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United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2001

OR

For the transition period from to                              to                             

Commission file number 0-10964

MAXWELL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)

8888 Balboa Avenue
San Diego, California 92123
(Address of principal executive offices)

Registrant's telephone number, including area code: (858) 279-5100

Securities registered pursuant to Section 12(b) of the Act: Common Stock, par value $.10 per share

Name of each exchange on which registered: Nasdaq National Market ("Nasdaq")

Securities registered pursuant to Section 12(g) of the Act: None

        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 ý    No o

        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. o

        The aggregate market value of the Common Stock of the Registrant held by non-affiliates of the Registrant on February 28, 2002, based on the closing price at which the Common Stock was sold on Nasdaq as of February 28, 2002, was $67,180,000.

        The number of shares of the Registrant's Common Stock outstanding as of February 28, 2002 was 10,235,598 shares.

DOCUMENTS INCORPORATED BY REFERENCE

        Portions of the Registrant's definitive Proxy Statement for the 2002 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A (including the Appendix thereto) are incorporated by reference in Part III of this Report.

MAXWELL TECHNOLOGIES, INC.

INDEX TO ANNUAL REPORT ON FORM 10-K
For the fiscal year ended December 31, 2001

PART I

        Unless the context otherwise requires, all references in this Annual Report on Form 10-K to "Maxwell," the "Company," "we," "us," and "our" refer to Maxwell Technologies, Inc. and its subsidiaries; all references to "Electronic Components Group" refer to our subsidiary, Maxwell Electronic Components Group, Inc.; all references to "I-Bus/Phoenix" refer to our subsidiary, I-Bus/Phoenix, Inc., and its subsidiaries; and all references to "PurePulse" refer to our subsidiary, PurePulse Technologies, Inc. This Form 10-K may contain 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. Such forward-looking statements involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in any forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Risk Factors" herein. Discussions containing such forward-looking statements may be found in the material set forth under "Item 1. Business," and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," as well as within this Form 10-K generally.

Item 1. Business

Overview

        Maxwell develops, manufactures and markets high reliability electronic components and power and computing systems for use in the transportation, telecommunications, consumer and industrial electronics, medical and aerospace industries. Products include ultracapacitors, radiation-shielded microelectronics and custom power and computing systems for original equipment manufacturers, or OEMs.

Industry

        We have focused our business on the following areas:

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power delivery components;



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high reliability specialized electronic components for space and military applications; and



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high availability, customized, applied computing and power systems.

Power Delivery

        New power hungry electronic products such as digital cameras and wireless communications devices, and increasing demand for electric power in motor vehicles to assist vehicle acceleration and to operate on-board electronic systems, are creating significant markets for energy storage and high power delivery. In many applications, power demand varies widely from moment to moment. Typically, peak power demand is much greater than the average power requirement. For example, automobiles require much more power to accelerate from a stop than to maintain a constant speed. In other applications, such as in a digital camera, more power is needed to operate the flash than to store images in memory.

        Engineers generally address peak power needs by designing the primary energy source, such as an engine or a battery system, to the size needed to provide for peak demands, even if those demands occur for only a few seconds. Building an entire system based on peak power needs, rather than designing for the average power requirement, is costly and inefficient. Such systems can be significantly improved by storing electrical energy generated from a primary energy source such as an engine or battery and then delivering that energy in controlled high power bursts only when high power is required. Such high power delivery provides electrical systems with dynamic power range to meet peak power demands for periods of time ranging from fractions of a second to several minutes. This enables new system functions, reduces system size and cost and improves performance.

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        Many markets and applications can benefit from high power delivery components that:

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store large amounts of electrical energy;



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are in a small, lightweight package;



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operate reliably at extreme temperatures;



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can discharge and recharge in less than a second or provide power as required for up to several minutes;



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deliver high power;



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require low maintenance; and



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have minimal environmental issues associated with disposal.

        Following are some of the currently identified markets and applications for high power delivery components:

        Any other application that requires the storage of energy and the discharge of highly variable amounts of power is a potential market for power delivery components. We expect that components designed to meet these power delivery requirements will capture an increasing share of the energy storage market.

Radiation-Shielded Microelectronics

        Manufacturers of satellites and other spacecraft and military vehicles require on-board microelectronics that meet specific functional requirements and will operate reliably in environments in which they may encounter radiation. In the past, microelectronics for these special applications used radiation-hardened silicon. The supply of radiation-hardened silicon is diminishing because there are fewer fabricators of specialty silicon. As a result, demand for off-the-shelf silicon, protected in radiation-shielded packages, is growing. Radiation-shielded off-the-shelf silicon provides higher functionality at lower costs than radiation-hardened silicon. The ability to provide radiation-shielded silicon requires expertise in power electronics, custom integrated circuit design, silicon selection, radiation shielding and high quality assurance testing.

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        Current worldwide sales of radiation-shielded microelectronics for the satellite market are estimated at more than $500 million annually, with a historic yearly growth rate of approximately nine percent. An additional large market is emerging for the replacement of radiation-hardened microelectronics in military vehicles with commercial off-the-shelf microelectronics protected in radiation-shielded packages. This market is emerging as the service life of military vehicles, such as armored vehicles, ships and aircraft, extends beyond the operational life of on-board electronics. The market is driven by the lack of availability of radiation-hardened silicon and the desire to upgrade on-board electronics with modern microprocessors produced with commercial silicon, which is not radiation-hardened.

Applied Computing and Power Quality Systems

        High reliability applied computing systems and power quality systems are required to support larger systems for telecommunications, Internet infrastructure, broadcasting and industrial automation. Many such systems support mission critical applications that require "five nines", or 99.999% availability. This high availability equates to approximately five minutes of down time per year for a system operating 24 hours a day, seven days a week.

        Applied computing systems provide a platform to perform specific functions within a larger system made by an OEM. OEMs generally focus their efforts on overall system design and integration, including application-specific software and network support and service. OEMs frequently outsource the design and manufacture of the applied computing and power products that will be part of the larger system being supplied by the OEM to the end customer.

        To satisfy both functional and high availability requirements, power and computing solutions generally require customization. Also, as time-to-market is critical for many such applications, rapid design and production capabilities are required of suppliers providing these systems. Therefore, the proliferation of complex electronics applications has created attractive markets for specialized applied computing system manufacturers and power product manufacturers who possess the engineering and manufacturing know-how and experience to provide design intensive, custom solutions.

        In 2001, the market for applied computing systems incorporating ISA/PCI (industry standard architecture/peripheral components interconnect) and cPCI (compact peripheral components interconnect) architectures is estimated to have been approximately $3.9 billion. The market for such systems is estimated to grow to approximately $6.2 billion in 2004, with cPCI being the fastest growing industry standard architecture. In 2001, the market for uninterruptible power supplies, or UPS, and power protection and power quality products of five kilovolts and lower, which is the power range most appropriate to support applied computing requirements, is estimated to have been approximately $3.2 billion, growing to approximately $4.2 billion in 2004.

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Maxwell's Solutions

        Our solutions apply our expertise and proprietary technology in power and computing at both the component level and the systems level for specialized, high value applications where high reliability and high availability are required by the customer. We intend to be a leading supplier of power and computing components and systems for such specialized, high-value applications.

Ultracapacitors

        We are a leader in commercialized ultracapacitor technology. Ultracapacitors are ideally suited for applications that require energy storage and repeated bursts of electric power for fractions of a second up to several minutes. With no moving parts, ultracapacitors provide a simple, solid state, highly reliable solution to buffer short term mismatches between power available and power required.

        Unlike batteries, capacitors can be recharged from any electrical energy source as quickly as they are discharged, and they operate reliably for up to 10 years through hundreds of thousands of discharge/recharge cycles with minimal degradation of performance. Traditional capacitors discharge power too rapidly to be suitable for many power delivery applications. Ultracapacitors have greater energy storage capability than traditional capacitors and can discharge power over time periods ranging from fractions of a second to several minutes. Used in tandem with batteries, ultracapacitors can provide bursts of power to meet power demand peaks, enhance performance and significantly extend battery life. When alternative sources of recharge energy are available, ultracapacitors can replace batteries entirely.

        We offer our proprietary PowerCache ultracapacitors in several form factors, ranging from five-farad postage stamp size cells to 2,700-farad large cells that measure 2" × 2" × 6". We are able to supply these cells in volumes and at price points that are opening numerous market opportunities for ultracapacitors to satisfy energy storage and power delivery requirements. For example, in December 2000 we entered into a supply agreement with General Motors Corporation to supply our large cell ultracapacitors for incorporation into the power trains of hybrid diesel electric buses and trucks produced by GM's Allison Transmission division.

        We have redesigned our large cell ultracapacitors to double power density and dramatically reduce cost. The new design incorporates proprietary technology in a form factor suitable for high speed automated manufacturing. The goal of this initiative is to penetrate cost sensitive applications in high volume markets (millions of cells per year) by 2004.

Radiation-Shielded Microelectronics

        We design, manufacture and market radiation-shielded microelectronics, including integrated circuits, power modules and single board computers, primarily for the satellite and spacecraft market. We engineer customized microelectronics together with highly adaptable, proprietary packaging and shielding techniques to allow OEMs to use powerful, low cost, commercial off-the-shelf components protected with the level of radiation shielding required for the environment in which they are to be deployed.

        We are a supplier of radiation-shielded microelectronics in volumes that have opened market opportunities in the satellite and spacecraft market. We also are seeking to penetrate the military electronics replacement market.

Applied Computing and Power Quality Systems

        We design, manufacture and market a diverse line of application-ready computing platforms and single board computers based on advanced, industry standard electromechanical architectures.

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OEMs integrate our products into larger systems for telecommunications, Internet infrastructure, broadcasting and industrial automation.

        Our engineering and design capabilities allow quick-turn customization of boards, systems, and enclosures for customer specific applications. In 2001, we introduced several new computing products that support multiple operating systems such as Windows, Windows NT, Windows 2000, Solaris VX Works and Linux and provide redundant, high availability computing for mission critical applications requiring 99.999% availability.

        We believe that power technology, such as uninterruptible power, is a requirement for providing high reliability applied computing systems. In addition to the discrete power quality products we now offer, we have computing products in development and scheduled for introduction during 2002, that will incorporate power protection capabilities within the computer chassis. These built-in power protection features will include up to 10 seconds of "ride-through" protection for brief power fluctuations in some designs and up to 10 minutes of backup power in other designs. These products will incorporate our PowerCache ultracapacitors, either alone or in combination with batteries. We introduced rack-mount UPS products in 2001, and we are developing additional UPS, power distribution and power conditioning products as part of high reliability integrated power and computing solutions for our applied computing OEM customers.

        Our extensive design and integration experience and capabilities shorten time-to-market for OEMs and allow them to outsource these functions to us. This permits them to concentrate on differentiating, value-added capabilities they bring to an overall system or network application.

Products and Customers

        We sell our electronic components products to OEMs serving numerous markets, including transportation, consumer and industrial electronics, medical and aerospace. We sell our applied computing products primarily to OEMs serving the telecommunications and Internet infrastructure, broadcast and industrial automation markets. We sell power distribution and power quality products mainly to OEMs serving the medical and industrial markets. Following are descriptions of our key products and the markets they address.

Ultracapacitors

        Our PowerCache ultracapacitors store high quantities of electrical energy in a high density electric field through a proprietary carbon-based material that has large surface area (more than 2,500 square meters per gram of carbon) to permit high electrical storage density in a small package. As a result, our products have two to four times greater power density than competing ultracapacitors or supercapacitors.

        PowerCache ultracapacitors provide dynamic range and peak power for applications that require periodic bursts of power, whether for an internal combustion/electric hybrid drive train, a fuel cell system or a battery pack for industrial or consumer electronics. Ultracapacitors can be charged from any primary energy source, such as a battery, engine, fuel cell or electrical outlet, and deliver high power on demand. Virtually any device with peak power demands greater than its average power requirement is a candidate for our ultracapacitors as part of its energy storage and power delivery system.

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Ultracapacitor Application Model

        Although batteries currently are the prevailing energy storage devices, ultracapacitors have significant performance advantages over batteries, including:

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delivery of up to 10 times the power;



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lower weight for storage of comparable electrical energy;



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deeper discharge and faster recharge;



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more reliable operation in extreme temperatures (-40 degrees C to +75 degrees C); and



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up to 10 times the useful life.

        Our PowerCache ultracapacitors can be linked together in modules or banks to meet the energy storage and peak power requirements of applications ranging from hybrid internal combustion/electric buses, trucks and automobiles to fuel cells, actuators, toys and hand-held consumer electronic devices.

        We are pursuing opportunities to incorporate our ultracapacitors into hybrid diesel/electric and gasoline/electric power trains that either are being commercialized now for buses and large trucks or are in development for passenger vehicles. The hybrid internal combustion/electric power train depicted below shows how electrical energy is generated and stored in vehicles and supplied to the power train.

        The hybrid power train has a large alternator connected to the crankshaft that generates electricity when the alternator engages the crankshaft to help brake the vehicle or when the engine is running. The electricity produced by the alternator is stored in a power pack containing approximately 300 PowerCache ultracapacitors for buses or large trucks and 18 to 20 ultracapacitors for automobiles, light trucks or sport utility vehicles. The electrical energy stored in the ultracapacitors is then sent back through the alternator to turn the crankshaft to accelerate the vehicle. The power pack also powers on-board electrical systems, such as power steering, braking, locks, seats, air conditioning, mobile communications and audio systems.

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Hybrid Internal Combustion/Electric Power Train

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power pack drives crankshaft motor to assist initial acceleration;



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power pack starts internal combustion engine to provide cruising power;



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crankshaft alternator charges the power pack;



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control electronics manage power storage and usage;



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power pack powers electrical system, operating steering, braking, heating, air conditioning, mobile communications, stereo, etc.; and



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alternator engages the crankshaft to assist braking, generate energy and store it in the power pack.

        Hybrid power train designs such as the one depicted above are part of the future plans of all of the major automotive companies as the industry seeks to improve fuel economy, reduce emissions and graduate from 12-volt electrical systems to 42-volt systems. The dramatic increase in electrical demand in modern automobiles for features such as power steering, air conditioning, global positioning and audio systems has initiated the redesign of electrical systems to 42 volts. All of the major automotive companies have announced plans to introduce 42-volt systems and hybrid power trains in automobiles beginning in 2004 or 2005.

        All of the 42-volt hybrid power train systems require an energy storage system that can recapture energy from braking, satisfy peak power requirements, operate reliably in extreme temperatures, last the life of the vehicle and require low maintenance. We believe that ultracapacitors uniquely satisfy all of these requirements and have the opportunity to become an industry standard energy storage and power delivery device for such systems.

        In December 2000, we entered into a supply agreement with General Motors Corporation to supply our large cell ultracapacitors for incorporation into the power trains of hybrid diesel/electric buses and trucks produced by GM's Allison Transmission division. Allison has reported that by supplementing the primary diesel engine with an ultracapacitor-powered electric motor that assists initial acceleration and recaptures and reuses braking energy, fuel efficiency of buses and trucks can be increased by more than 50 percent, particulate emissions reduced by approximately 90 percent and nitrogen oxide emissions reduced by more than 50 percent, as compared to conventional diesel power trains.

        Allison selected our PowerCache ultracapacitors over conventional and advanced batteries because our ultracapacitors:

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last up to 10 times as long;

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weigh up to 2000 pounds less per vehicle;



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operate reliably at extreme temperatures (-40 degrees C to +75 degrees C);



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recapture more energy from vehicle braking systems;



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deliver up to 10 times the power;



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require lower maintenance; and



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reduce environmental issues associated with disposal.

        To facilitate adoption of ultracapacitors for applications such as bus, truck and auto power trains, uninterruptible power supplies (UPS) and fuel cells, which require integrated packs consisting of multiple ultracapacitor cells, we are collaborating with third parties that possess the systems integration and power and thermal management capabilities to provide fully integrated power packs that satisfy the energy storage and power delivery demands of these larger systems. These include strategic development and supply agreements with Solectria Corporation in May 2001, and with ISE Research-ThunderVolt, Inc. in February 2002.

        Our small cell ultracapacitors have been designed into, or are being considered for, consumer electronics such as toys and digital cameras, industrial electronics such as actuators, remote transmitting devices, fuel cells and bar code scanners, and transportation electronics such as safety features for automobiles. Several of the end products into which our ultracapacitors have been designed are now in fuel cells production.

Radiation-Shielded Microelectronic Products

        We also design, manufacture and market radiation-shielded microelectronics, including integrated circuits, power modules and single board computers, primarily for the satellite and spacecraft market. We engineer customized microelectronics together with highly adaptable proprietary packaging and shielding techniques to allow OEMs to use powerful, low cost, commercial off-the-shelf components, protected with the required level of radiation shielding for the orbit or environment in which they are to be used.

        We supply microelectronics to multiple satellite and space vehicle manufacturers, including Lockheed Martin Corporation, The Boeing Corporation, Raytheon Company, the National Aeronautics and Space Administration (NASA) and its Jet Propulsion Laboratory, and Technologica, a key supplier to the European Space Agency. We also are pursuing opportunities for the replacement of original microelectronics in military battlefield vehicles, aircraft and ships, which represents a large potential market for our radiation-shielded microelectronics.

I-Bus/Phoenix Power and Computing Systems

        I-Bus/Phoenix designs, develops and manufactures high availability custom computing systems and power quality products. Combining our computing systems and power quality and reliability expertise allows us to offer superior high availability computing products and innovative power quality solutions. Our current product offerings include applied computing systems, power distribution systems and power conditioning units. We sell our products mainly to OEMs serving the telecommunications and Internet infrastructure, industrial automation, broadcasting and medical imaging markets.

        As part of our restructuring in 2000, we expanded I-Bus/Phoenix's engineering and product development capabilities. We also acquired Gateworks Corporation, a CPU engineering and board design company. As a result of adding these board design capabilities and increasing our investment in engineering and product development, we have introduced several new products in 2001, and are introducing several more in 2002. Incorporating our competencies in the latest system architecture,

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including cPCI, our computing systems offer additional flexibility and reliability to end users. For example, to promote high availability, these new systems are designed to allow key components to be "hot-swapped," meaning that they can be replaced without shutting down the system.

        We view power reliability as an enabling technology for high availability computing. Accordingly, we have computing products in development and scheduled for introduction in 2002 that will incorporate power protection features built into the computer chassis itself to provide up to 10 seconds of ride-through power with certain designs and up to 10 minutes of backup power with other designs. Such embedded power solutions will incorporate our PowerCache ultracapacitors, either alone or in combination with hot-swappable batteries. In 2001, we introduced UPS products designed to fit into computer server racks to facilitate integration of power reliability features to support high availability computing systems for our OEM customers. We also are developing redundant DC to AC power inverters to bring additional power reliability features to integrated applied computing system solutions. Our extensive design and integration experience and resources shorten time-to-market for OEMs and allow them to outsource these functions entirely to us so that they can concentrate on the differentiating value-added capabilities they bring to the overall system application.

        I-Bus/Phoenix also designs, develops and manufactures power conditioning and power distribution units for medical imaging equipment and power protection and power conditioning systems for other industrial applications. At present, many of our power quality products are based on our customers' designs. We are developing improved power quality products based on our own designs that intend to improve performance and reduce cost for our customers while also permitting us to expand sales and improve product line gross margins.

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        The following table describes new power and computing products scheduled for introduction in 2002.

        We supply applied computing systems or power systems to many leading OEMs, including Motorola, Inc., Compagnie Finciere Alcatel, Deutsche Telekom AG, Rockwell International Corporation, the GE Medical Systems division of the General Electric Company, Toshiba Corporation and Siemens AG.

Manufacturing

        We manufacture our electronic components products principally at facilities located in San Diego, California. Our power and computing systems are produced at facilities in San Diego, California, Tangmere and Uckfield, England, Sophia, France and Munich, Germany.

        During the year ended December 31, 2000, we restructured our operations, divesting certain non-core businesses and consolidating our core businesses into the commercial business units described above. We also invested more than $11 million in 2000 and $6 million in 2001, to build and outfit state-of-the-art production facilities, including information technology infrastructure, and implemented

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new manufacturing and business processes and systems to increase our production capacity and improve efficiency and product quality. We believe that Maxwell now has ample production capacity to meet current demand for our products and any near term increase in demand.

        We consolidated our ultracapacitor and microelectronics manufacturing operations into a new 46,000 square foot facility in San Diego in September 2000. Our power and computing systems manufacturing operations moved into an expanded and refurbished 84,000 square foot facility in San Diego in October 2000. A new 20,000 square foot production and warehousing facility in Tangmere, England, has been completed and will be a distribution center for products and materials for the I-Bus/Phoenix operations in France and Germany.

        All of our new 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. We believe that our manufacturing facilities and resources give us sufficient capacity to meet near term demand for all of our products.

Ultracapacitors

        We have installed automated production machinery to make our small cell ultracapacitors. This automated production line gives us production capacity of approximately 50,000 small cells per day. We have also increased the production capacity for our large cell ultracapacitors from approximately 100 cells per day in early 2000, to more than 400 cells per day currently, with improved yield. We have redesigned our large cells to incorporate lower cost materials and facilitate high-speed automated manufacturing. In addition to significantly reducing material cost, the new design reduces the number of components required to make a finished cell and reduces the number of manufacturing process steps to a fraction of those required for the previous design. Our objective with all of our ultracapacitor products is to be the most reliable supplier of these products for customer applications that require high power density in small packages for energy storage and power delivery.

Radiation-Shielded Microelectronics

        We have reengineered our production processes for radiation-shielded microelectronics, resulting in dramatic improvement in cycle time to produce and test microelectronics and a significant increase in yield of components that comply with customer-required quality and performance standards. We believe we now have top tier manufacturing capabilities for highly reliable, radiation-shielded power and computing microelectronics for the space and military electronics replacement markets.

Power and Computing Systems

        We assemble applied computing products at our San Diego, California, Tangmere, England, Sophia, France, and Munich, Germany facilities. We manufacture sheet metal enclosures for the systems we sell in Europe and some that we sell in the U.S. at our Uckfield, England facility. We rely on third party suppliers for fabrication and assembly of printed circuit boards and major subassemblies. We assemble and test power quality products at our San Diego production facility. We manufacture harnesses and transformers for power quality products and contract with third party suppliers for sheet metal and printed circuit boards.

Suppliers

        We generally purchase components and materials, such as electronic components, dielectric materials and enclosures of metal and plastic, from a number of suppliers. For certain products, we rely on a limited number of suppliers or a single supplier. Our applied computing business relies on single qualified suppliers for some of its critical components, primarily CPU boards and some power supplies. Although we believe there are alternative sources for components and materials currently obtained

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from a single source, there can be no assurance that we will be able to identify and qualify alternative suppliers in a timely manner. We seek to reduce our dependence on sole and limited source suppliers.

Marketing and Sales

        Across all our product lines, we market and sell components and systems for integration by OEMs into larger systems and other end products through both direct and indirect sales organizations in North America, Europe and Asia. As the introduction of emerging technologies requires customer acceptance of new and different technical approaches, and many of our OEM customers have rigorous vendor qualification processes, the initial sale for our products can take weeks or months.

        Our principal marketing strategy is to cultivate long-term customer 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, environment and mechanics. As time-to-market often is the primary consideration in our customers' decisions to outsource components or systems and in their selection of a vendor, the initial sale and design-in process frequently evolves into ongoing account management to ensure on time delivery and responsive technical support and problem solving.

        Our business units conduct marketing programs intended to position and promote their products, including trade shows, seminars, advertising, public relations, distribution of product literature and websites on the Internet. We employ marketing communications specialists 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.

Competition

        Each of our business operations has competitors, many of whom have longer operating histories, significantly greater financial, technical, marketing and other resources, greater name recognition, and a larger installed base of customers. In some of the target markets for our emerging technologies, we face competition from products utilizing alternative technologies.

Ultracapacitors

        Although a number of companies are developing capacitor technology, we have two principal competitors in ultracapacitor or supercapacitor products: Panasonic, a division of Matsushita Electric Industries, Ltd.; and Montena Corporation, a privately held company. The key competitive factors are price, performance (energy stored and power delivered per unit volume), form factor, operational lifetime and breadth of product offerings. Our PowerCache ultracapacitors have two to four times greater power density and longer operational life than competing, commercially available ultracapacitors and supercapacitors. We believe that we also compete favorably with respect to the other competitive factors identified above. Ultracapacitors also compete with other technologies, including high power batteries, in power quality and automobile load-leveling applications, with flywheels in power quality and automotive applications (including as a power source for electric vehicles) and with superconducting magnetic energy storage in power quality.

Radiation-shielded Microelectronics

        Our radiation-shielded monolithic integrated circuits (ICs), application specific integrated circuits (ASICs), processors and single board computers compete with the products of traditional radiation-hardened IC suppliers such as Honeywell Corporation and Lockheed Martin Corporation. We also

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have competition from commercial suppliers with product lines that have favorable radiation tolerance characteristics, such as Temic Instruments B.V. in Europe and National Semiconductor and Analog Devices Inc. Our proprietary radiation shielding technology enables us to provide flexible, low cost radiation protection solutions utilizing the most advanced commercial off-the-shelf electronic circuits. In that market segment, we compete with high reliability packaging houses such as Austin Semiconductor, Inc., White Microelectronics, Inc. and Teledyne Microelectronics, a unit of Teledyne Technologies, Inc. for monolithic and multichip modules.

Power and Computing Systems

        The applied computing market is highly fragmented, with no dominant entrants. Our principal competitors include RadiSys Corporation, SBS Technologies, Inc., Diversified Technology, Inc., American Advantech Corp., Teknor Applicom, a Kontron company, and Trenton Technology, Inc., among others. Motorola Inc. and the Force Computer division of Solectron Corporation have entered the cPCI market, and represent strong competition in the applied computing market based on cPCI architecture. Competitive factors in this market include price, custom design expertise, functionality, fault tolerance and time-to-market. We believe we compete favorably with respect to each of these factors.

        The markets for our power quality products also are highly fragmented, with no single dominant participant. In the medical and industrial markets in which our product offerings are concentrated, we compete with several participants, including Liebert Corporation, OnLine Power, Inc., Teal Electronics Corporation and Controlled Power Corporation. We believe we compete favorably in these markets on price, quality and functionality.

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, 2001, research and development expenditures totaled approximately $11.5 million, as compared to $8.7 million and, $6.8 million in the fiscal years ended December 31, 2000 and July 31, 1999, respectively.

        In general, our product development focuses on:

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enhancing existing products and developing technologically advanced products;



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developing new products to meet identified market opportunities; and



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making our products more reliable, more compact and less expensive to manufacture to meet the performance, form factor and pricing demands of our customers.

        Most of the current research, development and engineering activity of the Electronic Components Group is focused on material sciences, including electrically conducting and dielectric materials, ceramics and radiation tolerant silicon and ceramic composites, to improve performance, reliability, ease of manufacture and cost of our electronic components. Efforts also are focused on product design for high volume manufacturing.

        We have redesigned our large cell ultracapacitors to double power density and dramatically reduce cost. The new design consists of proprietary technology in a low cost, high capacity package. The new large cell design also incorporates a form factor and assembly process suited for high-speed automated manufacturing. Our goal is to penetrate cost sensitive applications at very high volumes (millions of cells per year beginning in 2004).

        I-Bus/Phoenix's research, development and engineering efforts are focused on joint projects with OEM customers, resulting in customer computing and power system level products tailored to OEM

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requirements. We invest our resources in the research and development of technology building blocks such as:

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CPU board design and applied computing modules and platforms;



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power conditioning, storage and distribution platforms;



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Design processes and tools; and



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high availability, application-ready systems integration capabilities, including software operating systems.

        Our engineering staff works closely with customers to operate as a "virtual division" interacting with the customer's internal organization to develop computing and power systems that satisfy specific customer requirements. We typically retain the rights to any technology developed as part of joint design programs.

Intellectual Property

        As our commercial businesses expand, we are placing increased emphasis on patents to provide protection for certain key technologies and products. Our success will depend in part on our ability to maintain our patents, add to them where appropriate, and to develop new products and applications without infringing the patent and other proprietary rights of third parties, and without breaching or otherwise losing rights in technology licenses we have obtained.

        We have well established patent portfolios covering the various technologies associated with our electronic components businesses, consisting of issued patents and patent applications in the United States. We also routinely secure corresponding foreign patents in principal countries of Europe, Asia and in Canada. Our power and computing systems business involves designs based largely on industry standard architecture and patents have not been an important competitive factor. This is changing, however, as the designs to meet high availability requirements become more complex and proprietary. We have several patent applications on file in this area and are pursuing others.

        Establishing and maintaining proprietary products and technologies is a key element of our success. Although we attempt to protect our intellectual property rights through patents, copyrights, trade secrets and other measures, there can be no assurance that these steps will be adequate to prevent misappropriation by third parties, or will be adequate under the laws of some foreign countries, which may not protect our proprietary rights to the same extent as do the laws of the United States.

        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 proprietary Company information and, subject to certain exceptions, to assign to the Company all rights in any proprietary information or technology made or contributed by the employee during his or her employment. In addition, we regularly enter into nondisclosure agreements with third parties, such as potential joint venture partners and customers.

Backlog

        Our backlog for continuing operations as of December 31, 2001 and 2000 amounted to approximately $14.6 million, and $36 million, respectively. Backlog consists of firm orders for products not yet delivered. We expect to deliver substantially all of our current backlog within 12 months.

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Government Regulation

        The testing, sale and application of our computing and power systems require compliance and certification with a number of U.S. and foreign standards for electromechanical systems, such as Underwriters Laboratories (UL), Canadian Standards Association (CSA) and Committee European (CE). We incorporate compliance with such standards into the quality assurance protocols in building and testing our computing and power products.

        Because of 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 the use, generation, manufacturing, storage, air emission, effluent discharge, handling and disposal of certain materials and wastes.

Foreign Sales

        Our revenue from customers outside of the United States was $21.8 million and $25.8 million in the years ended December 31, 2001 and 2000, respectively, and $10.7 million, and $24.0 million, in the five months ended December 31, 1999 and in the fiscal year ended July 31, 1999 respectively. Of the total foreign sales in the years ended December 31, 2001, December 31, 2000, the five months ended December 31, 1999 and the fiscal year ended July 31, 1999, $10.4 million, $12.4 million, $5.6 million, and $12.2 million, respectively, were attributable to sales to customers located in the United Kingdom.

Employees

        At December 31, 2001, our continuing operations had 483 full-time employees, including 154 employees within the Electronic Components Group, 290 within I-Bus/Phoenix and 39 at the corporate level. None of our employees is represented by a labor union. We consider our relations with our employees to be good.

Discontinued Operations—PurePulse Technologies

Overview—PureBright Pathogen Inactivation

        At the beginning of 2001, the Board of Directors approved a resolution to adopt management's plan, which was established in late 2000, to dispose of all or substantially all of our interest in our PurePulse subsidiary. As a result we are exploring strategic alternatives for our PurePulse subsidiary, which we expect will result in the sale of all or a majority interest in the business or a spinoff in 2002. PurePulse has been classified as a discontinued operation for financial reporting purposes.

        PurePulse develops, manufactures and commercializes PureBright sterilization and purification systems to purify water and inactivate viruses and other pathogens that contaminate products sourced from human or animal tissues, such as plasma derivatives, transfusion blood components, and biopharmaceuticals, and in the production of vaccines. PureBright systems employ pulsed power technology to produce broad spectrum pulsed light (BSPL) 90,000 times more intense than sunlight at sea level to inactivate viruses and other pathogens while preserving the efficacy of beneficial proteins and other therapeutic compounds.

        Base material passes through a BSPL chamber and receives one or more flashes to inactivate all viruses and other microbial contaminants in the material. Each BSPL flash, lasting a fraction of a second, inactivates pathogens in base materials without generating heat or other undesirable residual effects in the sterilization process. PurePulse also has developed PureBright systems that are used commercially to sterilize medical products and packaging.

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PureBright System vs. Current Pathogen Inactivation Processes

        Pathogen inactivation processes currently in use include heat, solvent detergent, and gamma radiation. None of these processes is entirely satisfactory. Chemical solvents added to base materials to inactivate viruses must later be removed, which often results in a loss of valuable base material. Heat treatment for virus activation, in addition to causing damage to beneficial proteins and some loss of base material, takes up to 72 hours. Additionally, some pathogens, such as human parvovirus and hepatitis A, are resistant to currently approved inactivation methods.

        By contrast, extensive pre-clinical testing of our PureBright systems by multiple strategic partners in the blood fractionation, vaccine and biopharmaceutical industries has shown BSPL treatments of only a few seconds' duration to be effective in inactivating viruses by breaking down the nucleic acids required for reproduction. And, because therapeutic protein base materials are made up of amino acids that are not damaged by BSPL at levels required for virus inactivation, recovery of PureBright treated protein base materials is in the range of 95-100 percent. PureBright is of interest for vaccine production because BSPL treatments break down genetic material required for viral reproduction and leave intact viral protein structures that are used as antigenic material. We believe that this may allow development of more potent vaccines, reduce the risk of adverse reactions and eliminate the need for harsh chemical additives.

PurePulse Focus and Market Size

        Most of PurePulse's focus has been in six key segments; water purification, representing a $830 million market opportunity based on a $4.3 billion wholesale market for purification equipment and customer support services; plasma derivative products, blood components (i.e. platelets and plasma), biopharmaceuticals and vaccine manufacturing, representing a combined virus and pathogen inactivation opportunity of over $1.0 billion based on a $22.4 billion medical products and services market; and medical device sterilization, representing a $150 million opportunity based on equipment and services. Our strategy has been to position PureBright as a "platform technology" that can be applied to these distinct, but technologically complementary, market segments.

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Strategic Collaborations

        Since the beginning of 2000, PurePulse has entered into collaboration agreements with market leaders who control approximately 25 to 30 percent market share in the plasma derivative, biopharmaceutical and vaccine markets to participate in the development of inflow PureBright systems for incorporation and evaluation in their pharmaceutical product manufacturing lines for multiple products per collaborator. These development programs require us to deliver advanced design PureBright systems for testing and evaluation, and for each collaborator to begin clinical and regulatory work in 2002 or in 2003.

        We also have developed BSPL-based prototype water purification systems that inactivate microbial contaminants in water, including cryptosporidium, which is not affected by many other water treatment processes. Our prototype water purification systems vary in capacity from one gallon of water per minute to 250 gallons per minute. Such systems may be installed on a countertop or under the sink for the homeowner market or at the point of entry into a food service, grocery or manufacturing facility. PureBright also can be used to purify bottled water after it has been packaged and sealed with a compatible translucent packaging material. We have decided to pursue the water purification market by aligning ourselves with marketing partners. In December 2001, we entered into an agreement with Culligan International Company, a division of USFilter, a Vivendi Water Company, to collaboratively develop pulsed light water purification systems for the consumer and commercial markets. PurePulse initially will receive license fees based in part on certain development milestones, and ultimately will receive royalties based on product sales.

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 any of the following risks occur. In any such case, the market price of our common stock could decline and you may lose all or part of the money you paid to buy 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 events which could result in a decline in the price of our common stock.

We may not be able to develop or market commercial products successfully which would prevent us from achieving or maintaining profitability in the future.

        Historically, we have relied in part upon government contracts to fund our research and development, and we have derived a significant portion of our revenues from the government sector. In March 2001, we closed the sale of our defense contracting business. Subsequent to the sale of that business, we generate revenue solely from developing, manufacturing and marketing commercial products. If we are unable to develop or market commercial 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 introduce 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 significantly affected by their cost, technology standards and end user

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preferences. In addition, the success of our products depends on a number of factors, including our ability to:

•

maintain an engineering and marketing staff sufficiently skilled to identify and design new products;



•

overcome technical, financial and other risks involved in introducing new products and technologies;



•

identify and develop a market for our new products and technologies and accurately anticipate demand;



•

develop appropriate commercial sales and distribution channels;



•

develop and manufacture new products at competitive prices;



•

increase our manufacturing capacity and improve manufacturing efficiency;



•

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; and



•

respond to competitors that are more experienced, have significantly greater resources, and have a larger base of customers.

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 process. If we are unable to manufacture our products in increased quantities, or if we are unable to outsource the manufacture of our products or improve the manufacturing process, we may be unable to increase sales and market share for our products. We have limited experience in manufacturing our products in high volume. 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



•

design and procure automated manufacturing equipment.

        It may also be difficult for us to solve management, technological, engineering and other problems related to our manufacturing processes. These problems include production yields, quality assurance, component supply 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.

We may be unable to produce our ultracapacitors in commercial quantities or reduce the cost of production enough to be commercially viable for widespread application.

        If we are not able to produce large quantities of our ultracapacitors in the near future at a dramatically reduced per unit cost, our ultracapacitors may not be a commercially viable alternative to traditional or other alternative power delivery devices. Although we have already begun selling a new type of PowerCache ultracapacitor designed for automotive and transportation applications, we have only produced this ultracapacitor in limited quantities and at a relatively high cost as compared with

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traditional power delivery devices. We are currently investing significant resources in automating and scaling up our manufacturing capacity to permit us to produce this product in large, commercial quantities sufficient to meet the needs of our potential customers. In particular, because these products are very complex to manufacture, we cannot be certain that we will be able to maintain quality standards at high production levels. 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 producing large quantities of ultracapacitors in the near future, we may not be able to generate sufficient revenue from this product to recapture our significant investment in the development and manufacturing scale-up of this product and our overall business prospects will be significantly impaired.

Our ultracapacitors designed for automotive and transportation applications may not gain widespread commercial acceptance.

        We have designed one of our PowerCache ultracapacitor products primarily for use in automotive and transportation applications. Currently, most of the major automotive companies are pursuing large initiatives to develop alternative power sources for cars and trucks and to replace the traditional 12-volt electrical system with a 42-volt system. We believe our ultracapacitor provides an innovative, alternative power solution for both of these applications and are currently in discussions with several major automotive companies and their suppliers with regard to designing our ultracapacitor into their future products. However, there are many competing technologies such as nickel metal hydride batteries, combustion engines using alternative fuels and competing ultracapacitors. In particular, we are currently working with the Allison Transmission division of General Motors Corporation in the early stages of incorporating our ultracapacitors into its first generation of hybrid drive trains. GM is under no obligation to ultimately use our ultracapacitors in their products or purchase any minimum quantity of our ultracapacitors. We believe that the long-term success of our ultracapacitors will be determined by our ability to 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 42-volt electrical systems. If our ultracapacitors fail to achieve widespread commercial acceptance in this next generation of automotive products, our revenues will be adversely impacted in future periods and our overall business prospects will be significantly impaired.

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 stock.

        We have incurred net losses in our most recent fiscal year and in three of our past five fiscal periods. In the future, 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 the following:

•

the amounts invested in developing and marketing our products in any period as compared to the volume of sales of those products in the same period;



•

fluctuations in demand for our products by OEMs;



•

the prices at which we sell our products and services as compared to the prices of our competitors;



•

the timing of our product introductions as compared to those of our competitors;



•

the profit margins on our mix of product sales; and



•

the dilution, debt, expenses, and/or charges we incur as part of acquisitions we may make.

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        In addition, we incur significant costs developing and marketing products based on new technologies. For example, we expect our investment in PurePulse to significantly exceed the revenues achieved by that operation, and operating losses due to this investment will continue until such time as we complete a strategic transaction for the business.

        We anticipate that, in order to increase our market share, we may sell our products and services at profit margins below those we ultimately expect to achieve and/or significantly reduce the prices of our products and services in a particular quarter or quarters. The impact of the foregoing may cause our operating results to be below the expectations of public market analysts and investors, which may decrease the market value of our stock.

If our OEM customers fail to sell a sufficient quantity of products incorporating our components, or if the OEM's sales timing and volume fluctuates, it would prevent us from achieving increased sales and market share.

        Sales to a relatively small number of OEMs, as opposed to direct retail sales to customers, make up a significant percentage of our revenues. 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's sales timing and volume fluctuates, it could prevent us from achieving sales. 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.

        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 an opportunity that may not reappear for some time.

Continued poor economic conditions in the United States and abroad may adversely affect our OEM customers and prevent us from achieving sales and profit growth.

        Many of our new products are components designed for new products and systems to be introduced to the marketplace by our OEM customers. In addition, a significant portion of our existing products and newly designed products in our applied computing business is directed at the telecommunications market. The poor economic conditions in 2001, particularly in the telecommunications industry, have slowed the introduction of new products generally by our OEM customers and continued poor economic conditions may adversely affect our ability to market and sell our new products based on new technologies and our existing applied computing products.

Our ability to increase market share and sales depends on our ability to hire and train marketing and sales personnel successfully.

        We have limited experience marketing and selling our products. To sell our products, we need to train marketing and sales personnel to demonstrate effectively the advantages of our products over the products offered by our competitors. The highly technical nature of the products we offer requires that we retain and attract adequate 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.

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If we are unable to protect our intellectual property adequately, we could lose our competitive advantage in each of the industry segments in which we do business.

        Our success depends on establishing and maintaining our intellectual property rights. If we are unable to protect our intellectual property adequately, we could lose our competitive advantage in each of 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 misappropriation 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 United States laws. In addition, we face the possibility that third parties might "reverse engineer" our products in order to determine their method of operation and introduce competing products.

        As our business has expanded, we have emphasized protecting our technologies and products through patents. Our success depends on maintaining our patents, adding to them where appropriate, and developing products and applications without infringing on the patent and proprietary rights of others. The following risks 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, does not hold sole rights to the patent, we could lose our competitive advantage in each of 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 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 our proprietary rights without litigation. If we are subject to such claims, or if we are forced to bring such claims, we could endure time-consuming, costly litigation resulting in product shipment delays and possible damage payments or injunctions which could prevent us from making, using or selling the infringing product. We may also be required to enter into royalty or licensing agreements 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 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 grow our business abroad.

        We derive a significant portion of our revenues from sales to customers located outside the United States. 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 grow our business abroad.

        We have only recently established or acquired operations in foreign countries. Since we are relatively inexperienced in managing our international operations, we may be unable to focus on the operation and expansion of 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

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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.

        As a result of our international operations, the United States dollar amount of our revenue and expenses is impacted by changes in foreign currency exchange rates.

If we are unable to retain key personnel, we could lose our technological and competitive advantage in some product areas and business segments.

        Since we primarily focus on 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 high quality 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. Our employees may terminate their employment with us at any time.

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 material effect on our business and results of operations, and damage customer relationships. On occasion, we have experienced difficulty in obtaining timely delivery of supplies from outside suppliers. This has adversely impacted our delivery time to our customers and there can be no assurance that such supply problems will not recur.

We may not be able to obtain a sufficient amount of capital needed to grow our business which could require us to change our business strategy and result in decreased profitability and cause a loss of customers.

        We believe that in the future we will need a substantial amount of capital for a number of purposes including the following:

•

to meet anticipated 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 establish viable production alternatives;



•

to fund our continuing expansion into commercial markets;



•

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.

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        There can be no assurance that the 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 product commercialization strategy or our anticipated facilities expenditures which could result in decreased profitability and cause a loss of customers.

We could incur significant liabilities if we do not comply with the environmental regulations applicable to our operations.

        We are subject to a variety of environmental regulations relating to the use, storage, discharge, handling, emission, generation, manufacture and disposal of toxic or other hazardous substances. If we fail to comply with current or future regulations, substantial fines could be imposed against us, our production could be suspended or stopped, or our manufacturing process could be altered. Such regulations could require us to acquire expensive remediation or abatement equipment or to incur substantial expenses to comply with environmental regulations. If we fail to adequately control the use, discharge, disposal or storage of hazardous or toxic substances, we could incur significant liabilities.

Anti-takeover provisions in our certificate of incorporation and bylaws could prevent transactions which are in the best interest of our stockholders.

        Some provisions in our certificate of incorporation 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. Our certificate of incorporation and bylaws do not permit stockholder action by written consent or the calling by stockholders of a special meeting.

        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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Item 2. Properties

        We conduct our operations in the following major facilities:

Our

corporate offices are also located in this facility.

        In addition, we occupy other small sales and research facilities in the United States and Europe. We also sublease certain other leased facilities to third parties.

Item 3. Legal Proceedings

        As of the date of this Form 10-K, we are not engaged in any legal proceedings that we expect will have a material adverse effect on our business, financial condition or results of operations.

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

        None.

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Item 4.1 Executive Officers of the Registrant

        The executive officers of the Company are set forth below. The Company's officers serve at the pleasure of the Board of Directors.

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PART II

Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters

        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.

        The last reported sale price of common stock on the Nasdaq National market on March 15, 2002, was $9.51 per share. As of January 31, 2002, there were 436 holders of record of the Company's Common 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 dividends on our Common Stock in the foreseeable future. In addition, under our bank credit agreement, neither we nor any of our subsidiaries may, directly or indirectly, pay any cash dividends to our stockholders.

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Item 6. Selected Financial Data

*

unaudited

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

        We apply industry-leading capabilities in power and computing to develop and commercialize electronic components and power and computing systems for OEM customers in multiple industries, including transportation, telecommunications, consumer and industrial electronics, medical and aerospace.

        In December 1999, we adopted a plan to restructure our operations. The goal of the restructuring plan was to create a focused, product-driven, high-growth company. Since then, we have hired more than 50 key managers with extensive commercial experience in engineering, manufacturing, material procurement, supply chain management, information technology, financial controls and sales and marketing and we have invested over $18 million to build and outfit state-of-the-art production facilities and implement new manufacturing and business processes and systems, including information technology infrastructure and an ERP system.

        In addition to rebuilding the industrial capabilities and infrastructure of Maxwell, we increased in 2000 and 2001 the investment in research and development to change and expand dramatically the Company's products toward proprietary higher-margin power and computing products. We began introducing the new products at the end of 2001 and currently are focused on our marketing and sales initiatives around the new products. (see the "Business" description under Item 1 for a discussion of our new products.)

        As part of the restructuring plan, during calendar year 2000, we sold our businesses involving high voltage wound film capacitors, high voltage power supplies and time card and job cost accounting software. We also decided to sell our defense contracting business and to seek strategic alternatives for the PurePulse business. The defense contracting business was sold in March 2001 and the Company plans to sell or spin-off its PurePulse business during 2002. These entities have been reflected as discontinued operations in the financial statements.

        Our continuing operations are comprised of two business segments, electronic components and I-Bus/Phoenix power and computing systems. We generate substantially all of our revenue from continuing operations from the sale of commercial products.

        In 1999, we changed our fiscal year to a calendar year effective January 1, 2000. We previously reported results on a fiscal year of August 1 through July 31.

Business Segments

        Our continuing operations are comprised of the following two business segments.

Electronic Components Group

        As part of the restructuring plan, we organized the Electronic Components Group by combining numerous business units and product lines including our PowerCache ultracapacitors, EMI filtered feedthroughs, ceramic capacitors and our radiation-shielded microelectronics. In October 2000, we integrated the PowerCache ultracapacitor operations and the radiation-shielded microelectronics operations into one new manufacturing site in San Diego which has been designed for highly efficient manufacturing, with improved processes, improved personnel training and more disciplined cost control practices. Our EMI filtered feedthroughs and ceramic capacitors business (Sierra KD or Sierra), which was located in Carson City, Nevada, was sold in June 2001.

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        The Electronic Components Group currently includes the following power delivery and other high reliability devices product lines:

•

ultracapacitors for electrical energy storage and delivery of peak power for a variety of applications



•

radiation-shielded microelectronics, including integrated circuits, power modules and single board computers for space and military markets



•

testing equipment for accelerated life testing of RF components used in environments requiring extremely high reliability

I-Bus/Phoenix Power and Computing Systems

        As part of our restructuring plan, we integrated our I-Bus, Inc. and Phoenix Power Systems, Inc. subsidiaries. The I-Bus/Phoenix organization has operations in the U.S. and Europe. I-Bus/Phoenix is focused on providing high availability custom computing systems and power quality products. As part of the restructuring plan, we combined the San Diego operations of these two businesses into a single facility in October 2000. The new facility has been designed for highly efficient manufacturing, with improved processes, improved personnel training and more disciplined cost control practices. In December 2001, our operations in Great Britain were moved to a new facility and we have initiated plans to consolidate standard product assembly for Europe in this facility.

        Our current I-Bus/Phoenix product offerings include applied computing systems, power distribution systems and power conditioning units. We sell our products mainly to OEMs serving the telecommunications and Internet infrastructure, industrial automation, broadcasting and medical imaging markets.

PurePulse

        We have classified the PurePulse business segment as a discontinued operation for financial reporting purposes. PurePulse designs and develops systems that generate extremely intense, broad-spectrum, pulsed light to inactivate viruses and other pathogens that contaminate products sourced from human or animal tissues, such as plasma derivatives, transfusion blood components and biopharmaceuticals, and in the production of vaccines. PurePulse also is developing systems to purify water.

        In December 2000, management identified its Government Systems and PurePulse operations as not being part of the Company's strategic focus for the future. We adopted a plan, which was subsequently approved by the Board of Directors in January of 2001, to be completed by the end of 2001 to sell the Government Systems Division and to either sell all or a majority of PurePulse.

        We first sold the Government Systems division in two transactions in March and April of 2001 and then turned our attention to selling PurePulse. The timing of this effort coincided with the economy going into recession, a dramatic downturn of the public and private equity markets, and the further negative impact on the economy and the financial markets of terrorist attacks of September 11, 2001.

        As a result of the poor market conditions of 2001, we were unable to secure a transaction under acceptable terms. However, in 2001, PurePulse improved its business prospects by developing an in-flow system utilizing its broad spectrum pulsed light technology, developing additional positive clinical data supporting the safety and efficacy of its technology, securing numerous customer relationships and entering into a strategic alliance with Culligan International Corporation to develop and commercialize systems to purify drinking water. Based on the progress in its business plus the improvements in the economy and financial markets, the Company is currently pursuing financing with strategic partners and private individuals which we believe will provide adequate financing that will allow Maxwell

29

Technologies to spinoff its share ownership in PurePulse to the Maxwell shareholders. We are currently pursuing all steps necessary to spinoff the share ownership in PurePulse to the Maxwell investors as soon as practical and before the end of 2002. We also continue to explore the possible sale of Maxwell's share ownership in PurePulse.

Critical Accounting Policies

        The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the U.S., which requires the Company to make estimates and assumptions. The Company believes that of its significant accounting policies, 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 current year, substantially all of our revenue is derived from the sale of manufactured products directly to customers. Revenue is recognized at the time the product is shipped. In general, we do not offer discounts and there is no right of return. However 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. These contracts are subject to rate audits and other audits, which could result in additional revenues or additional losses in excess of estimated provisions.

Accounts Receivable

        We establish and maintain customer credit limits based on credit checks, analyses of 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 the expected bad debts based on past collection history and specific risks identified in the portfolio.

Excess and obsolete inventory

        We value inventories at 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. We have recorded significant changes in reserves in recent periods due to changes in market conditions. It is possible that changes in reserves may be required due to changing market conditions, or that judgments as to ultimate realization may be incorrect.

Impairment of Goodwill

        In assessing the recoverability of goodwill, we must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. In addition, we periodically complete independent appraisals of the business segments and compare the fair value to the carrying value. If these estimates or their related assumptions change in the future, we may be required to record impairment charges.

Valuation allowance for deferred tax assets

        A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is 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 on their ability to generate sufficient future income within the next two years in order to realize the benefit of the deferred tax assets. In 2001, the Company determined that it was

30

appropriate to record a valuation allowance against its deferred tax assets based on its recent history of losses. The deferred tax assets are still available for the Company 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.

Discontinued operations, estimated costs associated with sale of business

        In determining the net gain on the sale of businesses included in discontinued operations, we made judgments as to our liability associated with lease obligations. In making these judgments, we assessed commercial real estate markets in several locations and made estimates as to how and when we will be able to either sub-lease, terminate or buy out lease obligations. Changes in these markets may impact our estimates.

Results of Operations

        Comparison and Discussion of Results of Operations for the Three Months Ended September 30, 2001 and the Three Months Ended December 31, 2001.

Sales and Gross Profit

        Sales for the fourth quarter were $15.4 million, reflecting a $0.4 million, or 3%, increase from the third quarter and gross profit as a percentage of sales increased from 4% to 14%.

        Sales in the fourth quarter in the Electronic Components Group segment increased by $2.8 million, or 71%, due mainly to shipments of components to certain customers involved in making satellites. Gross profit and gross profit as a percentage of sales increased because of the higher revenue and improved mix. The Electronic Components Group has relatively low variable costs so that revenue increases generate significant incremental margin.

31

        Sales in the fourth quarter in the I-Bus/Phoenix power and computing systems segment decreased by $2.4 million, or 22%, due to $1.5 million lower sales of power products used in making medical imaging equipment and lower computing systems sales mainly in Europe. Gross profit and gross profit as a percentage of sales also decreased because of lower sales.

Operating Expenses

        Operating expenses decreased in the fourth quarter by $0.3 million, or 4%, to $7.9 million from $8.2 million in the third quarter due mainly to lower research and development expenses.

Operating Loss

        As a result of the factors mentioned above, the operating loss was $5.6 million for the fourth quarter as compared to an operating loss of $7.6 million for the third quarter.

        Comparison and Discussion of Results of Operations for the Fiscal Year Ended July 31, 1999, the Five Months Ended December 31, 1999, and the Years Ended December 31, 1999, 2000 and 2001

*

unaudited

Sales and Gross Profit

        Electronic Components Group.    For the year ended December 31, 2001, sales in the electronic components segment decreased $9.5 million, or 24%, to $29.6 million from $39.1 million for the year ended December 31, 2000. $4.6 million of the decrease was due to the sale of Sierra, which was

32

completed in June of 2001. Sales decreased $3.6 million and $2.4 million in the microelectronics and ultracapacitor product lines, respectively, due to early year slowness in the commercial satellite market and delays in adopting the PowerCache products in automotive and consumer electronics markets.

        In the year ended December 31, 2001, gross profit decreased by $6.6 million, or 59%, to $4.6 million from $11.1 million, for the year ended December 31, 2001. As a percentage of sales, gross profit decreased to 15% in the current year from 28% in the prior year. The sale of Sierra accounted for $1.3 million of the decrease. The balance of the decrease resulted from lower microelectronics and ultracapacitor sales and start-up costs associated with making proto-type RF component testing products.

        For the year ended December 31, 2000, sales in the electronic components segment increased $9.8 million, or 33%, to $39.1 million from $29.3 million for the year ended December 31, 1999. Sales increased in all product lines during 2000, including a $6.9 million increase in sales in our microelectronics product lines to customers in the commercial satellite market. Sales in our PowerCache ultracapacitor product lines also increased in 2000, despite a $1.0 million decrease in revenue received from technology license agreements, due primarily to shipments made during the fourth quarter to the Allison Transmission division of General Motors Corporation.

        In the year ended December 31, 2000, gross profit increased by $4.9 million, or 79%, to $11.1 million from $6.2 million in the year ended December 31, 1999. As a percentage of sales, gross profit improved to 29% in 2000 from 21% in the prior year. The increase in gross profit is the result of increased sales volume and an improved cost structure, primarily in our microelectronics and PowerCache product lines, offset by a reduction in gross margins associated with revenue from licenses and other collaborative agreements and by costs incurred in connection with training personnel in improved manufacturing processes and certain write-offs of inventories related to discontinued product lines or deemed to be excess or obsolete. The increase in gross profit as a percentage of sales also reflects the increased sales volume and the impact of the process and cost improvements in this business segment.

        I-Bus/Phoenix Power and Computing Systems.    For the year ended December 31, 2001, I-Bus/Phoenix sales decreased $15 million, or 24%, to $48.2 million from sales of $63.2 million for the year ended December 31, 2000. The decrease in sales for the year ended December 31, 2001 is primarily attributable to the conclusion of several major OEM supply agreements of computing products, which were not replaced with new or follow-on agreements. These agreements accounted for $12 million of the decrease. In addition, poor market conditions in the telecommunications sector both in US and Europe accounted for another $12 million decrease. Offsetting reduced applied computing sales, sales of non-proprietary build-to-print power quality products, primarily to GE Medical, increased $10 million during the current year.

        In the year ended December 31, 2001, gross profit decreased by $5 million, or 43%, to $6.7 million from $11.7 million in the year ended December 31, 2000. As a percentage of sales, gross profit decreased to 14% in the current year, as compared to 19% in the year ended December 31, 2000. The decrease in gross profit is primarily attributable to the impact of reduced sales volume for this segment in the current year. In addition, this segment has experienced a change in product mix to include a higher proportion of lower-margin, non-proprietary build-to-print power quality products, as compared to higher margin proprietary power quality and applied computing products.

        For the year ended December 31, 2000, I-Bus/Phoenix sales decreased $11.1 million, or 15%, to $63.2 million from sales of $74.3 million for the year ended December 31, 1999. For the year ended December 31, 2000, foreign sales represented 34% of the total sales in this segment compared to 32% for the year ended December 31, 1999. Domestic sales in this segment are made principally to OEM customers and are primarily derived from the shipment of power and computing systems that are "designed-in" to the OEMs' products. The decrease in sales for the year ended December 31, 2000 is

33

primarily attributable to a decline in revenues from an OEM supply agreement for computing products with Siemens ElectroCom L.P. for the United States Postal Service, which concluded in the third quarter of 2000 and was winding down during 2000. This supply agreement contributed sales of $8.6 million in the year ended December 31, 2000, compared to sales of $19.3 million in 1999. Excluding sales from this supply agreement, sales for this segment in 2000 were $54.6 million, or approximately the same as sales of $55.0 million for 1999. Excluding the major supply agreement, sales decreased in the applied computing product lines of this segment in 2000 due primarily to the phase-out of certain marginal older technology product lines without a comparable contribution from new products, which were introduced beginning in the first quarter of 2001. Offsetting reduced applied computing sales, sales within the power quality product lines of this segment increased.

        In the year ended December 31, 2000, I-Bus/Phoenix gross profit decreased by $11.1 million, or 48.7%, to $11.7 million from $22.8 million in the year ended December 31, 1999. As a percentage of sales, gross profit decreased to 18.6% in the current year, as compared to 30.8% in the year ended December 31, 1999. The decrease in gross profit is primarily attributable to the impact of reduced sales volume for this segment in the current year. In addition, this segment has experienced a change in product mix to include a higher proportion of lower-margin power quality products, as compared to higher margin applied computing solutions. The reduced gross profit in the current year also reflects costs incurred in the current year in connection with training personnel in improved manufacturing processes and certain write-offs of inventories related to discontinued product lines or deemed excess or obsolete.

Selling, General and Administrative Expenses

        During 2001, we completed the implementation of our ERP system which has allowed us combine the separate Finance, HR and Purchasing groups into Corporate service groups that are now supporting Maxwell's operating divisions. The annual cost savings is estimated at $2 million and will impact 2002. In addition to overhead savings, we believe that these groups will provide better support.

        In the year ended December 31, 2001, our selling, general and administrative expenses decreased $2.6 million, or 10%, to $23.7 million from $26.3 million in the year ended December 31, 2000. As a percentage of total sales, selling, general and administrative expenses increased to 30% in the year ended December 31, 2001 from 26% in the year ended December 31, 2000. The decrease in these expenses was primarily due to the sale of Sierra.

        In the year ended December 31, 2000, our selling, general and administrative expenses decreased $1.2 million, or 5%, to $26.3 million from $27.5 million in the year ended December 31, 1999. As a percentage of total sales, these expenses decreased to 26% in the year ended December 31, 2000, from 27% in the year ended December 31, 1999. The year ended December 31, 1999 included $750,000 of severance cost related to a former CEO.

Research and Development Expenses

        Our research and development expenses reflect internally funded research and development programs. We expect our research and development expenses will continue at levels comparable to 2001 in order to continue development of proprietary technology based power and computing products.

        Research and development expenses were $11.5 million, or 15% of sales, for the year ended December 31, 2001, as compared to $8.7 million, or 9% of sales, for the year ended December 31, 2000. We have increased our level of spending to accelerate new product introductions and we expect to remain at this level in future periods. Although we have selectively added and upgraded certain key engineering positions, most of the increase is attributable to materials, agency fees and other third party costs.

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        Research and development expenses were $8.7 million, or 9% of sales, for the year ended December 31, 2000, as compared to $6.4 million, or 6% of sales, for the year ended December 31, 1999. We increased our level of spending in research and development to accelerate new product introductions.

Restructuring and Other Charges

        We recorded restructuring and other related charges of $3.9 million during the first three quarters of the year ended December 31, 2000. These charges included severance costs related to reductions in personnel, costs associated with the closure and combination of certain facilities and the write-off of non-performing operating assets. We completed the facilities and organizational consolidations program in 2000. In the three months ended September 30, 2000, we also recorded a charge of $4.8 million to reduce the carrying value of goodwill related to our 1998 acquisition of Phoenix Power Systems, Inc. to an amount representative of the current appraised value of that asset. Also, in the three months ended September 30, 2000, we recorded a charge of $0.5 million related to in-process technology acquired in connection with our acquisition of Gateworks Corporation in September 2000.

        We also recorded restructuring and other related charges in connection with the restructuring plan in the five months ended December 31, 1999 totaling approximately $2.8 million.

Gain on Sale of Business

        In June 2001, we sold certain of the assets of our EMI filtered feedthroughs and ceramic capacitors business (Sierra) to Wilson Greatbatch for cash of $46.9 million and recorded a gain of $39.1 million.

Interest Expense

        Interest expense decreased to $1.2 million in the year ended December 31, 2001 from $1.4 million in the prior year. The decreased interest expense relates to lower borrowing levels in the second half of the current year as the Company repaid its outstanding obligations under a bank line of credit from the proceeds of the sale of Sierra and the Government Systems division.

        Interest expense increased to $1.4 million in the year ended December 31, 2000 from $0.3 million in the prior year. The increased interest expense relates to higher borrowing levels compared to the prior year. At December 31, 2000, we had $22.8 million outstanding under our bank line-of-credit.

Interest Income and Other, Net

        Interest income and other, net, consisting primarily of interest income, foreign currency transaction gains and losses and gains and losses on dispositions of fixed assets, was $634,000 in the year ended December 31, 2001 and $9,000 in the year ended December 31, 2000. The change was due mainly to cash available for investments.

        In December 2001, we recorded a reserve of $500,000 against an investment in common stock in a private company based on our assessment as to its current fair market value.

Provision (Credit) For Income Taxes

        The 2001 tax provision reflects a reduction in deferred tax assets within continuing operations of $3.6 million and an increase in the valuation allowance of $18.8 million to fully reserve for our deferred tax assets. The Company's 2001 loss from operations results in a cumulative loss position over the last three years. In accordance with generally accepted accounting principles, the realization of the Company's net deferred tax assets has not met the "more likely than not threshold". Accordingly, during the fourth quarter a valuation allowance was recorded to fully reserve cumulative deferred tax

35

assets recorded through December 31, 2001.We have net deferred tax assets of approximately $18.8 million at December 31, 2001, which relate primarily to net operating loss carryforwards and tax credits.

        The credit for income taxes for the year ended December 31, 2000 reflected our expected world-wide tax rate for that year. The effective tax rate was reduced by the fact that no tax credit was provided for the $4.8 million charge recorded to reduce the carrying value of goodwill since that amount will never be deductible for tax purposes.

        For the year ended December 31, 1999, our credit for income taxes included a credit of $4.3 million, representing the reversal of a valuation allowance provided in previous years against certain deferred tax benefits. The deferred income tax credit was partially offset by certain foreign and state income tax expense.

Minority Interest in Net Income (Loss) of Subsidiaries

        Minority interest in net loss of subsidiaries was $710,000 for the year ended December 31, 2001 and $181,000 for the year ended December 31, 2000. The reduction in our net loss resulted from losses incurred by our majority-owned subsidiaries, which is allocated based on ownership percentage to the minority shareholders.

Discontinued Operations

        The loss from discontinued operations was $4.7 million in the year ended December 31, 2001, compared to a loss of $26,000 for the year ended December 31, 2000. Discontinued operations are comprised of our Government Systems Division and PurePulse subsidiary, as well as the businesses divested in 2000. The loss was comprised of:

*

unaudited

        In March 2001, we sold the Government Systems Division for cash and recorded a gain of $1.1 million net of $2.8 million provision mainly related to on going lease obligations. The net lease obligations are $7.4 million and run through April 2006. Income (loss) from operations of these discontinued businesses was ($5.8) million in the year ended December 31, 2001, compared to ($2.9) million for the year ended December 31, 2000. Included in the loss for 2001 is a charge to the tax provision of $2.5 million for recording a valuation allowance.

        In February 2000, we sold the high voltage wound film capacitors and high voltage power supplies businesses for cash of $3.5 million, approximately the book value of the net assets sold as of that date. In addition, the buyer assumed certain liabilities of the businesses, including a long-term lease for the facility the businesses occupied, which extended through 2006 with annual rent of approximately $0.5 million. In November 2000, we sold our time card and job cost accounting software business for cash of $2.5 million and shares of common stock of the buyer with an immaterial value. In the fourth

36

quarter of 2000, we also received cash of approximately $0.7 million related to our equity investment in an unconsolidated entity, which was classified as a discontinued operation. In December 1999, we recorded provisions of approximately $2.1 million, net of tax, for estimated losses on the sale of these discontinued businesses. Based on the actual proceeds received and the net assets of the discontinued businesses at their respective dates of sale, we reversed the provisions we estimated in December 1999 and recorded an aggregate gain on these sales of $2.9 million, net of tax, including the reversal.

        Income (loss) from operations of the discontinued businesses was $(2.9) million in the year ended December 31, 2000, compared to $1.8 million for the year ended December 31, 1999 and $(5.2) million and $7.1 million for the five months ended December 31, 1999 and the fiscal year ended July 31, 1999, respectively. The income from operations of the discontinued businesses for the year ended December 31, 1999 and the fiscal year ended July 31, 1999 includes a $1.7 million tax credit representing the reversal of an income tax valuation allowance provided in previous years against certain deferred tax assets.

Liquidity and Capital Resources

        Cash used by operating activities in the year ended December 31, 2001 was approximately $17.3 million, as compared to $15.3 million in the year ended December 31, 2000. In the current year, the use of cash was primarily attributable to operating losses. Capital expenditures in the years ended December 31, 2001 and 2000 were $6.2 million and $11.8 million, respectively. In the year ended December 31, 2001, we received $46.9 million and $20.7 million of cash in connection with the sale of Sierra and the Government Systems division, respectively. These funds were used to pay down debt and fund continuing and discontinued operations.

        We believe that funds on hand, together with cash generated from operations, and funds available under our bank credit agreement, will be sufficient to finance our continuing operations, discontinued operations and our capital expenditures for 2002. However, we may require additional finances to fund losses. We may, from time-to-time, consider acquisitions of complementary businesses, products or technologies, which may require additional funding.

        Sources of additional funding for these purposes could include borrowings under the existing bank credit agreement, additional debt or equity financings or sales of businesses. There can be no assurance that we will be able to obtain additional sources of financing on favorable terms, if at all, at such time or times as we may require such capital.

New Bank Credit Agreement

        Our U.S. based operations had borrowings of $6 million outstanding under a bank credit agreement as of December 31, 2001 compared to $22.8 at the end of 2000. In February 2001, we and all of our United States subsidiaries entered into a Loan and Security Agreement with Comerica Bank—California, which was subsequently amended in December 2001. The agreement, as amended, consists of a $6 million term loan secured by a deed of trust as well as certain other collateral and a $5 million revolving credit facility. The term loan bears interest, at our option, at the bank's reference rate plus .5%, or cost of funds plus 2.25%. The principal is amortized monthly over 20 years with the balance due December 31, 2004. We may prepay the term loan or revolving loans at any time, and all amounts borrowed are due on December 31, 2004. At December 31 2001, $6 million was outstanding under the term loan and none was outstanding under the revolving facility. As of the filing date of this Form 10-K, we are in compliance with all required covenants.

Minority Equity Interests in Subsidiaries and Subsidiary Option Programs

        Each of the Electronic Components Group, I-Bus/Phoenix and PurePulse have minority equity investors. These investors are former strategic partners associated with relationships established in the

37

past, former shareholders of companies acquired using our subsidiaries' stock and former and current employees who have exercised stock options in those entities. As of December 31, 2001, minority investors owned, of the outstanding shares, approximately 5.4% of the Electronic Components Group, 6.5% of I-Bus/Phoenix and 15.2% of PurePulse. In addition, each such subsidiary has an employee stock option plan that permits the issuance of incentive and nonqualified stock options to purchase subsidiary common stock.

        In January 2002, we adopted a plan to complete a merger transactions with the Electronic Components Group subsidiary and the I-Bus/Phoenix subsidiary whereby all of the minority shareholdings and options were converted to shares and options of Maxwell Technologies. Upon completion, these mergers would result in the issuance of 0.6 million common shares of Maxwell Technologies and 0.5 million options to purchase common shares of Maxwell Technologies. In February 2002, PacifiCorp Energy Ventures, Inc., the largest minority shareholder in the Electronic Components Group, exchanged its preferred shares of the Electronic Components Group for 0.5 million common shares of Maxwell Technologies pursuant to its right under the original investment agreement.

        At December 31, 2001, the potential percentage ownership interest attributable to exercisable subsidiary options was, on a diluted basis, approximately 4.6% of PurePulse.

Inflation and Changes in Prices

        Generally, we have been able to increase prices to offset inflation-related increased costs in our commercial businesses.

Forward-Looking Statements

        To the extent that the above discussion goes beyond historical information and indicates results or developments which we plan or expect to achieve, these forward-looking statements are identified by the use of terms such as "expected," "anticipates," "believes," "plans" and the like. Readers are cautioned that such future results are uncertain and could be affected by a variety of factors that could cause actual results to differ from those expected, and such differences could be material. We undertake no obligation to revise these forward-looking statements to reflect future events or circumstances. You are referred to the "Risk Factors" section of this Form 10-K for a further and more detailed discussion of certain of those factors.

New Accounting Pronouncements

        In July 2001, the Financial Accounting Standards Board issued Statements of financial Accounting Standards No. 141, Business Combinations ("FAS 141") and No. 142, Goodwill and Other Intangible Assets ("FAS 142"). FAS 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Under FAS 142, goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have indefinite lives will continue to be amortized over their useful lives (but with no maximum life). The amortization provisions of FAS 142 apply immediately to goodwill and intangible assets acquired after June 30, 2001. Companies are required to adopt FAS 142 for fiscal years beginning after December 15, 2001. Accordingly, the Company will adopt FAS 142 on January 1, 2002. In connection with the adoption of FAS 142, the Company will be required to perform a transitional goodwill impairment assessment. The Company is currently evaluating the effect that adoption of the provisions of FAS 142 will have on its results of operations and financial position.

        In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses the financial accounting and reporting for the impairment

38

or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121 but retains SFAS No. 121's fundamental provisions for recognition and measurement of impairment of long-lived assets to be held and used and measurement of long-lived assets to be disposed of by sale. SFAS No. 144 also supersedes the accounting and reporting provisions of Accounting Principles Board ("APB") Opinion No. 30 for segments of a business to be disposed of but retains APB Opinion No. 30's requirement to report discontinued operations separately from continuing operations and extends that reporting to a component of an entity that either has been disposed of or is classified as held for sale. SFAS No. 144 became effective for the Company beginning January 1, 2002. Adoption of SFAS No. 144 as of January 1, 2002 did not have a material impact on the Company's financial position or results of operations.

Item 7a. Quantitative and Qualitative Disclosure about Market Risk

        We have not entered into or invested in any instruments that are subject to market risk, except as follows:

        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. Our primary foreign currency exposure has been related to local currency revenue and operating expenses in Europe. As a result of our international operations, changes in foreign currency exchange rates impact the United States dollar amount of our revenue and expenses. Historically, we have not hedged specific currency exposures as gains and losses on foreign currency transactions have not been material to date. At December 31, 2001, we had $6 million outstanding related to variable rate U.S dollar denominated term debt. The carrying value of this debt approximates fair value due to the variable rate. Assuming a hypothetical 10% adverse change in the interest rate, annual interest expense if the amount outstanding remained unchanged, would increase by approximately $30,000.

        We invest excess cash in debt instruments of the U.S Government and its agencies, and in high-quality corporate issuers. 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. A third party manages approximately $10 million of the short-term investment portfolio under guidelines approved by the Company's Board of Directors. The remaining portfolio is invested in CD's which will mature in the first half of 2002 and money market accounts.

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Item 8. Financial Statements

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

To the Board of Directors and Stockholders
Maxwell Technologies, Inc.

We have audited the accompanying consolidated balance sheets of Maxwell Technologies, Inc. and subsidiaries as of December 31, 2000 and 2001, and the related consolidated statements of operations, stockholders' equity, and cash flows for the year ended July 31, 1999, for the five months ended December 31, 1999, and for each of the two years in the period ended December 31, 2001. Our audits also included the financial statement schedule listed in the Index at Item 14(a). 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 audits.

We conducted our audits in accordance with auditing standards generally accepted in the 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 audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Maxwell Technologies, Inc. and subsidiaries at December 31, 2000 and 2001, and the consolidated results of their operations and their cash flows for year ended July 31, 1999, for the five months ended December 31, 1999, and for each of the two years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. 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.

ERNST & YOUNG LLP

San Diego, California
February 8, 2002

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MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

        See accompanying notes.

42

MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

        See accompanying notes.

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MAXWELL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Year Ended July 31, 1999,
Five Months Ended December 31, 1999, Years Ended December 31, 2000 and 2001

(in thousands, except share data)