhibit 10.38

	 	NUMBER:	 	 
05-2009	
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	 	DATE OF ORDER:	 	 
February 25, 2005	

PURCHASE ORDER	 	PAGE 1 OF 4    	

VENDOR:
Attn: Serge Drobatschewsky
Maxwell Technologies
9244 Balboa Avenue
San Diego, California 92123
USA
 
Tel: 858-503-3409
Fax: 858-503-3301
 
(Seller) will sell and deliver the supplies and services specified herein in accordance with the terms and conditions hereof.	  	PROJECT:   DE-FC36-95EE50425
 
DELIVERY:   February 20, 2005
 
PAYMENT:   Net 30th Prox
 
DELIVERY:
Type & Place:
FOB Seller’s Plant
Payment for Transportation:
Collect
Routing:
Buyer’s Traffic	  	SHIP TO:
 
Cyrus N. Ashtiani
DaimlerChrysler
CIMS 483-00-08
800 Chrysler Drive
Auburn Hills,
Ml 48326-2757
USA
 
Tel: 248-512-9409	

QTY
	  	DESCRIPTION OF SUPPLIES OR SERVICES
	  	UNIT PRICE
	  	TOTAL PRICE
	
1	  	Develop the technology to deliver low cost high performance 42V ultracapacitor cells and modules for energy storage, power delivery needs, and system goals defined in the FreedomCAR program.	  	$	6,800,000.00	  	$	6,800,000.00	
n/a	  	Notes:	  	 	n/a	  	 	n/a	
 	  	A) The Head-Start letter dated August 13, 2004, copy attached, stated, among other terms, that Maxwell has agreed on the Purchase Order (P.O.) Terms and Conditions (T&C’s), and accordingly, the PO T&C’s are applicable to this project. The USABC does agree to clarify the T&C’ as set forth below:	  	 	 	  	 	 	
				
 	  	1. Paragraph 19: The parties agree that the Intellectual Property provisions of the incorporated Appendix E take precedence over the USABC P.O T&C’s.	  	 	 	  	 	 	
 	  	2.Paragraph 20: Maxwell will be reimbursed 45% of the allowable costs for performing the work under the P.O. and that the remaining 55% of the allowable cost shall constitute Maxwell’s share. B. The DOE Contracting Officer, by letter dated January 24, 2005, has granted approval of the subject project.	  	 	 	  	 	 	
 	  	B. The DOE Contracting Officer, by letter dated January 24, 2005 has granted approval of the subject project.	  	 	 	  	 	 	
 	  	continued…	  	 	 	  	 	 	
				
 	  	The USABC terms and conditions contained in this purchase order are the only terms and conditions applicable to this order. Any additional or different terms and conditions of seller referenced in any attachments to this purchase order, or any other documentation, are rejected by USABC and are deleted in their entirety.	  	 	 	  	 	 	

REQUESTOR:
 
Cyrus N. Ashtiani
DaimlerChrysler
CIMS 483-00-08
800 Chrysler Drive
Auburn Hills,
Ml 48326-2757
USA
 
Tel: 248-512-9409	 	INVOICE TO:
 
United States Advanced Battery Consortium
c/o Bucciero and Associates
1050 Wilshire Ste. 115
Troy, Ml 48084	  	APPROVED:
 
February 25, 2005	

	 		  		

	 		  		

					
	 	NUMBER:	 	 
05-2009	
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PURCHASE ORDER Continued	 	PAGE 2 OF 4    	

QTY
	  	DESCRIPTION Of SUPPLIES OR SERVICES
	  	UNIT PRICE
	  	TOTAL PRICE
	 	
 	  	…continued	  	 	  	 	 	 	
n/a	  	 	  	 	  	 	 	 	
 	  	 	  	 	  				
 	  	Gross purchase order:	  	 	  	$	6,800,000.00	 	
 	  	Less supplier cost share @55%:	  	 	  	$	(3,740,000.00	)	
 	  	 	  	 	  				
 	  	Net purchase not to exceed:	  	 	  	$	3,060,000.00	 	

					
	 	NUMBER:	 	 
05-2009	
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PURCHASE ORDER Terms and Conditions	 	PAGE 3 OF 4    	
 
1. OFFER, ACCEPTANCE AND MODIFICATION - This order is an offer to Seller by Buyer to enter into the agreement it describes and it shall be the complete and exclusive statement of such agreement. Seller shall accept the offer in writing or by beginning work hereunder. Modifications proposed by Seller are not part of the agreement in the absence of Buyer’s written acceptance.
 
2. CHANGES - Buyer at any time by written order may change the work of this order, including the specifications, statement of work, number and design of prototypes and delivery dates. If any such change affects cost or timing, Buyer shall adjust price and delivery schedules equitably. Seller shall not make any change in the work of this order without the written approval of Buyer.
 
3. SUBCONTRACTING - Seller shall not subcontract any of its substantive obligations under this order without the prior consent of Buyer. In each subcontract of work hereunder, Seller shall obtain from the subcontractor the same obligations and rights and licenses for Buyer and Buyer’s Partners and Partner Associated Companies as are provided by Seller under Section 9. A Partner Associated Company is any entry or division of a Partner, present or future (except those that manufacture batteries), in which one of Buyer’s Partner’s owns fifty percent or more of its voting stock or equity.
 
4. TITLE AND BAILED PROPERTY - (a) The documents and articles produced or acquired by Seller under this order shall become the property of Buyer immediately upon production or acquisition.
 
(b) Unless otherwise specified, Seller bears all responsibility for loss and damage to all documents and articles owned by Buyer and possessed by Seller, including responsibility for loss and damage which occur despite Seller’s exercise of reasonable care, but excluding normal wear and tear. Seller shall (1) properly house and maintain such documents and articles on Seller’s premises, (2) mark them “Property of USABC”, (3) refrain from commingling them with the property of Seller or with that of a third party, and (4) maintain them as personal property. Buyer shall have the right to enter Seller’s premises at reasonable time to inspect the documents and articles and pertinent records. Upon completion of the work of this order, Seller shall advise Buyer of those documents and articles produced or acquired hereunder which remain in Seller’s possession.
 
(c) At Buyer’s request, Seller immediately shall deliver the documents and articles to Buyer or a carrier selected by Buyer, at Buyer’s option F.O.B. carrier Seller’s facility or F.O.B. Buyer’s facility freight collect, properly packed and marked in accordance with the requirements of the carrier and Buyer. In the event that Buyer requests scrapping of the documents or articles, Seller shall destroy the specified documents and articles or mutilate them to the point of usefulness only as raw materials. Seller may sell the materials resulting from such mutilation only to another who agrees to use them only as raw materials. Seller may delegate to a responsible third party its duties regarding the destruction or mutilation of such documents and articles, but delegation does not relieve Seller from responsibility for such duties and Seller must monitor the performance of the third party.
 
5. BLANKET ORDER RELEASES - If this purchase order specifies that the services to be performed shall be designated by release, Seller shall perform services only as authorized in releases issued to Seller by Buyer. Any specific requirements concerning scheduled milestones, delivery dates or progress reporting must be met by Seller prior to payment by Buyer, including progress payments.
 
6. INVOICES AND PAYMENT - (a) If applicable to Seller, each invoice shall contain the following assurance: “Seller represents that it has complied with the Fair Labor Standards Act of 1938, as amended, in producing the supplies or performing the services covered by this invoice.”
 
(b) If this order specifies prices on an other-than-fixed price basis, Buyer’s payment obligation shall be calculated only from the direct labor and direct materials expended by Seller on the work hereof at rates specified in this order. Such rates shall be deemed to include adequate allowances for all other costs and charges. Work shall be at straight-time rates unless Buyer approves higher rates in writing in advance. For these purposes, direct labor consists of actual hours spent pursuant to this order by qualified persons whose classifications are listed in this order and who are not otherwise compensated for such hours, and direct materials are those items that become part of the supplies delivered to Buyer.
 
(c) Each invoice of an other-than-fixed price order shall specify the amount of direct labor for each rate, the amount of direct materials, and other appropriate data requested by Buyer.
 
(d) Seller shall establish an accounting system that enables ready identification of the foregoing data. Buyer may audit Seller’s records at any time prior to two years after final payment under an other-than-fixed price order to verify Buyer’s payment obligation to Seller. Seller shall provide written notice to Buyer when work performed reaches eighty percent of the maximum price, if any, specified in this purchase order.
 
(e) Before payment of final invoice by Buyer, Seller, unless otherwise directed by Buyer, shall provide the items necessary for contract closeout, including, but not limited to a final technical report, Property Certification, Patent Certification, Summary Settlement Statement, and Subcontractor’s Final Release and Assignment and Certification Respecting Refunds, Rebates, Credits and Other Amounts.
 
7. WARRANTY - Seller expressly warrants that all goods or services covered by this order will conform to the specifications furnished to or by Buyer, and will be merchantable, of good material and workmanship and free from defect. In addition, Seller acknowledges that Seller knows of Buyer’s intended use and expressly warrants that all goods covered by this order which have been selected, designed, manufactured, or assembled by Seller, based upon Buyer’s stated use, will be fit and sufficient for the particular purposes intended by Buyer.
 
8. INFRINGEMENT - Seller at its expense shall investigate and defend or otherwise handle, or at Buyer’s option provide all reasonable assistance to Buyer in Buyer’s investigation, defense or handling of, every claim that may be brought against Buyer, its Partners and Partner Associated Companies, or others that use the documents and articles on behalf of any of them, for any alleged infringement of any present or future patent, copyright, industrial design right or other proprietary right based on Seller’s work hereunder or the sale or use of the documents or articles (1) alone, (2) in combination by reason of their content, design or structure, or (3) in combination in accordance with Seller’s recommendations. Seller’s obligations shall apply even though Buyer furnishes all or any portion of the design and specifies all or any portion of the processing. Seller shall pay all expenses and damages that Buyer, its Partners or Partner Associated Companies and others using the documents or articles on behalf of Buyer may sustain by reason of each such claim.
 
9. INFORMATION AND DATA -
 
(a) Seller shall furnish to Buyer or another party designated by Buyer, without restrictions of use or disclosure, all information and data developed in the performance of work and required to be delivered hereunder.
 
(b) All designs, inventions, and improvements which Seller makes in the course of Seller’s activities hereunder and any patents and/or copyrights received by Seller thereon shall be the property of Seller provided that Seller agrees to contribute at least fifty percent (50%) of the total cost of the work hereunder; otherwise all such designs, inventions and improvements which Seller makes, solely or jointly with Buyer, in the course of Seller’s activities hereunder and any patents or copyrights received by Seller, solely or jointly, thereon shall be the property of Buyer and, in such case, Seller shall execute or have executed any papers and provide assistance as may be necessary to perfect ownership thereof in Buyer. In addition, if Seller fails to contribute at least fifty percent (50%) of the total cost of the work hereunder, (1) at Buyer’s request Seller shall furnish to Buyer, on reasonable terms and conditions, all other information and data of Seller which Buyer deems necessary to understand and apply the information and data of the above Section 9(a), and (2) Seller hereby grants to Buyer, its Partners and Partner Associated Companies designated by Buyer, a nonexclusive, paid- up, worldwide, irrevocable license to make, have made, use, have used, sell, offer to sell and import under, and to copy, modify, use, distribute, and prepare derivative works under, any intellectual property rights owned or controlled by Seller which cover any application of the technology embodied in the information or data Seller acquires or develops in the course of Seller’s activities hereunder.
 
(c) In the event that Seller is unwilling or unable to manufacture the product substantially developed in the course of Seller’s activities hereunder, at Buyer’s request, Seller shall negotiate in good faith with manufactures that are designated by the Buyer in collaboration with the Seller for the issuance of one or more royalty-bearing licenses under Seller’s intellectual property rights for the purposed of commercialization in all automotive applications of such product. Such license shall be granted by the Seller upon terms that are reasonable under the circumstances.
 
(d) For a period of five (5) years from the date hereof, Seller shall use reasonable care to prevent disclosing to others and shall not use on behalf of others (1) the technical information and data furnished by Buyer or developed by Seller in the performance of work hereunder, and (2) information relating to any portion of Buyer’s business that Seller may acquire in the course of Seller’s activities hereunder. This obligation shall not apply to information that is or becomes publicly known through not fault of Seller.
 
(e) Seller agrees not to assert any claim other than a claim (subject to any applicable license under Sections (b) and/or 9(c) above) for patent infringement against Buyer, its Partners and Partner Associated Companies with respect to any technical information which Seller shall have disclosed to or may hereafter disclose to Buyer in connection with the goods or services covered by this purchase order.
 
10. ENGINEERING DRAWINGS - Any engineering drawings Seller is required to prepare and furnish to Buyer shall conform with standards to be provided by Buyer.
 
11. INDEMNITY- Seller shall hold harmless Buyer, its Partners and Partner Associated Companies, and the directors and employees of all of them, from all claims, liabilities, losses, damages or other expenses, including legal fees, which arise from Seller’s performance of work in connection with this order or use of Buyer’s property on or off Buyer’s premises and which are for actual or alleged (a) injury to any person, (b) damage to any property, (c) economic loss, or (d) violation of any law, ordinance, or regulation, except when such (c) economic loss, or (d) violation of any law, ordinance, or regulation, except when such expenses are attributable to the sole negligence or sole and willful misconduct of Buyer, its Partners and Partner Associated Companies, or the directors and employees of any of them.
 
12. TERMINATION AT OPTION OF BUYER -
 
(a) Buyer may terminate its purchase obligations hereunder, in whole or in part, at any time, by a written notice of termination to Seller. Buyer shall have such right of termination notwithstanding the existence of an excusable delay of Section 14.
 
(b) Upon receipt of the notice of termination, Seller unless otherwise directed by Buyer shall (1) terminate promptly all work under this order, (2) transfer title and deliver to Buyer the finished work, the work in process and the parts and materials which Seller produced or acquired in accordance with this purchase order and which Seller cannot use in producing goods for itself or for others, (3) settle all claims by subcontractors (if any) for actual costs that are rendered unrecoverable by such termination, and (4) take actions reasonably necessary to protect property in Seller’s possession in which Buyer has an interest.
 
(c) Upon termination by Buyer under this Section, Buyer’s obligation to Seller shall be: (1)the purchase order price for all finished work and completed services which conform to the requirements of the order, (2) Seller’s reasonable actual cost of the work in process and parts and materials transferred to Buyer in accordance with subsection (b)(2) hereof, (3) Seller’s reasonable actual cost of settling the claims by subcontractors of subsection (b)(3) hereof but not in excess of the obligation Seller would have had to the subcontractor in the absence of termination, and (4) Seller’s reasonable actual cost of carrying out its obligations of subsection (b)(4) hereof. Buyer’s obligations upon termination under this Section shall not exceed the obligation Buyer would have had to Seller in the absence of termination.
 
(d) Within two months after the date of termination, Seller shall furnish to Buyer its termination claim which shall consist exclusively of the items of Buyer’s obligation to Seller that are listed in subsection (c) hereof. Buyer may audit Seller’s records, before or after payment, to verify amounts requested in Seller’s termination claim.
 
(e) Buyer shall have no obligation to Seller if Buyer terminates its purchase obligations of this purchase order because of default by Seller.

					
	 	NUMBER:	 	 
05-2009	
	 	Show this number on all shipping and billing documents	

PURCHASE ORDER Terms and Conditions (cont)	 	PAGE 4 OF 4    	
 
13. COMPLIANCE WITH LAW - Seller shall comply with federal, state and local laws, rules, regulations, ordinances and executive orders applicable to Seller’s performance of its obligations under this order. Contract clauses required by the Government in such circumstances are incorporated herein by reference.
 
14. EXCUSABLE DELAYS - Neither Buyer nor Seller shall be liable for a failure to perform that arises from causes or events beyond its reasonable control and without its fault or negligence, including labor disputes of any kind. Seller’s delivery obligations of Section 4 are not impaired by an excusable delay of this Section.
 
15. APPLICABLE LAW - This order shall be governed by the laws of the State of Michigan, and litigation on contractual causes arising from the order shall be brought only in a federal District Court located in Michigan or in a court of the State of Michigan.
 
16. MOST FAVORED CUSTOMER: If Seller and Buyer complete the work ordered hereunder and if Buyer, or its Partners or Partner Associated Companies designated by Buyer, elect to purchase from the Seller any item substantially developed hereunder, Seller shall sell such item to Buyer, or its Partners or Partner Associated Companies at prices that are no less favorable to the purchaser than those then currently given to any other customer for essentially a similar product in similar quantities and under essentially similar terms and conditions. If Seller later reduces the price to other customers for essentially the similar product in similar quantities and under essentially similar terms and conditions, Seller will reduce correspondingly the price to Buyer, its Partners and Partner Associated Companies.
 
17. OTHER TERMS-This purchase order is issued subject to Department of Energy Cooperative Agreement number DE-FC26-95EE50425 (“Cooperative Agreement”). In the event of a conflict between the terms of this purchase order and the Cooperative Agreement, the Cooperative Agreement controls. The Office of Management and Budget (“OMB”) Circular A-110 applies to Seller. If Seller is a non-profit organization (other than an educational institution), OMB Circular A-122 applies to Seller. If Seller is an educational institution, OMB Circular A-21 applies to Seller. If the amount of this purchase order exceeds $25,000, then Seller must comply with Department of Energy regulations located at 10 CFR Part 1036. If the amount of this purchase order exceeds $100,000, this purchase order and Seller are subject to Department of Energy regulations located at 10 CFR Part 601, regarding restrictions on lobbying. Seller must submit to buyer a completed “Disclosure of Lobbying Activities” form, Appendix B to 10 CFR Part 601, within 15 days following the end of any calendar quarter in which an event occurs that must be disclosed. Seller will require any calendar quarter in which an event occurs that must be disclosed. Seller will require any subcontractor under this purchase order to comply with this provision. Seller must provide copies to Buyer of any disclosures received from Sellers subcontractors.
 
Seller must allow Buyer or anyone with rights through Buyer to audit Seller’s records with respect to this purchase order. Seller must retain those records for 3 years following final payment under this purchase order.
 
18: The Seller shall perform the tasks and provide deliverables on the schedule specified in the SOW contained in Appendix A and agrees to use its best efforts to meet and attempt to exceed the technical goals of the program.
 
19: This purchase order is governed in declining order of precedence by: 1) the terms listed on the front page of the Purchase Order and on any continuation page thereof, 2) the Intellectual Property terms of Appendix E, 3) the terms on the back page of the Purchase Order, and 4) the Statement of Work in Appendix A.
 
20: This is a cost sharing Purchase Order. USABC shall reimburse seller for fifty (50%) percent of the allowable costs for performing the work under this Purchase Order. The remaining fifty (50%) percent of the allowable costs shall constitute the sellers share, for which it will not be reimbursed by USABC. Each month the seller shall submit to USABC an invoice reflecting the total allowable costs incurred by the seller during the previous month, less the seller’s cost share of such costs. USABC shall pay the seller within (60) days of receipt of each invoice, subject to seller providing a report outlining the work accomplished in sufficient detail to justify the funds seller expended during the month. Along with the monthly invoice, seller shall supply USABC with an estimate of the next month’s cost. Seller shall advise USABC immediately when the percent of work accomplished is inconsistent with the agreed upon funding expenditure schedule such that insufficient funds remain to complete the program as planned within the total costs outlined herein. This Purchase Order will enter into effect only after review and approval by DOE of Seller’s financial submissions. Paragraph 6(b) on the back page of the Purchase Order is deleted. This Purchase Order is issued on an allowable cost basis, without fee or profit. Allowable costs shall be identified in accordance with Generally Accepted Accounting Principles, and are defined in the Federal Acquisition Regulation (FAR Part 31.2; 48 CFR 31.2) and 10 CFR 600.127. Invoices will be submitted on Standard Form 270, Request for Advance or Reimbursement, with content acceptable to DOE. A Final Cost report will be submitted within 90 days of completion of the work, in the same format as the approved budget for the program, comparing the amounts allocated in the award budget to the amounts expended for each budget element, and identifying any unobligated balance which should be refunded to USABC and DOE. Paragraph 6(d) on the back page of the Purchase Order is modified to extend USABC audit rights to any period during which the US Government may audit the USABC expenditures on this Purchase Order (ref. 10 CFR 600.25 and 600.126(d)). Seller is expected to bring the work to conclusion within the funding limits of the approved financial submissions. There is no commitment by DOE or USABC to provide additional funds and Seller is not authorized to incur costs under this Purchase Order beyond the amounts on the face hereof.
 
Failure of the DOE to provide funding for this Purchase Order, or cancellation by DOE of such funding, may result in termination at the option of the USABC under the provisions of paragraph 12.
 
21. Publication by Seller of information developed under this Purchase Order will be governed by Appendix E provisions relating to patents and Protected Battery Information. Any publication which is approved under those conditions will contain the following acknowledgment statement:
 
‘This (material) was prepared with the support of the US Department of Energy, Cooperative Purchase Order number DE-FC02-95EE50425 with the United States Advanced Battery Consortium. However, any opinions, findings, conclusions, or recommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the DOE or the USABC.’
 
22: During the term of this Purchase Order, Seller agrees to secure pre-publication approval from USABC of proposed publications and USABC agrees to give Seller a copy of proposed publications at least thirty (30) days prior to publication.
 
Any news release, public announcement, advertisement, or publicity released by either party concerning this Purchase Order and work done pursuant to this Purchase Order will give full consideration and credit to the roles and contributions of both parties and DOE and further shall be subject to (a) all restrictions regarding publicity imposed by DOE and (b) prior mutual approval by both parties hereto. Any public statements, press releases, RFP, or other documents describing this program funded in part with Federal money must clearly state (1) the percentage of the total cost of the program funded by the US Government, (2) the dollar amount of Federal contribution being described, and (3) the percentage and dollar amount of the total costs of the program that will be funded by non-Federal sources. The Federal contribution for this program is expected to be 50%.
 
Seller shall not, for a period of sixty (60) days from the effective date of this Purchase Order, without first obtaining the written consent of USABC, in any manner advertise or publish the fact that the parties have entered into this Purchase Order or that Seller has contracted to perform research and development work for USABC as described in the Statement of Work. Furthermore, Seller shall not use any trademarks or trade names of USABC in Seller’s advertising or promotional materials except as required by federal, state and local laws, executive orders, rules, regulations, ordinances, governmental authorities and agencies.
 
23: Seller is advised that the conditions under which the DOE has agreed to fund this USABC program include substantial involvement by the DOE, to include technical direction for the program and program elements. Seller agrees that USABC and DOE may make visits at reasonable times and frequencies to review program accomplishments and management control systems, and provide technical assistance.
 
24: Paragraph 13 is amended to refer specifically to DOE regulations regarding Nondiscrimination in Federally Assisted Programs (ref. 10 CFR 1040). Seller is hereby notified of the following provision of Public Law 103-316. The Energy and Water Development Appropriations Act, FY 1995):
 
25: Title to nonexpendable personal property acquired shall vest in Seller subject to USABC approval and subject to DOE rights to transfer title in accordance with the requirements of OMB Circular A-110, or to abandon such property in place. None of the funds contributed by the parties pursuant to this Purchase Order may be expended for buying real estate.
 
‘It is the sense of Congress that to the greatest extent practicable, all equipment and products purchased with funds made available by PL 103-316 which are provided under this award should be American-made.’
  
EXHIBIT 21.1
 
Subsidiaries of Maxwell Technologies, Inc.

Entity
	  	State/Country of Incorporation
	
Maxwell Technologies, Inc.	  	California	
Maxwell Technologies SA	  	Switzerland	
Maxwell Technologies Systems Division, Inc.	  	California	
PurePulse Technologies, Inc.	  	Delaware	
I-Bus/Phoenix, Inc.	  	California	
 
EXHIBIT 23.1
 
Consent of Independent Registered Public Accounting Firm
 
We hereby consent to the incorporation by reference of our reports, dated March 15, 2005 relating to our audits of the consolidated financial statements, the financial statement schedule and internal control over financial reporting, appearing in this Annual Report on Form 10-K of Maxwell Technologies, Inc. for the year ended December 31, 2004 in the previously filed Registration Statements of Maxwell Technologies, Inc. on Form S-8 (File Nos. 333-86686, 333-86688, 333-53278, 033-88634, 333-41632, 333-41634, 333-41670, 333-28459, 333-07831 and 033-88638) and on Form S-3 (File No. 333-118849).
 
/s/    M C G LADREY & P ULLEN , LLP
 
San Diego, California
March 18, 2005
 
EXHIBIT 23.2
 
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
We consent to the incorporation by reference in Registration Statement Nos. 333-86686, 333-86688, 333-53278, 033-88634, 333-41632, 333-41634, 333-41670, 333-28459, 333-07831 and 033-88638 of Maxwell Technologies, Inc. on Form S-8 and Registration Statement No. 333-118849 on Form S-3 of our report dated March 29, 2004, (which report expresses an unqualified opinion and includes an explanatory paragraph relating to the adoption of Statement of Financial Accounting Standards No. 87, as amended), appearing in this Annual Report on Form 10-K of Maxwell Technologies, Inc. for the year ended December 31, 2004.
 
/ S /    D ELOITTE & T OUCHE , LLP
 
San Diego, California
March 18, 2005
 
EXHIBIT 23.3
 
CONSENT OF ERNST & YOUNG LLP,
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
We consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-118849) and Form S-8 (Nos. 333-07831, 333-28459, 333-41632, 333-41634, 333-41670, 333-53278, 333-86686, 333-86688, 033-88634, and 033-88638) of Maxwell Technologies, Inc. and subsidiaries of our report dated February 7, 2003 (except for the 3 paragraphs under the caption “Restatement of Consolidated Financial Statements for the Year Ended December 31, 2002” in Note 1 and the 3rd paragraph in Note 7 as to which the date is March 15, 2005), with respect to the 2002 consolidated financial statements and schedule of Maxwell Technologies, Inc. and subsidiaries included in the Annual Report (Form 10-K) for the year ended December 31, 2004.
 
/s/    E RNST & Y OUNG LLP
 
San Diego, California
March 18, 2005
 
EXHIBIT 31.1
 
SARBANES-OXLEY SECTION 302(a) CERTIFICATION
 
I, Richard D. Balanson, certify that:
 
1. I have reviewed this annual report on Form 10-K of Maxwell Technologies, Inc.;
 
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
 
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

			
Dated:    March 22, 2005	 	 	 	/ S /    R ICHARD D. B ALANSON        	
 	 	 	 	 	 	Richard D. Balanson
President and Chief Executive Officer	

 
EXHIBIT 31.2
 
SARBANES-OXLEY SECTION 302(a) CERTIFICATION
 
I, David H. Russian, certify that:
 
1. I have reviewed this annual report on Form 10-K of Maxwell Technologies, Inc.;
 
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
 
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated:    March 22, 2005	 	 	 	/ S /    D AVID H. R USSIAN        	
 	 	 	 	David H. Russian
Chief Financial Officer	
 
EXHIBIT 32.1
 
Certification of Periodic Financial Report by the Chief Executive Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
Solely for the purposes of complying with 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, I, the undersigned Chief Executive Officer of Maxwell Technologies, Inc. (the “Company”), hereby certify, based on my knowledge, that the annual report on Form 10-K of the Company for the year ended December 31, 2004 (the “Report”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated:    March 22, 2005	 	 	 	/ S /    R ICHARD D. B ALANSON        	
 	 	 	 	President and Chief Executive Officer	

 
EXHIBIT 32.2
 
Certification of Periodic Financial Report by the Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
Solely for the purposes of complying with 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, I, the undersigned Chief Financial Officer of Maxwell Technologies, Inc. (the “Company”), hereby certify, based on my knowledge, that the annual report on Form 10-K of the Company for the year ended December 31, 2004 (the “Report”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated:    March 22, 2005	 	 	 	/ S /    D AVID H. R USSIAN        	
 	 	 	 	Vice President, Finance, Treasurer,
Chief Financial Officer and Secretary
(Principal Financial and Accounting Officer)