NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Unless the context otherwise requires, all references to “Maxwell,” the “Company,” “we,” “us,” and “our” refer to Maxwell Technologies, Inc. and its subsidiaries; all references to “Maxwell SA” refer to our European Subsidiary, Maxwell Technologies, SA.

Note 1 – Description of Business

Description of Business

Maxwell Technologies, Inc. is a Delaware corporation originally incorporated in 1965 under the name “Maxwell Laboratories, Inc.” In 1996, the Company changed its name to Maxwell Technologies, Inc. and is headquartered in San Diego, California.

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

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

Note 2 – Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts of Maxwell Technologies, Inc. and its subsidiaries. All significant intercompany transactions and account balances have been eliminated in consolidation. The Company has prepared the accompanying unaudited interim condensed consolidated financial statements in accordance with the instructions to Form 10-Q and the standards of accounting measurement set forth in Accounting Principles Board (“APB”) Opinion No. 28, Interim Financial Reporting , and any amendments thereto adopted by the Financial Accounting Standards Board (“FASB”). Consequently, the Company has not necessarily included in this Form 10-Q all information and footnotes required for audited financial statements. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements in this Form 10-Q contain all adjustments (consisting only of normal recurring adjustments, except as otherwise indicated) necessary to present fairly the financial position, results of operations, and cash flows of Maxwell Technologies, Inc. for all periods presented. The results reported in these condensed consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for any subsequent period or for the entire year. These unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto included in the Company’s latest Annual Report on Form 10-K. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) have been condensed or omitted.

Liquidity and Management’s Plan

As of June 30, 2009, the Company had approximately $31.5 million in cash and cash equivalents with an additional $8.0 million in restricted cash for a total of $39.5 million. The cash restriction will be released when the convertible debenture is repaid or converted.

The Company’s ability to meet its cash requirements may be adversely impacted by the diminished credit availability and extreme volatility in security prices as a result of the current deterioration in global financial markets. In response to these conditions, management has commenced the implementation of numerous programs through which it anticipates the Company may generate positive cash flows sufficient to finance its operations. The anticipated improvements in cash flows are primarily through the

7

Table of Contents

combination of inventory management, manufacturing and quality improvements, product cost reductions (including a shift to off-shore manufacturing in China) and an overall improvement in operating results driven primarily by increased revenues and improved gross margins from the Company’s Boostcap product line.

Although the Company was able to raise $18.6 million from the sale of 2.3 million shares, net of expenses, through an underwritten public offering during the six months ended June 30, 2009, if it continues generate net losses and use cash in it operations, management may be required to raise additional funds. While there are no certainties that the Company will be successful in its efforts, it is currently management’s belief that the Company has several options to raise capital. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Based on the Company’s assessment of its current and long-term obligations, management believes it will have adequate resources to fund working capital requirements, obligations as they become due, capital equipment additions and product development expenditures through the next 12 months.

Reclassifications

Certain prior period amounts in the condensed consolidated statement of operations have been reclassified to conform to the current period presentation. These reclassifications do not impact the reported net loss and do not have a material impact on the presentation of the overall financial statements.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect reported amounts and related disclosures. Estimates have been prepared on the basis of the most current information available. These estimates include, but are not limited to, assessing the collectability of accounts receivable, applied and unapplied production costs, production capacities, the usage and recoverability of inventories and long-lived assets, including deferred income taxes, the incurrence of losses on warranty costs, stock compensation expense, impairment of goodwill and other intangible assets, estimations of the cost to complete certain projects, successful recoverability of patents, estimation of the probability that the performance criteria of restricted stock awards will be met and the fair value of warrants and embedded conversion options related to convertible debentures. 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 materially from the estimates used by management.

Revenue Recognition

Sales revenue is derived from the sale of manufactured products directly to customers. For certain long-term contracts, revenue is recognized at the time costs are incurred and for licensing fees we recognize revenue from the right to manufacture products based on our proprietary ultracapacitor design. Product revenue is recognized, according to the guidelines of the Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) Numbers 101, Revenue Recognition in Financial Statements , and 104, Revenue Recognition , when title passes to the customer at either shipment from our facilities or receipt at the customer facility, depending on shipping terms, provided collectability is reasonably assured. If a volume discount is offered, revenue is recognized at the lowest price to the customer. This method has been consistently applied from period to period and there is no right of return.

Revenue generated from fixed price contracts is recognized at the time costs are incurred and is calculated on a percentage of completion basis measured by the percentage of cost incurred to date to the estimated costs for each contract, in accordance with the American Institute of Certified Public Accountants’ Statement of Position (“SOP”) 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts and is limited by the funding of the prime contractor. Provisions for estimated losses on incomplete contracts are made in the period in which such losses are determined.

From time to time the Company has entered into multiple-element contractual arrangements with elements of software that are essential to the functionality of the delivered elements. Additionally, the Company has contracts where all the elements of the agreement need to be delivered and accepted by the customer prior to any revenue being recognized for the deliverables. The Company recognizes revenue on the delivered elements when vendor-specific objective evidence (“VSOE”) of the fair value of the undelivered elements exists in accordance with SOP 97-2, Software Revenue Recognition , as modified by SOP 98-4. The Company has entered into a contract whereby the Company has delivered certain elements and VSOE of fair value of the undelivered elements did not exist. As of June 30, 2009, the Company has recorded approximately $1.9 million of deferred revenue related to these contracts.

For contract research and development arrangements that contain up-front or milestone-based payments, the Company recognizes revenue using the proportional performance method based on the percentage of costs incurred relative to the total costs estimated to be incurred to complete the contract. Revenue recognition computed under this methodology is compared with the

8

Table of Contents

amount of non-refundable cash payments received or contractually receivable at the reporting date and the lesser of the two amounts is recognized as revenue at each reporting date. The proportional performance methodology applied by the Company utilizes an input based measure, specifically costs incurred to date, to determine proportional performance because the Company believes the use of an input measure is a reasonable surrogate of proportional performance compared to an output based measure, such as milestones. Amounts billed in advance are recorded as deferred revenue on the balance sheet. Since payments received are generally non-refundable, the termination of a contract by a customer prior to its completion could result in an immediate recognition of deferred revenue relating to payments already received but not previously recognized as revenue.

Computation of Net Loss per Share

In accordance with FASB Statement of Financial Accounting Standards (“SFAS”) No. 128, Earnings Per Share , basic loss per share is calculated using the weighted average number of common shares outstanding. Potentially dilutive securities are not considered in the calculation of net loss per share, as their inclusion would be anti-dilutive. The following table sets forth the computation of basic and diluted loss per share (in thousands, except per share data):

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

Income Tax (Benefit) Provision

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

Recent Accounting Pronouncements

In April 2009, the FASB issued Staff Position No. FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, (“FSP 157-4”). FSP 157-4 provides guidelines for making fair value measurements more consistent with the principles presented in SFAS 157. FSP 157-4 provides additional authoritative guidance in determining whether a market is active or inactive, and whether a transaction is distressed, is applicable to all assets and liabilities (i.e., financial and nonfinancial) and will require enhanced disclosures. The pronouncement is effective for periods ending after June 15, 2009. The adoption of this statement did not have a material impact on the Company’s financial statements.

In April 2009, the FASB issued Staff Position No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments , or FSP 115-2 and FSP 124-2; provides additional guidance to provide greater clarity about the credit and noncredit component of an other-than-temporary impairment event and to more effectively communicate when an other-than-temporary impairment event has occurred. This FSP applies to debt securities. This also modifies the requirements for recognizing other-than-temporary impaired debt securities and revises the existing impairment model for such securities by modifying the current “intent and ability” indicator in determining whether a debt security is other-than-temporarily impaired. The pronouncement is effective for periods ending after June 15, 2009. The adoption of this statement did not have a material impact on the Company’s financial statements.

9

Table of Contents

In April 2009, the FASB issued Staff Position FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments , or FSP FAS 107-1 and APB 28-1. FSP FAS 107-1 and APB 28-1 amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments , to require disclosures about fair value of financial instruments in interim as well as in annual financial statements. This FSP also amends APB Opinion No. 28, Interim Financial Reporting , to require those disclosures in all interim financial statements. As this pronouncement is only disclosure-related, it did not have an impact on the financial position and results of operations.

In May 2009, the FASB issued and we adopted SFAS No. 165, Subsequent Events , (“SFAS 165”). SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS 165 requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether the date represents the date the financial statements were issued or were available to be issued. SFAS 165 is effective in the first interim period ending after June 15, 2009. The adoption of this statement did not have a material impact on the Company’s financial statements.

Pending Accounting Pronouncements

In December 2008, the FASB issued Staff Position No. FAS 132(R)-1, Employers’ Disclosures about Postretirement Benefit Plan Assets (“FSP 132(R)-1”). FSP 132(R)-1 requires more detailed disclosures about employers’ plan assets in a defined benefit pension or other postretirement plan, including employers’ investment strategies, major categories of plan assets, concentrations of risk within plan assets, and inputs and valuation techniques used to measure the fair value of plan assets. FSP 132(R)-1 also requires, for fair value measurements using significant unobservable inputs (Level 3), disclosure of the effect of the measurements on changes in plan assets for the period. The disclosures about plan assets required by FSP 132(R)-1 must be provided for fiscal years ending after December 15, 2009. As this pronouncement is only disclosure-related, it will not have an impact on the financial position and results of operations.

In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles a replacement of FASB Statement No. 162 , (“SFAS 168”) and approved the FASB Accounting Standards Codification (“Codification”) as the single source of authoritative nongovernmental US GAAP. The Codification does not change current US GAAP, but is intended to simplify user access to all authoritative US GAAP by providing all the authoritative literature related to a particular topic in one place. All existing accounting standard documents will be superseded and all other accounting literature not included in the Codification will be considered non-authoritative. SFAS 168 is effective for interim and annual periods ending after September 15, 2009. The implementation of SFAS 168 will have no impact on the Company’s consolidated financial statements.

Note 3 – Balance Sheet Details

Inventories

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

10

Table of Contents

Warranty Reserve

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

The following table sets forth an analysis of the warranty reserve activity for the six months ended June 30, 2009 and 2008, as follows (in thousands):

Note 4 – Equity

Stock sale and Equity Distribution Agreement

In November 2006 the Company filed a registration statement on Form S-3 with the Securities and Exchange Commission to, from time to time, sell up to an aggregate of $125 million of the Company’s common stock, warrants or debt securities. On August 8, 2008, the Company entered into an Equity Distribution Agreement (“EDA”) with UBS Securities LLC (“UBS”). The EDA provides that we may offer and sell shares of our common stock, par value $0.10 per share, having an aggregate offering price of up to $15 million (the “Shares”) from time to time through UBS, as sales agent. In exchange for its services as sales agent, the Company will pay UBS a commission equal to 3.5% of the gross sales price of the Shares sold. In May 2009 the Company issued shares of common stock, par value $0.10 per share (the “Shares”) through a public offering underwritten by Roth Capital Partners (“Roth”) for 2 million Shares with an over-allotment option to purchase an additional 300,000 Shares. In exchange for its services as underwriter, the Company paid Roth a commission of 7% of the gross sales price of the Shares sold.

During the six months ended June 30, 2009, the Company raised $25.0 million under the S-3, Employee Stock Purchase Plan and the exercise of stock options under the Omnibus Equity Incentive Plan. This $25.0 million consists of $18.6 million in cash from the sale of 2.3 million shares, net of commissions of $1.4 million and audit and legal fees of $249,000; $2.4 million from the issuance of 473,000 shares to UBS under the EDA, net of commissions of $91,000 and audit and legal fees of $59,000; $3.8 million from the exercise of stock options; and $178,000 under the Employee Stock Purchase Plan. Beginning in April 2009 the Company suspended the EDA program.

11

Table of Contents

Change in Additional Paid in Capital

For the six months ended June 30, 2009, additional paid in capital increased $26.3 million which consisted primarily of proceeds from the issuance of common stock of $18.3 million, $2.4 million raised under the EDA, $5.5 million from the Company’s stock plans and $90,000 of interest paid with shares of common stock on our convertible debt.

Note 5 – Stock-Based Compensation

The Company has two active stock-based compensation plans as of June 30, 2009; the 2004 Employee Stock Purchase Plan (the “ESPP”) and the 2005 Omnibus Equity Incentive Plan (the “Incentive Plan”) under which employees purchase common stock. The Company issues and grants incentive stock options, non-qualified stock options, restricted stock awards and restricted stock units.

Employee Stock Options Plan

Compensation expense recognized from employee stock options for the three months ended June 30, 2009 and 2008 was $287,000 and $258,000, respectively and $595,000 and $582,000 for the six months ended June 30, 2009 and 2008, respectively. For the six months ended June 30, 2009 and 2008 the total employees’ stock options granted were 301,350 and 187,500, respectively with an average grant date fair value per share of $4.06 and $3.87, respectively. The fair value of the stock based options is estimated using the Black-Scholes valuation model with the following assumptions:

Restricted Stock Awards

In accordance with FASB SFAS No. 123, Share-Based Payment (revised 2004) (“SFAS 123R”) the Company determines the fair value at grant date and expenses that amount over the requisite service period. As prescribed under SFAS 123R we reassess the probability of achievement of milestones for each restricted stock award that was not vested as of June 30, 2009 and determine appropriate stock-based expense treatment. The following table summarizes the amount of compensation expense recognized for the three and six months ended June 30, 2009 and 2008 (in thousands):

Employee Stock Purchase Plan

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

The fair value of the “look back” option of the ESPP is estimated based on the fair value of the ESPP shares to be granted during the offering period by using the Black-Scholes valuation model for a call and a put option. Compensation expense recognized from the ESPP for the three months ended June 30, 2009 and 2008 was $62,000 and $50,000, respectively and $143,000 and $99,000 for the six months ended June 30, 2009 and 2008, respectively. The share price used for the model is a 15% discount on the stock price on the first day of the offering period; the number of shares to be purchased is calculated based on employee contributions; and by using the following assumptions:

12

Table of Contents

Restricted Stock Units

Beginning January 1, 2009 the non-employee directors of the Company will no longer be paid a quarterly retainer in cash. Instead, the Company will automatically grant non-discretionary restricted stock unit (“RSU”) awards under the 2005 Omnibus Equity Incentive Plan.

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

Under SFAS 123R the Company determines the fair value at grant date and expenses that amount over the requisite service period. The following table summarizes the amount of compensation expense recognized for the three and six months ended June 30, 2009 and 2008 (in thousands):

Stock based compensation expense

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

Note 7 – Legal Proceedings

There have been no material changes from the legal proceedings disclosed in Note 14 of the Notes to Consolidated Financial Statements included in Part II, Item 8 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008 except the settlement described below.

13

Table of Contents

In February 2009, the Company entered into a settlement agreement with NessCap. In the settlement agreement, Maxwell and NessCap agreed to drop all pending claims against each other and agreed to a ten year, worldwide cross license of each company’s patents and a mutual covenant not to sue on patents either party has a right to assert. As part of the settlement agreement, NessCap has paid $200,000 to Maxwell and must pay $200,000 in annual installments in the years 2010 through 2013 for a total of $1 million. During the case the Company capitalized patent legal defense costs as additional costs of the patents and is now amortizing these capitalized costs over the remaining lives of these patents. Payments received from NessCap under this settlement have been and will continue to be netted against these capitalized patent legal defense costs upon receipt.

Note 8 – Convertible Debenture

Maxwell accounts for the conversion option in the convertible debenture (the “Debenture”) and the associated warrants as derivative liabilities in accordance with SFAS 133, Accounting for Derivative Instruments and Hedging Activities , EITF 00-19, Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in a Company’s Own Stock and EITF 05-2, The Meaning of “Conventional Convertible Debt Instrument” in Issue No. 00-19 . The discount at the issuance date attributable to the aggregate fair value of the conversion options, warrants and issuance costs totaling $9.2 million, is being amortized using the effective interest method over the term of the Debenture. For the three months ended June 30, 2009 and 2008, $243,000 and $641,000 and $622,000 and $1.4 million for the six months ended June 30, 2009 and 2008, respectively, of the discount and prepaid fees were amortized and included in the condensed consolidated statement of operations.

Interest is due quarterly with the interest rate tied to the Federal Funds Rate plus 1.125% per annum. All or a portion of the accrued and unpaid interest may be paid in shares of Maxwell’s common stock at the Company’s option. As of June 30, 2009 and 2008, the interest rate on the Debenture was 1.375% and 3.125% respectively.

The outstanding principal of the Debenture at June 30, 2009 was $11.1 million and is payable in installments of $2.8 million in September 2009, $5.6 million in December 2009 and $2.8 million in June 2011. The holder, at its election, can defer each quarterly payment one time, for up to 24 months. As a result, the final payment may be delayed, at the holders’ election, until December 2011. The holder elected to delay the payment that was due in December 2007 until December 2009 and the payment that was due in June 2009 until June 2011. At June 30, 2009 and December 31, 2008 accrued interest on the Debenture was $38,000 and $91,600, respectively. The following table summarizes principal and interest incurred on the Debenture for the three and six months ended June 30, 2009 and 2008, respectively (in thousands):

At June 30, 2009, the Debenture was convertible by the holder at any time into 685,100 common stock. The Company also issued warrants in connection with the issuance of the Debenture. At June 30, 2009 the holder had a total of 462,500 warrants which had an exercise price of $16.22. The warrants are exercisable at any time through December 20, 2010. The exercise price and the number of convertible shares, and warrants have been adjusted from the original issued amounts and continue to be subject to an adjustment upon certain events, such as the sale of equity securities by Maxwell at a price below the current exercise price.

Maxwell may require that a specified amount of the principal of the Debenture be converted if certain conditions are satisfied for a period of 20 consecutive trading days. To determine a fair value of this forced conversion the Company applies a Z factor, which is a theoretical measurement of the probability of this occurrence. The factor used as of June 30, 2009 and 2008 was 28.8% and 5.6%, respectively, for forced conversion of 50% of the conversion option at 135% of the exercise price and 15.4% and 0.7%, respectively, for forced conversion of the remaining conversion option at 175% of the exercise price.

14

Table of Contents

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

The change in fair value on revaluation of Debenture conversion rights and warrant liabilities represents the difference between the fair value at the end of the current period and the fair value at the beginning of the current period using the value calculated by the Black-Scholes pricing model. The fair value of the warrants at June 30, 2009 and December 31, 2008 was $2.5 million and $318,000 respectively and is included in “Stock warrants” on the balance sheet. The net fair value of the liability to the holders and Maxwell’s conversion rights at June 30, 2009 and December 31, 2008 was $2.6 million and $357,000 respectively which is included in “Convertible debenture and long-term debt” on the balance sheet. The effect of the fair market value adjustment for the three months ended June 30, 2009 and 2008 was a $3.8 million loss and $33,000 gain, respectively and $4.4 million loss and $960,000 loss for the six months ended June 30, 2009 and 2008, respectively. These adjustments are recorded as “Gain (loss) on embedded derivative and warrants.”

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

The Company shall pay to each holder of registrable securities related to the embedded conversion feature and warrants liquidated damages of 1.5% of the aggregate purchase price every 30th day after a maintenance failure of the registration of the securities. These damages continue each 30 days (pro rated) until the registration failure is cured. As of June 30, 2009, if the Company was not in compliance we would have incurred damages of $167,000 every 30 days until the maintenance failure is cured. In addition, if the damages are not paid in 30 days after they are due the Company would incur interest of 1.0% per month on the outstanding damages.

As long as the Debenture is outstanding, the Company is required to maintain a cash balance in excess of $8.0 million, which is included in restricted cash at June 30, 2009 and December 31, 2008. At December 31, 2008 the restricted was classified as a current asset. However, since the holder of the Debenture elected to delay the payment that was due in June 2009 until June 2011, the restricted cash was classified as a non-current asset as of June 30, 2009.

Note 9 – Defined Benefit Plan

Maxwell SA, a subsidiary of the Company, has a retirement plan that is classified as a defined benefit pension plan. The pension benefit (cost) is based on compensation, length of service and credited investment earnings. The plan guarantees both a minimum rate of return as well as minimum annuity purchase rates. The Company’s funding policy with respect to the pension plan is to contribute, at a minimum, the amount required by Swiss law, using the required percentage applied to the employee’s compensation. There is no offset provision based on the obligation level of the fund. In addition, the employee is required to contribute to the pension plan. This plan has a measurement date of December 31.

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

15

Table of Contents

Employer contributions of $139,000 and $141,000 were paid during the three months ended June 30, 2009 and 2008, respectively. Total employer contributions of $278,000 and $270,000 were paid during the six months ended June 30, 2009 and 2008, respectively. Additional employer contributions of approximately $329,000 are expected to be paid during the remainder of fiscal 2009.

Note 10 – Fair Value Measurement

The convertible debentures issued on December 20, 2005 were evaluated and determined not to be conventional convertible debentures and, therefore, because of certain terms and provisions including liquidating damages under the associated registration rights agreement the embedded conversion option was bifurcated and has been accounted for as a derivative liability instrument. The stock warrants issued on December 20, 2005, in conjunction with the convertible debt were also evaluated and determined to be a derivative instrument and, therefore, classified as a liability on the balance sheet. The accounting guidance also requires that the conversion feature and warrants be recorded at fair value for each reporting period with changes in fair value recorded in our Statement of Operations. The fair value of embedded conversion options and stock warrants are based on a Black-Scholes fair value calculation. It is not practicable to estimate the fair value of the convertible debentures at June 30, 2009 based on the current liquidity crisis and the specific terms associated with the debt.

The carrying value of restricted cash and short-term borrowings approximates fair value.

The Company records certain liabilities at fair value under SFAS No. 157, Fair Value Measurements (“SFAS 157”). As of June 30, 2009, the financial instruments to which SFAS 157 applied were financial liabilities for the conversion feature of the convertible debenture and warrants.

Liabilities held by the Company and measured at fair value on a recurring basis are summarized as follows (in thousands):

For those financial instruments with significant Level 3 inputs, the following table summarizes the activity for the period by investment type:

Note 11 – Related Party

Maxwell, SA made payments to Metar Machines (Metar) for commissions on sales of our High Voltage products. Metar has established business relationships in Asia that provide additional sales opportunity for High Voltage products. Montena, SA (“Montena”) was the majority shareholder of Metar Machines until March 22, 2009. A member of Maxwell Technologies, Inc. Board of Directors, José Cortes, is also a director of Montena. Mr. Cortes is also a minority shareholder of Genturica Ltd. and Genturica Ltd. is the majority shareholder of Montena. As of March 22, 2009, Montena had sold its interest in Metar. Further, the Company has terminated its agreement with Metar as of May 14, 2009. Therefore, Metar is no longer a related party. Total expense for this non-exclusive sales commission recognized during the three months ended June 30, 2009 and 2008 were $71,000 and $96,000, respectively and $128,000 and $104,000 for the six months ended June 30, 2009 and 2008, respectively. There was no payable to Metar as of June 30, 2009 and 2008, respectively. All expenses are classified as selling, general and administrative expense in the statement of operations. Metar and Maxwell used the same independent sales agent in China. See Note 12 below for further information.

Maxwell, SA Pension Plan has provided a long term loan of 700,000 Swiss Francs (approximately $645,000 as of June 30, 2009) to Montena Properties SA. Montena Properties SA is 100% owned by Montena SA. The loan has been negotiated to be completely repaid by December 12, 2010 and bears an interest rate of 4.25%. As stated earlier, a member of Maxwell Technologies, Inc’s Board of Directors, José Cortes, is also a director of Montena SA, as well as an indirect minority stockholder. The loan was provided to Montena Properties SA prior to Mr. Cortes becoming a director of Maxwell and Montena.

16

Table of Contents

Note 12 – Commitments and Contingencies

As a result of Maxwell’s international operations, the Company is subject to the U.S. Foreign Corrupt Practices Act (“FCPA”), which prohibits companies from making improper payments to foreign officials for the purpose of obtaining or keeping business. As a result of an internal review, the Company is currently conducting an inquiry into the nature of certain payments made to our former independent sales agent in China with respect to sales of our high voltage capacitor products produced by our Swiss subsidiary. These payments equaled the difference between the quoted price for certain products and the amount that the independent sales agent was able to sell such products to certain customers in China. These payments had previously been recorded as commissions; however, a portion of those payments may actually have been rebated directly or indirectly to customers. The Company recorded commissions to the agent of $1.8 million, $653,000 and $178,000 for the years ended December 31, 2008, 2007 and 2006, respectively. These commissions were based on sales of $8.2 million, $3.4 million and $1.4 million for the years ended December 31, 2008, 2007 and 2006, respectively. This independent sales agent also works as an independent sales agent for Metar (see Note 11 above). Maxwell terminated its relationship with this independent sales agent as of May 20, 2009.

For the three months ended June 30, 2009 and 2008, the Company recorded commissions to the agent of $0 and $639,000, respectively and $585,000 and $827,000 for the six months ended June 30, 2009 and 2008, respectively. These amounts are recorded as a reduction to revenue for the periods presented.

Maxwell is in the process of evaluating how these payments should be treated for FCPA purposes, which could harm the Company’s business. The Company’s internal review is focused on a thorough examination of all of its international operations and business practices, as well as a review of its compliance programs. The Company has taken certain remedial actions, including terminating its relationship with the independent sales agent in China as well as terminating its relationship with Metar, which could harm the Company’s business.

The Company is not yet complete with its internal review. As this review progresses, the Company is voluntarily sharing information related to its internal review with the SEC and Department of Justice (“DOJ”) and has provided certain documents as requested by the SEC in connection with their review of this matter. In the event that this internal review or any governmental investigation identifies violations of law, the DOJ, the SEC or other governmental authorities could seek civil or criminal sanctions, including monetary fines and penalties, against the Company and/or its employees, as well as additional changes to the Company’s business practices and compliance programs, which could have a material adverse effect on its business, results of operations or financial condition. An estimate of the possible loss or range of loss for this matter cannot be made. Therefore, no loss has been recognized.