VICOR CORP - Quarter Report: 2004 September (Form 10-Q)

SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

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

For the quarterly period ended                                                             September 30, 2004

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

For the transition period from

Commission File Number                                                  0-18277

VICOR CORPORATION

25 Frontage Road, Andover, Massachusetts 01810
(Address of registrant’s principal executive office)

(978) 470-2900
(Registrant’s telephone number)

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 þ     No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ     No o

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of September 30, 2004.

Common Stock, $.01 par value -------------------- 30,212,215
Class B Common Stock, $.01 par value ---------- 11,867,100

VICOR CORPORATION

INDEX TO FORM 10-Q

FORM 10-Q
PART 1       
ITEM 1       
PAGE 1       

Item 1 - Financial Statements

VICOR CORPORATION

Condensed Consolidated Balance Sheets
(In thousands)
(Unaudited)

See accompanying notes.

FORM 10-Q
PART I       
ITEM 1       
PAGE 2       

VICOR CORPORATION

Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)

See accompanying notes.

FORM 10-Q
PART I       
ITEM 1       
PAGE 3       

VICOR CORPORATION

Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

See accompanying notes.

FORM 10-Q
PART I       
ITEM 1       
PAGE 4       

VICOR CORPORATION

Notes to Condensed Consolidated Financial Statements
September 30, 2004
(Unaudited)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. The balance sheet at December 31, 2003 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s audited financial statements for the year ended December 31, 2003, contained in the Company’s annual report filed on Form 10-K (File No. 0-18277) with the Securities and Exchange Commission.

FORM 10-Q       
PART I       
ITEM 1       
PAGE 5       

VICOR CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)
September 30, 2004
(Unaudited)

2. Stock-Based Compensation

The Company uses the intrinsic value method in accounting for its employee stock options in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25) and related interpretations, as permitted under FASB Statement No. 123, “Accounting for Stock-Based Compensation” (FAS 123) and FASB Statement No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure” (FAS 148). Under APB 25, because the exercise price of the Company’s employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. For purposes of pro forma disclosures, the estimated fair value of the options is amortized over the options’ vesting period. Had expense been recognized using the fair value method described in FAS 123, using the Black-Scholes option pricing model, the following pro forma results of operations would have been reported (in thousands except for per share information):

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of subjective assumptions including the expected stock price volatility. Because the Company’s employee stock options have characteristics different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair values of its employee stock options.

FORM 10-Q
PART I       
ITEM 1       
PAGE 6       

VICOR CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)
September 30, 2004
(Unaudited)

3. Net Loss per Share

The following table sets forth the computation of basic and diluted loss per share for the three and nine months ended September 30 (in thousands, except per share amounts):

The effect of outstanding stock options has been excluded from the calculation of diluted loss per share for the three and nine months ended September 30, 2004 and September 30, 2003, respectively, as the effect would be anti-dilutive.

4. Inventories

Inventories are valued at the lower of cost (determined using the first-in, first-out method) or market. Inventories were as follows as of September 30, 2004 and December 31, 2003 (in thousands):

VICOR CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)
September 30, 2004
(Unaudited)

5. Investment

In March and August 2004, the Audit Committee of the Board of Directors approved additional investments by the Company of $1,000,000 each in non-voting preferred stock of Great Wall Semiconductor Corporation (“GWS”). As of September 30, 2004, the Company’s total investment in GWS was $3,000,000. A director of Vicor is founder, president and a shareholder of GWS. GWS is majority owned and controlled by an unrelated company.

The Company considered the requirements of FASB Interpretation No. 46 - Revised (FIN 46R), “Consolidation of Variable Interest Entities,” in accounting for the additional investment in GWS, and determined that GWS is not a variable interest entity. As a result, the Company has accounted for the investment under Accounting Principles Board Opinion No. 18 (APB 18), “The Equity Method for Accounting for Investments in Common Stock,” as a cost method investment as management believes it does not have significant influence over GWS. The investment in GWS is included in other assets in the condensed consolidated balance sheet at September 30, 2004. The Company will periodically evaluate whether any indicators of impairment surrounding the GWS investment are present and, if so, consider whether any adjustments to the carrying value of the investment in GWS should be recorded.

6. Product Warranties

The Company generally offers a two-year warranty for all of its products. The Company provides for the estimated cost of product warranties at the time product revenue is recognized. Factors that affect the Company’s warranty reserves include the number of units sold, historical and anticipated rates of warranty returns and the cost per return. The Company periodically assesses the adequacy of the warranty reserves and adjusts the amounts as necessary. Warranty obligations are included in accrued liabilities in the accompanying condensed consolidated balance sheets.

Product warranty activity for the nine months ended September 30, 2004 was as follows (in thousands):

7. Income Taxes

Tax provisions in 2004 have been provided for estimated income taxes due in various state and international taxing jurisdictions for which losses incurred by the Company cannot be offset, and for federal and state taxes for certain minority-owned subsidiaries that are not part of the Company’s consolidated income tax returns. During the third quarter of 2004, the Company provided additional tax expense for potential liabilities related to certain jurisdictions under examination aggregating $950,000, partially offset by a reduction in the tax reserves for certain jurisdictions due to tax periods closing aggregating $650,000.

VICOR CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)
September 30, 2004
(Unaudited)

The Company operates in numerous taxing jurisdictions and is, therefore, subject to a variety of income and related taxes. The Company has provided for potential tax liabilities due in various jurisdictions which it judges to be probable and reasonably estimable in accordance with Statement of Financial Accounting Standards No. 5. Judgment is required in determining the income tax expense and related tax liabilities. In the ordinary course of business, there are transactions and calculations where the ultimate tax outcome is uncertain. The Company believes it has reasonably estimated its accrued taxes for all jurisdictions for all open tax periods. The Company assesses the adequacy of its tax and related accruals on a quarterly basis and adjusts appropriately as events warrant and open tax periods close. It is possible that the final tax outcome of these matters will be different from management’s estimate reflected in the income tax provisions and accrued taxes. Such differences could have a material impact on the Company’s income tax provision and operating results in the period in which such determination is made.

8. Comprehensive Income (Loss)

Total comprehensive loss was ($466,000) and ($1,875,000) for the three and nine months ended September 30, 2004, respectively and ($7,144,000) and ($19,754,000) for the three and nine months ended September 30, 2003, respectively. Other comprehensive income (loss) consisted principally of adjustments for foreign currency translation gains and (losses) in the amounts of $8,000 and ($3,000) and unrealized gains and (losses) on available for sale securities in the amount of $98,000 and ($171,000) for the three and nine months ended September 30, 2004, respectively.

9. Legal Proceedings

As previously disclosed in Vicor’s Form 10-K for the year ended December 31, 2003, and Forms 10-Q for the three months ended March 31, 2004 and June 30, 2004, the Company was engaged in litigation with Exar Corporation (“Exar”), a former vendor, who had filed a complaint against the Company in the Superior Court of the State of California, County of Alameda (the “Superior Court”). In addition, the Superior Court granted the Company’s motion to add as third party defendants to the case, Rohm Co. Ltd., Rohm Corporation and Rohm Device U.S.A., LLC (“Rohm Entities”). Effective July 8, 2004, Vicor, Exar and the Rohm Entities entered into a Settlement Agreement and Mutual Limited Releases, resulting in the entry of a dismissal with prejudice by the Superior Court on July 20, 2004. As a result, the Company recorded a non-recurring $800,000 reduction in an accrual recorded through cost of sales associated with the litigation.

As previously disclosed in Vicor’s Form 10-K for the year ended December 31, 2003, and Forms 10-Q for the three months ended March 31, 2004 and June 30, 2004, Vicor and VLT, Inc. (“VLT”), a wholly owned subsidiary of the Company, are pursuing Reset Patent infringement claims directly against Artesyn Technologies, Lambda Electronics, Lucent Technologies, Tyco Electronics Power Systems, Inc. and Power-One. On May 24, 2004, the Court of Appeals for the Federal Circuit affirmed the decisions issued in January, 2003, by the Federal District Court, Boston, Massachusetts, in each of Vicor’s patent

VICOR CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)
September 30, 2004
(Unaudited)

infringement lawsuits against each of the above-named companies. As previously reported, the District Court’s decisions related to claim construction and validity of Vicor’s Reset Patent (U. S. Patent Re. 36,098). The judgment affirms the validity of the patent claims; rejects assertions that the claims are invalid for indefiniteness; and affirms Vicor’s interpretation of several terms used in the claims. However, the Appeals Court judgment also affirms the District Court’s interpretations of certain terms that were contrary to Vicor’s position. Vicor believes that the affirmation of the District Court’s interpretations strengthens its position regarding validity of the patent. Affirmation of the District Court’s claim construction, however, reduces the cumulative amount of infringing power supplies and the corresponding amount of potential damages. There can be no assurance that Vicor and VLT will ultimately prevail with respect to any of these claims or, if they prevail, as to the amount of damages that would be awarded.

In Ericsson Wireless Communications, Inc. v. Vicor Corporation filed in Superior Court of the State of California, County of San Diego in May 2004, the plaintiff has brought an action against the Company claiming unspecified damages for failure of out-of warranty products previously purchased by it from the Company. The Company believes the claims are without merit and will defend the action vigorously.

In addition, the Company is involved in certain other litigation incidental to the conduct of its business. While the outcome of lawsuits against the Company cannot be predicted with certainty, management does not expect any current litigation to have a material adverse impact on the Company’s financial position or results of operations.

10. Impact of Recently Issued Accounting Standards

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities,” (FIN 46) and in December 2003 issued a revised FIN 46 (FIN 46R) which addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. FIN 46R requires consolidation of a variable interest entity if the reporting entity is subject to a majority of the risk of loss from the variable interest entity’s activities or is entitled to receive a majority of the variable interest entity’s residual returns or both. The consolidation requirements of FIN 46R apply immediately to variable interest entities created after January 31, 2003, and to all other existing structures commonly referred to as special-purpose entities. The consolidation requirements were applied to variable interest entities created prior to January 31, 2003, other than special-purpose entities, in the first quarter of 2004. The adoption of FIN 46 and the revised FIN 46R did not have a significant impact on the Company’s financial position or results of operations.

In March 2004, the Emerging Issues Task Force (“EITF”) reached consensus on EITF 03-6 “Participating Securities and the Two-Class Method Under FASB Statement 128, Earnings Per Share,” which requires that convertible participating securities should be included in the computation of basic earnings per share using the two-class method. The Company’s Class B Common Stock are not participating securities, as they share equally in the undistributed earnings of the Company. Therefore, EITF 03-6 has no impact on the Company’s financial position or results of operations.

VICOR CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)
September 30, 2004
(Unaudited)

In June 2004, the EITF reached a consensus on EITF 02-14, “Whether an Investor Should Apply the Equity Method of Accounting to Investments Other Than Common Stock”, which addresses the application of the equity method of accounting as described in APB Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock”, in situations in which an investor exercises significant influence over the investee but does not have an investment in the voting common stock of the investee. The EITF concluded that an investor should apply the equity method of accounting to investments in “in-substance common stock” if the investor has the ability to exercise significant influence over the operating and financial policies of the investee. In reaching this consensus, the EITF agreed on a definition of “in-substance common stock”, determined when entities should evaluate whether investments are in-substance common stock subject to the equity method, and provided transition guidance. The consensus is to be applied for reporting periods beginning after September 15, 2004. The Company does not believe the adoption of EITF 02-14 will have a significant impact on the Company’s financial position or results of operations.

11. License Agreement

On June 30, 2004, the Company announced that it had entered into a non-exclusive license with Sony Corporation (“Sony”) to design and manufacture power converters, using V•I Chip technology and Factorized Power, for use within its products and for sale to its customers in certain agreed-upon applications. The license also grants Sony rights to manufacture certain semiconductor components that are used in V•I Chips. Royalties are based upon the value of the licensed converters used or sold.

12. Reclassification

At December 31, 2003, the Company reclassified certain auction rate securities from cash and cash equivalents to short-term investments for the year ended December 31, 2003 and for all prior periods. As a result, certain amounts were reclassified in the accompanying condensed consolidated statement of cash flows for the nine months ended September 30, 2003 to conform to the 2004 presentation.

13. Dividend

On July 22, 2004, the Company’s Board of Directors approved an annual cash dividend for 2004 of $.08 per share of the Company’s stock. The total dividend of approximately $3,371,000 was paid on August 31, 2004 to shareholders of record at the close of business on August 11, 2004.

Dividends are declared at the discretion of the Company’s Board of Directors and depend on actual cash from operations, the Company’s financial condition and capital requirements and any other factors the Company’s Board of Directors may consider relevant.

VICOR CORPORATION

Management’s Discussion and Analysis of
Financial Condition and Results of Operations
September 30, 2004

Item 2 - Management’s Discussion and Analysis of
Financial Condition and Results of Operations
September 30, 2004

Except for historical information contained herein, some matters discussed in this report constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words “believes,” “expects,” “anticipates,” “intend,” “estimate,” “plans,” “assumes,” “may,” “will,” “would,” “continue,” “prospective,” “project,” and other similar expressions identify forward-looking statements. These statements are based upon the Company’s current expectations and estimates as to the prospective events and circumstances which may or may not be within the Company’s control and as to which there can be no assurance. Actual results could differ materially from those projected in the forward-looking statements as a result of various factors, including our ability to develop and market new products and technologies cost effectively, to leverage design wins into increased product sales, to decrease manufacturing costs, to enter into licensing agreements that amplify the market opportunity and accelerate market penetration, to realize significant royalties under the license agreements, to achieve an increased bookings rate over a longer period, and to successfully leverage the V•I Chips in standard products to promote market acceptance of Factorized Power, and those factors described in the risk factors set forth in this report and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003. Reference is made in particular to the discussions set forth below in this report under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and set forth in the Annual Report on Form 10-K under Part I, Item 1 — “Business — Second-Generation Automated Manufacturing Line,” "—Competition,” “—Patents,” “—Licensing,” and “—Risk Factors,” under Part I, Item 3 — “Legal Proceedings,” and under Part II, Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The risk factors contained in the Annual Report on Form 10-K may not be exhaustive. Therefore, the information contained in that Form 10-K should be read together with other reports and documents that the Company files with the Securities and Exchange Commission from time to time, including Forms 10-Q, 8-K and 10-K, which may supplement, modify, supersede or update those risk factors. The Company does not undertake any obligation to update any forward-looking statements as a result of future events or developments.

VICOR CORPORATION

Management’s Discussion and Analysis of
Financial Condition and Results of Operations
September 30, 2004
(Continued)

Results of Operations

Three months ended September 30, 2004 compared to three months ended September 30, 2003

Net revenues for the third quarter of 2004 were $43,048,000, an increase of $7,171,000 (20.0%) as compared to $35,877,000 for the same period a year ago, but a decrease of 5.1% on a sequential basis from the second quarter of 2004. The increase in net revenues from the prior year resulted primarily from an increase in unit shipments of standard and custom products of approximately $7,233,000 offset by a decrease in license revenue of $62,000. Orders during the quarter decreased by 7.8% compared with the second quarter of 2004. The book-to-bill ratio for the third quarter of 2004 was .94:1 as compared to 1.05:1 for the third quarter of 2003 and .97:1 in the second quarter of 2004.

Gross margin for the third quarter of 2004 increased $7,644,000 (89.0%) to $16,231,000 from $8,587,000 for the third quarter of 2003, and increased to 37.7% from 23.9% as a percentage of net revenues. The primary components of the increase in gross margin dollars and percentage were due to the higher levels of shipments and increased productivity. The improvement was partially offset by increased depreciation of approximately $252,000 resulting from shortening of the useful lives of certain equipment as a consequence of the conversion of second-generation products to the FasTrak platform.

Selling, general and administrative expenses were $10,141,000 for the period, a decrease of $89,000 (0.9%) from the same period in 2003. As a percentage of net revenues, selling, general and administrative expenses decreased to 23.6% from 28.5%, primarily due to the increase in net revenues. The principal components of the $89,000 decrease were $217,000 (31.0%) of decreased advertising expense and $170,000 (23.7%) of decreased costs associated with the Vicor Integration Architects (“VIAs”). The principal components offsetting the above decreases were $211,000 (24.3%) in increased commission expense and $97,000 (2.2%) in increased compensation expense.

Research and development expenses increased $660,000 (10.9%) to $6,706,000, but decreased as a percentage of net revenues to 15.6% from 16.9% primarily due to the increase in net revenues. The principal components of the $660,000 increase were $259,000 (46.4%) in increased project material costs, $153,000 (5.3%) in increased compensation expense, $127,000 (498.3%) in increased tooling costs and $52,000 (3.9%) in increased development costs associated with the automation, test and mechanical engineering groups, as less of these departments’ efforts were associated with internally constructed manufacturing and test equipment in 2004 as compared to 2003. The increases in project materials costs and increased tooling costs were principally due to the development efforts associated with the Company’s new Factorized Power Architecture (“FPA”) products.

VICOR CORPORATION

Management’s Discussion and Analysis of
Financial Condition and Results of Operations
September 30, 2004
(Continued)

     The major changes in the components of the other income (expense), net were as follows (in thousands):

Loss before income taxes was $72,000 for the third quarter of 2004 compared to a loss before income taxes of $7,803,000 for the same period in 2003.

Tax provisions in 2004 have been provided for estimated income taxes due in various state and international taxing jurisdictions for which losses incurred by the Company cannot be offset, and for federal and state taxes for certain minority-owned subsidiaries that are not part of the Company’s consolidated income tax returns. During the third quarter of 2004, the Company provided additional tax expense for potential liabilities related to certain jurisdictions under examination aggregating $950,000, partially offset by a reduction in the tax reserves for certain jurisdictions due to tax periods closing aggregating $650,000.

Diluted loss per share was $(0.01) for the third quarter of 2004 compared to diluted loss per share of $(0.17) for the third quarter of 2003.

Nine months ended September 30, 2004 compared to nine months ended September 30, 2003

Net revenues for the first nine months of 2004 were $130,943,000, an increase of $18,633,000 (16.6%) as compared to $112,310,000 for the same period a year ago. The increase in net revenues resulted primarily from an increase in unit shipments of standard and custom products of approximately $19,027,000, partially offset by a decrease in license revenue of $394,000. Orders during the first nine months of 2004 increased by 12.6% compared with the last nine months of 2003. The book-to-bill ratio was 1.01:1 for the first nine months of 2004 and 2003 and was 1.04:1 for the last nine months of 2003. The decrease in license revenue was due to receipt of the final royalty payment from Nagano Japan Radio Company, Ltd. (“NJRC”) in January 2004.

VICOR CORPORATION

Management’s Discussion and Analysis of
Financial Condition and Results of Operations
September 30, 2004
(Continued)

Gross margin for the first nine months of 2004 increased $20,580,000 (73.4%) to $48,611,000 from $28,031,000 for the first nine months of 2003, and increased to 37.1% from 25.0% as a percentage of net revenues. The primary components of the increase in gross margin dollars and percentage were due to the higher levels of shipments, increased productivity and a non-recurring $800,000 reduction in an accrual recorded through cost of sales associated with the settlement of a commercial dispute (see Part II, Item 1 – “Legal Proceedings”).

Selling, general and administrative expenses were $30,926,000 for the period, a decrease of $22,000 (0.1%) over the same period in 2003. As a percentage of net revenues, selling, general and administrative expenses decreased to 23.6% from 27.6%, due to the increase in net revenues. The principal components of the $22,000 decrease were $707,000 (32.3%) of decreased advertising expenses and $402,000 (18.2%) of decreased depreciation expense, primarily related to computer hardware and software. These decreases were offset by $634,000 (55.0%) of increased legal expenses due to the litigation with Exar Corporation and with Ericsson Wireless Communications, Inc., and $364,000 (13.4%) in increased commission expense, due to the higher revenues.

Research and development expenses increased $1,941,000 (11.3%) to $19,154,000 and decreased slightly as a percentage of net revenues to 14.6% from 15.3%. The principal components of the $1,941,000 increase were $630,000 (41.2%) of increased project material cost, $508,000 (6.1%) of increased compensation expense, $333,000 (9.4%) of increased development costs associated with the automation, test and mechanical engineering groups, as less of these departments’ efforts were associated with internally constructed manufacturing and test equipment in 2004 as compared to 2003, and $236,000 (132.0%) of increased tooling costs. The increases in project material costs, compensation expense and tooling costs were principally due to the development efforts associated with the Company’s new FPA products.

The major changes in the components of the other income (expense), net were as follows (in thousands):

VICOR CORPORATION
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
September 30, 2004
(Continued)

Loss before income taxes was $616,000 compared to a loss before income taxes of $19,906,000 for the same period in 2003.

Diluted loss per share was $(0.04) for the first nine months of 2004, compared to diluted loss per share of $(0.47) for the first nine months of 2003.

Liquidity and Capital Resources

At September 30, 2004 the Company had $38,325,000 in cash and cash equivalents. The ratio of current assets to current liabilities was 7.7:1 at September 30, 2004 compared to 7.9:1 at December 31, 2003. Working capital increased $6,763,000, from $140,547,000 at December 31, 2003 to $147,310,000 at September 30, 2004. The primary factors affecting the working capital increase were an increase in short-term investments of $9,063,000 and an increase in inventory of $3,943,000. These increases were offset by a decrease in cash and cash equivalents of $3,398,000 and other current assets of $1,790,000, and an increase in current liabilities of $1,404,000. The primary sources of cash for the nine months ended September 30, 2004 were $13,927,000 from operating activities and $2,327,000 in net proceeds from the issuance of Common Stock upon the exercise of stock options. The primary uses of cash for the nine months ended September 30, 2004 were for the net purchases of short-term investments of $10,133,000, the payment of a common stock dividend of $3,371,000 and the acquisition of equipment of approximately $3,283,000.

The Company’s primary liquidity needs are for making continuing investments in manufacturing equipment, much of which is built internally, particularly equipment for the Company’s new Factorized Power Architecture (“FPA”) products. The internal construction of manufacturing machinery, in order to provide for additional manufacturing capacity, is a practice which the Company expects to continue in the future. The Company expects capital spending to be approximately the same in 2004 as 2003, which is less than the spending in 2002 and 2001. The Company’s automation, test and mechanical engineering groups, which build the manufacturing equipment internally, are spending more time in development and support and maintenance activities in 2004, the costs of which are expensed.

In November 2000, the Board of Directors of the Company authorized the repurchase of up to $30,000,000 of the Company’s Common Stock (the “November 2000 Plan”). The November 2000 Plan authorizes the Company to make such repurchases from time to time in the open market or through privately negotiated transactions. The timing and amounts of stock repurchases are at the discretion of management based on its view of economic and financial market conditions. The Company spent approximately $606,000 for the repurchase of 56,900 shares of Common Stock during the nine months ended September 30, 2004. As of September 30, 2004, the Company had approximately $25,400,000 remaining under the plan.

On July 22, 2004, the Company’s Board of Directors approved an annual cash dividend for 2004 of $.08 per share of the Company’s stock. The total dividend of approximately $3,371,000 was paid on August 31, 2004 to shareholders of record at the close of business on August 11, 2004.

VICOR CORPORATION
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
September 30, 2004
(Continued)

The Company believes that cash generated from operations and the total of its cash and cash equivalents, together with other sources of liquidity, will be sufficient to fund planned operations and capital equipment purchases for the foreseeable future. At September 30, 2004, the Company had approximately $712,000 of capital expenditure commitments.

The Company does not consider the impact of inflation and changing prices on its business activities or fluctuations in the exchange rates for foreign currency transactions to have been significant during the last three fiscal years.

Item 3 - Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to a variety of market risks, including changes in interest rates affecting the return on its cash and cash equivalents and short-term investments and fluctuations in foreign currency exchange rates.

As the Company’s cash and cash equivalents consist principally of money market securities, which are short-term in nature, the Company’s exposure to market risk on interest rate fluctuations for these investments is not significant. The Company’s short-term investments consist mainly of corporate debt securities. These debt securities are all highly rated investments, in which a significant portion have interest rates reset at auction at regular intervals. As a result, the Company believes there is minimal market risk to these investments.

The Company’s exposure to market risk for fluctuations in foreign currency exchange rates relates primarily to the operations of Vicor Japan Company, Ltd. (“VJCL”) and changes in the dollar/yen exchange rate. The Company believes that this market risk is currently not material due to the relatively small size of VJCL’s operations.

Item 4 - Controls and Procedures

(a) Evaluation of disclosure controls and procedures.

As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company’s management conducted an evaluation with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, regarding the effectiveness of the Company’s disclosure controls and procedures, as of the end of the last fiscal quarter. In designing and evaluating the Company’s disclosure controls and procedures, the Company and its management recognize that any controls and procedures, no matter how well designed and operated, can provide only a reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating and implementing possible controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that

VICOR CORPORATION

September 30, 2004

they believe the Company’s disclosure controls and procedures are reasonably effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. We intend to continue to review and document our disclosure controls and procedures, including our internal controls and procedures for financial reporting, and we may from time to time make changes to the disclosure controls and procedures to enhance their effectiveness and to ensure that our systems evolve with our business.

(b) Change in internal controls

There were no changes in the Company’s internal control over financial reporting identified in connection with the Company’s evaluation of its disclosure controls and procedures that occurred during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

VICOR CORPORATION

Part II — Other Information
September 30, 2004

Item 1 - Legal Proceedings

As previously disclosed in Vicor’s Form 10-K for the year ended December 31, 2003, and Forms 10-Q for the three months ended March 31, 2004 and June 30, 2004, the Company was engaged in litigation with Exar Corporation (“Exar”), a former vendor, who had filed a complaint against the Company in the Superior Court of the State of California, County of Alameda (the “Superior Court”). In addition, the Superior Court granted the Company’s motion to add as third party defendants to the case, Rohm Co. Ltd., Rohm Corporation and Rohm Device U.S.A., LLC (“Rohm Entities”). Effective July 8, 2004, Vicor, Exar and the Rohm Entities entered into a Settlement Agreement and Mutual Limited Releases, resulting in the entry of a dismissal with prejudice by the Superior Court on July 20, 2004. As a result, the Company recorded a non-recurring $800,000 reduction in an accrual recorded through cost of sales associated with the litigation during the second quarter of 2004.

As previously disclosed in Vicor’s Form 10-K for the year ended December 31, 2003, and Forms 10-Q for the three months ended March 31, 2004 and June 30, 2004, Vicor and VLT, Inc. (“VLT”), a wholly owned subsidiary of the Company, are pursuing Reset Patent infringement claims directly against Artesyn Technologies, Lambda Electronics, Lucent Technologies, Tyco Electronics Power Systems, Inc. and Power-One. On May 24, 2004, the Court of Appeals for the Federal Circuit affirmed the decisions issued in January, 2003, by the Federal District Court, Boston, Massachusetts, in each of Vicor’s patent infringement lawsuits against each of the above-named companies. As previously reported, the District Court’s decisions related to claim construction and validity of Vicor’s Reset Patent (U. S. Patent Re. 36,098). The judgment affirms the validity of the patent claims; rejects assertions that the claims are invalid for indefiniteness; and affirms Vicor’s interpretation of several terms used in the claims. However, the Appeals Court judgment also affirms the District Court’s interpretations of certain terms that were contrary to Vicor’s position. Vicor believes that the affirmation of the District Court’s interpretations strengthens its position regarding validity of the patent. Affirmation of the District Court’s claim construction, however, reduces the cumulative amount of infringing power supplies and the corresponding amount of potential damages. There can be no assurance that Vicor and VLT will ultimately prevail with respect to any of these claims or, if they prevail, as to the amount of damages that would be awarded.

In Ericsson Wireless Communications, Inc. v. Vicor Corporation filed in Superior Court of the State of California, County of San Diego in May 2004, the plaintiff has brought an action against the Company claiming unspecified damages for failure of out-of warranty products previously purchased by it from the Company. The Company believes the claims are without merit and will defend the action vigorously.

In addition, the Company is involved in certain other litigation incidental to the conduct of its business. While the outcome of lawsuits against the Company cannot be predicted with certainty, management does not expect any current litigation to have a material adverse impact on the Company’s financial position or results of operations.

VICOR CORPORATION

Part II - Other Information
September 30, 2004
(Continued)

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

In November 2000, the Board of Directors of the Company authorized the repurchase of up to $30,000,000 of the Common Stock. The November 2000 Plan was announced November 30, 2000.

Item 3 - Defaults Upon Senior Securities

     Not applicable.

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

Not applicable

Item 5 - Other Information

     Not applicable.

VICOR CORPORATION

Part II — Other Information
September 30, 2004
(Continued)

Item 6 - Exhibits and Reports on Form 8-K

SIGNATURES

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