VICOR CORP - Quarter Report: 2008 September (Form 10-Q)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

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, 2008

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

For the transition period from                                         

VICOR CORPORATION

(Exact name of registrant as specified in its charter)

Delaware		04-2742817
(State of Incorporation)		(I.R.S. Employer Identification No.)

25 Frontage Road, Andover, Massachusetts 01810
(Address of 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 a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer   o (Do not check if a smaller reporting company)		Smaller Reporting Company o

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

The number of shares outstanding of each of the issuer’s classes of common stock as of October 31, 2008 was:

Common Stock, $.01 par value  29,897,510
Class B Common Stock, $.01 par value  11,767,052

 

 

VICOR CORPORATION

INDEX TO FORM 10-Q

		Page
Part I — Financial Information:
Item 1 — Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at September 30, 2008 and December 31, 2007			1
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2008 and 2007			2
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 and 2007			3
Notes to Condensed Consolidated Financial Statements			4
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations			21
Item 3 — Quantitative and Qualitative Disclosures About Market Risk			35
Item 4 — Controls and Procedures			35
Part II — Other Information:
Item 1 — Legal Proceedings			38
Item 1A – Risk Factors			38
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds			39
Item 3 — Defaults Upon Senior Securities			39
Item 4 — Submission of Matters to a Vote of Security Holders			39
Item 5 — Other Information			39
Item 6 – Exhibits			39
Signature(s)			40
Ex-31.1 Certification of Chief Executive Officer
Ex-31.2 Certification of Chief Financial Officer
Ex-32.1 Certification of Chief Executive Officer pursuant to Section 906
Ex-32.2 Certification of Chief Financial Officer pursuant to Section 906

		FORM 10-Q
		PART 1
		ITEM 1
		PAGE 1

Item 1 – Financial Statements

VICOR CORPORATION

Condensed Consolidated Balance Sheets
(In thousands)
(Unaudited)

		September 30, 2008				December 31, 2007
Assets
Current assets:
Cash and cash equivalents		$	25,436			$	20,017
Restricted cash and cash equivalents			178				—
Short-term investments			1,964				57,490
Accounts receivable, less allowance of $313 in 2008 and $398 in 2007			28,877				32,054
Inventories, net			27,104				23,078
Deferred tax assets			741				741
Other current assets			2,977				2,539
Total current assets			87,277				135,919
Restricted cash and cash equivalents			720				952
Long-term investments, net			36,540				—
Property, plant and equipment, net			49,151				50,257
Other assets			5,333				5,330
		$	179,021			$	192,458
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	8,745			$	10,062
Accrued compensation and benefits			6,476				6,003
Accrued expenses			3,015				3,711
Income taxes payable			1,333				278
Deferred revenue			854				941
Total current liabilities			20,423				20,995
Long-term deferred revenue			1,124				42
Long-term income taxes payable			303				1,344
Deferred income taxes			1,637				1,597
Minority interests			4,400				4,040
Stockholders’ equity:
Class B Common Stock			118				118
Common Stock			384				384
Additional paid-in capital			160,844				159,332
Retained earnings			113,675				126,263
Accumulated other comprehensive (loss) income			(2,060	)			170
Treasury stock, at cost			(121,827	)			(121,827	)
Total stockholders’ equity			151,134				164,440
		$	179,021			$	192,458

See accompanying notes.

		FORM 10-Q
		PART I
		ITEM 1
		PAGE 2

VICOR CORPORATION

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Net revenues		$	51,278			$	47,693			$	154,044			$	141,880
Cost of revenues			29,375				29,789				88,568				84,150
Gross margin			21,903				17,904				65,476				57,730
Operating expenses:
Selling, general and administrative			13,703				12,314				41,730				36,490
Research and development			7,801				7,735				23,392				22,802
Gain from litigation-related settlements, net			—				—				(177	)			(1,353	)
Total operating expenses			21,504				20,049				64,945				57,939
Income (loss) from operations			399				(2,145	)			531				(209	)
Other income (expense), net			(230	)			1,242				489				3,725
Income (loss) before income taxes			169				(903	)			1,020				3,516
(Benefit) provision for income taxes			(527	)			(1,616	)			65				(1,329	)
Loss from equity method investment, net of tax			87				170				1,049				1,007
Net income (loss)		$	609			$	543			$	(94	)		$	3,838
Net income (loss) per common share:
Basic		$	0.01			$	0.01			$	(0.00	)		$	0.09
Diluted		$	0.01			$	0.01			$	(0.00	)		$	0.09
Shares used to compute net income (loss) per share:
Basic			41,660				41,617				41,646				41,586
Diluted			41,685				41,715				41,646				41,657
Cash dividends per share		$	0.15			$	0.15			$	0.30			$	0.30

See accompanying notes.

		FORM 10-Q
		PART I
		ITEM 1
		PAGE 3

VICOR CORPORATION

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

		Nine Months Ended
		September 30,
		2008				2007
Operating activities:
Net income (loss)		$	(94	)		$	3,838
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization			7,824				8,928
Minority interest in net income of subsidiaries			1,452				179
Long-term deferred revenue			1,082				—
Loss from equity method investment, net of tax			1,049				1,007
Stock compensation expense			881				498
Amortization of bond premium			—				(437	)
Gain on disposal of equipment			(22	)			(108	)
Change in current assets and liabilities, net			(2,749	)			(33,314	)
Net cash provided by (used in) operating activities			9,423				(19,409	)
Investing activities:
Purchases of investments			(10,263	)			(102,060	)
Sales and maturities of investments			26,964				155,636
Additions to property, plant and equipment			(6,557	)			(7,427	)
Purchase of equity method investment			(1,000	)			(1,000	)
Proceeds from sale of equipment			22				108
Change in restricted cash and cash equivalents			54				—
Increase in other assets			(197	)			(85	)
Net cash provided by investing activities			9,023				45,172
Financing activities:
Proceeds from issuance of Common Stock			197				495
Common Stock dividends paid			(13,152	)			(12,569	)
Net cash used in financing activities			(12,955	)			(12,074	)
Effect of foreign exchange rates on cash			(72	)			(45	)
Net increase in cash and cash equivalents			5,419				13,644
Cash and cash equivalents at beginning of period			20,017				35,860
Cash and cash equivalents at end of period		$	25,436			$	49,504

See accompanying notes.

		FORM 10-Q
		PART I
		ITEM 1
		PAGE 4

VICOR CORPORATION

Notes to Condensed Consolidated Financial Statements
September 30, 2008
(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, 2008, are not necessarily indicative of the results that may be expected for any other interim period or the year ending December 31, 2008. Operating results for the nine months ended September 30, 2008, includes compensation-related accruals of $320,000 for certain of the Company’s international subsidiaries and additional stock compensation expense of $90,000 identified and recorded in the first quarter of 2008. Management has concluded the impact of accounting for these previously unidentified accruals in the first quarter of 2008 is not material for the first quarter, the nine months ended September 30, 2008, the Company’s estimated 2008 financial results, or prior periods. Certain amounts in the 2007 condensed consolidated financial statements have been reclassified to conform to the 2008 presentation. The balance sheet at December 31, 2007, presented herein 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 contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, (File No. 0-18277) filed by the Company with the Securities and Exchange Commission.
2.		Principles of Consolidation
		The consolidated financial statements include the accounts of the Company and its subsidiaries.  All intercompany transactions and balances have been eliminated upon consolidation.  The Company has minority owned investments in certain Vicor Integration Architects (“VIAs”). These certain subsidiaries are consolidated by the Company as management believes that the Company has the ability to exercise control over their activities and operations.  During 2008, the Company decreased the minority interests balance by $434,000, with a corresponding offset to Additional paid-in capital, to adjust the balance to reflect the minority interest ownership percentage in the net equity of these subsidiaries.
3.		Short-Term and Long-Term Investments
		The Company’s principal sources of liquidity are its existing balances of cash, cash equivalents and short-term investments, as well as cash generated from operations. Consistent with the Company’s investment policy guidelines, the Company can and has historically invested its substantial cash balances in demand deposit accounts, money market funds meeting certain quality criteria, and highly-liquid auction rate securities meeting certain quality criteria. All of the Company’s investments are subject to credit, liquidity, market, and interest rate risk.

		FORM 10-Q
		PART I
		ITEM 1
		PAGE 5

VICOR CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)
September 30, 2008
(Unaudited)

3.		Short-Term and Long-Term Investments (continued)
		As of September 30, 2008, the Company held $38,425,000 of auction rate securities, consisting of debt obligations of municipal and corporate issuers. The interest rates for these securities are reset at auction at regular intervals ranging from seven to 90 days. The auction rate securities held by the Company have historically traded at par and are callable at par at the option of the issuer. At September 30, 2008, the majority of the auction rate securities held by the Company were AAA/Aaa rated by the major credit rating agencies, with most collateralized by student loans guaranteed by the U.S. Department of Education under the Federal Family Education Loan Program.
		Until February 2008, the auction rate securities market was highly liquid. Starting the week of February 11, 2008, a substantial number of auctions failed, meaning there was not enough demand to sell all of the securities that holders offered for sale. The consequences of a failed auction are (a) an investor must hold the specific security until the next scheduled auction (unless that investor chooses to sell the security to a third party outside of the auction process) and (b) the interest rate on the security generally resets to an interest rate set forth in the security’s indenture. The principal associated with these failed auctions will not be accessible to the Company until a successful auction occurs, a buyer is found outside of the auction process, the security is called by the issuer, or the underlying securities have matured. As of September 30, 2008, the Company held auction rate securities that had experienced failed auctions totaling $38,425,000 at par value (the “Failed Auction Securities”).
		Management is not aware of any reason to believe any of the issuers of the Failed Auction Securities held by the Company are presently at risk of default. Through September 30, 2008, the Company has continued to receive interest payments on the Failed Auction Securities in accordance with their terms. Management believes the Company ultimately should be able to liquidate all of its auction rate security investments without significant loss primarily due to the collateral securing the substantial majority of the underlying obligations. However, current conditions in the auction rate securities market have lead management to conclude the recovery period for the Failed Auction Securities exceeds 12 months. As a result, the Company continued to classify the Failed Auction Securities as long-term as of September 30, 2008, having classified them as long-term as of March 31, 2008.
		Based on the fair value measurements described in Note 4, the fair value of the Failed Auction Securities at September 30, 2008, was estimated by the Company to be approximately $36,090,000, compared with a par value of $38,375,000, net of a $50,000 redemption received at par value on October 10, 2008. Management considers this $2,285,000 difference to be temporary and has recorded this amount as an unrealized loss, net of taxes, in “Accumulated other comprehensive (loss) income” on the consolidated balance sheet. In making this determination, management considered the financial condition and near-term prospects of the issuers, the magnitude of the losses compared to the investments’ cost, the length of time the investments have been in an unrealized loss position, the assumed low probability that the Company will be unable to collect all amounts due according to the contractual terms of the security, whether the security has been downgraded by a rating agency, and the Company’s ability and intent to hold these investments until the anticipated recovery in market value occurs. If current market conditions deteriorate further, the Company may be required to record additional unrealized losses. If the credit

		FORM 10-Q
		PART I
		ITEM 1
		PAGE 6

VICOR CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)
September 30, 2008
(Unaudited)

3.		Short-Term and Long-Term Investments (continued)
		rating of the security issuers deteriorates, or the anticipated recovery in the market values does not occur, the Company may be required to adjust the carrying value of these investments through impairment charges recorded in the consolidated statement of operations, and any such impairment adjustments may be material.
		UBS AG announced that on August 8, 2008, UBS AG and certain of its affiliates entered into settlements in principle with certain regulatory authorities, including the Massachusetts Securities Division, with respect to UBS’s sale and marketing of auction rate securities. Pursuant to the settlements, UBS agreed to offer to purchase certain auction rate securities from certain holders. On October 8, 2008, the Company received a settlement offer from UBS regarding $18,300,000 of auction rate securities, at par value, held by the Company with a broker-dealer affiliate of UBS. Pursuant to the settlement offer, the Company may be eligible to sell its auction rate securities held with UBS to UBS at par during the period of June 30, 2010 through July 2, 2012. Until then, the Company would be entitled to continued interest payments on its auction rate securities in accordance with their terms. If the Company accepts the settlement offer from UBS, until June 30, 2010 the Company also may be eligible to borrow at “no net cost” from UBS an amount up to 75% of the market value of the auction rate securities held with UBS. The terms and conditions of the settlement offer include a release of claims against UBS and its affiliates. The Company’s management and outside legal counsel are in the process of the reviewing the settlement offer, which expires on November 14, 2008.
		On September 10, 2008, Bank of America Corporation issued a press release announcing an agreement in principle with the Massachusetts Securities Division under which Bank of America would offer to purchase at par auction rate securities held by certain of its customers. The press release indicates that under the terms of the agreement in principle, the repurchase program applies to businesses with account values up to $10,000,000. The Company holds $20,075,000 par value of auction rate securities purchased through Banc of America Securities LLC. The Company does not appear to be eligible, and has not received an offer, to participate in the announced repurchase program, and has not otherwise received a proposed liquidity solution from Bank of America to date.
		Based on the Company’s ability to access cash and other short-term investments and its expected operating cash flows, management does not anticipate the current lack of liquidity will affect the Company’s ability to execute its current operating plan.

		FORM 10-Q
		PART I
		ITEM 1
		PAGE 7

VICOR CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)
September 30, 2008
(Unaudited)

4.		Fair Value Measurements
		The Company purchases marketable securities that have been designated as “available-for-sale” in accordance with Statement of Financial Accounting Standards (“SFAS”) 115, Accounting for Certain Investments in Debt and Equity Securities. SFAS 115 addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. Consistent with SFAS 115, such available-for-sale securities are carried at fair value, with unrealized gains and losses reported in “Accumulated other comprehensive (loss) income,” a component of stockholders’ equity.
		In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS 157, Fair Value Measurements, expanding upon SFAS 115 and providing guidance on how to measure assets and liabilities recorded at “fair” value.  SFAS 157 does not expand the use of fair value to any new circumstances, but does require additional disclosures in both annual and quarterly reports.  The Company adopted SFAS 157 and its related amendments for financial assets and liabilities effective as of January 1, 2008. In accordance with FASB Staff Position No. FAS 157-2 (“FSP FAS 157-2”), SFAS 157 will be effective for non-financial assets and liabilities in financial statements issued for fiscal years beginning after November 15, 2008. FSP FAS 157-2 will impact the disclosures related to the Company’s investment in Great Wall Semiconductor Corporation (“GWS”) and goodwill related to the operations of one of the Company’s subsidiaries, Vicor Japan Company, Ltd.
		SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (i.e., an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. SFAS 157 establishes a three-level hierarchy for disclosure to show the extent and level of judgment used to estimate fair value measurements:

		Level 1		Inputs used to measure fair value are unadjusted quoted prices available in active markets for the identical assets or liabilities as of the reporting date.
		Level 2		Inputs used to measure fair value, other than quoted prices included in Level 1, are either directly or indirectly observable as of the reporting date through correlation with market data, including quoted prices for similar assets and liabilities in active markets and quoted prices in inactive markets.  Level 2 also includes assets and liabilities valued using models or other pricing methodologies that do not require significant judgment since the input assumptions used in the models, such as interest rates and volatility factors, are corroborated by readily observable data from actively quoted markets for substantially the full term of the financial instrument.
		Level 3		Inputs used to measure fair value are unobservable inputs supported by little or no market activity and reflect the use of significant management judgment.  These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.

		FORM 10-Q
		PART I
		ITEM 1
		PAGE 8

VICOR CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)
September 30, 2008
(Unaudited)

4.		Fair Value Measurements (continued)
		As of September 30, 2008, there was insufficient observable auction rate security market information available to determine the fair value of the Failed Auction Securities. As such, the Company’s investments in Failed Auction Securities were deemed to require valuation using Level 3 inputs.  Consistent with SFAS 157, management, after consulting with outside experts, valued the Failed Auction Securities using analyses and pricing models similar to those used by market participants (i.e., buyers, sellers, and the broker-dealers responsible for execution of the Dutch auction pricing mechanism by which each issue’s interest rate was set). Management utilized a probability weighted discounted cash flow (“DCF”) model to determine the estimated fair value of these securities as of September 30, 2008.  The assumptions used in preparing the DCF model included estimates for the amount and timing of future interest, principal payments and the rate of return required by investors to own these securities in the current environment, and the estimated timeframe during which successful auctions for these securities will occur.  In making these assumptions, management considered relevant factors including: the formula applicable to each security defining the interest rate paid to investors in the event of a failed auction; forward projections of the interest rate benchmarks specified in such formulas; the likely timing of principal repayments; the probability of full repayment considering the guarantees by the U.S. Department of Education of the underlying student loans, guarantees by other third parties, and additional credit enhancements provided through other means; and publicly available pricing data for recently issued student loan asset-backed securities not subject to auctions. The estimate of the rate of return required by investors to own these securities also considered the currently reduced liquidity for auction-rate securities. An increase or decrease in the liquidity risk premium (i.e., the discount rate) of 100 basis points as used in the model would decrease or increase, respectively, the fair value of the Failed Auction Securities by approximately $500,000.

		FORM 10-Q
		PART I
		ITEM 1
		PAGE 9

VICOR CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)
September 30, 2008
(Unaudited)

4.		Fair Value Measurements (continued)
		Assets measured at fair value on a recurring basis, consistent with SFAS 157, include the following as of September 30, 2008 (in thousands):

		Using
						Significant
		Quoted Prices				Other				Significant
		in Active				Observable				Unobservable				Total Fair
		Markets				Inputs				Inputs				Value as of
		(Level 1)				(Level 2)				(Level 3)				September 30, 2008
Cash equivalents:
Money market funds		$	17,022			$	—			$	—			$	17,022
Certificate of deposit			90				—				—				90
Short term investments:
Auction rate securities			—				50								50
Short term investments			1,914				—				—				1,914
Long term investments:
Auction rate securities			—				—				36,090				36,090
Certificates of deposit			450				—				—				450
Restricted long term investment			720				—				—				720

The following table summarizes the change in the fair values for those assets valued on a recurring basis utilizing Level 3 inputs for the nine months ended September 30, 2008 (in thousands):

		Level 3
Balance at the beginning of the period (1)		$	—
Transfers into Level 3 categorization			38,500
Redemption (2)			(75	)
Transfer into Level 2 categorization (3)			(50	)
Unrealized loss included in Accumulated other comprehensive (loss) income			(2,285	)
Balance at the end of the period		$	36,090

All short-term and long-term investments measured at fair value are classified as available-for-sale securities, consistent with SFAS 115. Adjustments to fair value of these investments are recorded as an increase or decrease, net of taxes, in “Accumulated other comprehensive (loss) income”, except when

		FORM 10-Q
		PART I
		ITEM 1
		PAGE 10

VICOR CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)
September 30, 2008
(Unaudited)

4.		Fair Value Measurements (continued)
		losses are considered to be other-than-temporary, in which case the losses are recorded in “Other income (expense), net”.
		Effective January 1, 2008, the Company adopted SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for specified financial assets and liabilities on a contract-by-contract basis. The Company did not elect the fair value option as set forth by SFAS 159.
5.		Stock-Based Compensation
		The Company accounts for stock-based compensation in accordance with SFAS 123 (revised 2004), Share-Based Payment. Stock compensation expense for the three and nine months ended September 30 was as follows (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Cost of revenues		$	24			$	12			$	69			$	36
Selling, general and administrative (1)			218				104				649				268
Research and development			51				61				163				194
Total stock based compensation		$	293			$	177			$	881			$	498

		FORM 10-Q
		PART I
		ITEM 1
		PAGE 11

VICOR CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)
September 30, 2008
(Unaudited)

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Numerator:
Net income (loss)		$	609			$	543			$	(94	)		$	3,838
Denominator:
Denominator for basic income per share (weighted average shares)			41,660				41,617				41,646				41,586
Effect of dilutive securities:
Employee stock options (1) (2)			25				98				—				71
Denominator for diluted income per share (adjusted weighted-average shares and assumed conversions)			41,685				41,715				41,646				41,657
Basic income (loss) per share		$	0.01			$	0.01			$	(0.00	)		$	0.09
Diluted income (loss) per share		$	0.01			$	0.01			$	(0.00	)		$	0.09

7.		Inventories
		Inventories are valued at the lower of cost (determined using the first-in, first-out method) or market and presented in the accompanying consolidated balance sheets net of reserves for inventories estimated to be excess, obsolete or unmarketable. The Company’s estimation process for such reserves is based upon its known backlog, projected future demand and expected market conditions. If the Company’s estimated demand and / or market expectation were to change or if product sales were to decline, the Company’s estimation process may cause larger inventory reserves to be recorded, resulting in larger charges to cost of revenues.

		FORM 10-Q
		PART I
		ITEM 1
		PAGE 12

VICOR CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)
September 30, 2008
(Unaudited)

7.		Inventories (continued)
		“Inventories, net” as of September 30, 2008 and December 31, 2007 were as follows (in thousands):

		September 30, 2008				December 31, 2007
Raw materials		$	23,783			$	23,711
Work-in-process			3,296				2,656
Finished goods			5,929				4,357
			33,008				30,724
Inventory reserves			(5,904	)			(7,646	)
Inventories, net		$	27,104			$	23,078

8.		Investments
		In May 2007, the Company invested $1,000,000 in non-voting convertible preferred stock of GWS. The Company made an additional $1,000,000 investment in February 2008, increasing its ownership in GWS to approximately 30%. The Company’s total gross investment in GWS was $5,000,000 as of September 30, 2008, and $4,000,000 as of December 31, 2007. GWS designs, develops and manufactures high performance power semiconductors. A director of the Company is the founder, Chairman of the Board, President and Chief Executive Officer, as well as the majority voting shareholder, of GWS. The Company and GWS are parties to an intellectual property cross-licensing agreement, and the Company purchases certain components from GWS. Purchases from GWS totaled approximately $1,371,000 for the nine months ended September 30, 2008.
		As previously disclosed, the Company, due to the additional investment in GWS in May 2007, changed its method of accounting for its investment in GWS from the cost method to the equity method of accounting. As a result, the Company’s financial statements for the years ended December 31, 2003, 2004, 2005, and 2006 were restated to reflect the equity method of accounting, in accordance with Accounting Principles Board Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock (“APB 18”).
		In accordance with APB 18, each investment in GWS has been accounted for as a step acquisition using the purchase method of accounting, in accordance with SFAS 141, Business Combinations. The allocation of the purchase price included acquired intangible assets, including core and developed technology as well as in-process research and development (“IPR&D”). The excess of the purchase price over the fair value allocated to the net assets is goodwill. The core and developed technology is being amortized over three years. The amounts allocated to IPR&D were charged to expense in accordance with SFAS 141, which specifies that the amount assigned to the acquired intangible assets to be used in a particular research and development project that have no alternative future use shall be charged to expense at the acquisition date.

		FORM 10-Q
		PART I
		ITEM 1
		PAGE 13

VICOR CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)
September 30, 2008
(Unaudited)

8.		Investments (continued)
		The amounts included in “Other assets” in the accompanying consolidated balance sheets related to the net GWS investment were $639,000 and $687,000 as of September 30, 2008, and December 31, 2007, respectively, as follows (in thousands):

		September 30,				December 31,
		2008				2007
Equity method goodwill		$	528			$	634
Intangible assets, net of amortization			111				53
		$	639			$	687

“Loss from equity method investment, net of tax” presented in the accompanying condensed consolidated statements of operations for the three and nine months ended September 30 consists of the following (in thousands):

		Three Months Ended								Nine Months Ended
		September 30								September 30
		2008				2007				2008				2007
Allocation of losses from equity method investment, net of tax		$	54			$	125			$	228			$	208
Amortization of intangible assets and other, net of tax			33				45				115				179
Other than temporary decline in investment			—				—				706				620
Loss from equity method investment, net of tax		$	87			$	170			$	1,049			$	1,007

The Company periodically evaluates the investment in GWS to determine if there are any events or circumstances likely to have a significant adverse effect on the fair value of the investment, including the net book value of acquired intangible assets and goodwill. Examples of such impairment indicators include, but are not limited to: GWS’ actual results of operations; actual results of operations compared to forecast; working capital requirements; additional third-party equity investment, if any; and other considerations. If an impairment indicator is identified, the fair value of the investment is estimated and compared to its carrying value. If the fair value of the investment is less than it’s carrying value, the

		FORM 10-Q
		PART I
		ITEM 1
		PAGE 14

VICOR CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)
September 30, 2008
(Unaudited)

8.		Investments (continued)
		investment is impaired and a determination is made as to whether the impairment is other-than-temporary. For other-than-temporary impairments, an impairment loss equal to the difference between an investment’s carrying value and its fair value is recognized. In the first quarter of 2008, the investment was adjusted for a decline in value judged to be other than temporary of $706,000. Deterioration or changes in GWS’ business in the future could lead to impairment adjustments in future periods and such impairment adjustments may be material.
		Summary financial information for GWS is as follows (in thousands):

		As of
		September 30,				December 31,
		2008				2007
		(unaudited)
Current assets		$	1,242			$	2,322
Noncurrent assets			3,057				3,110
Total assets			4,299				5,432
Current liabilities			1,589				1,743
Noncurrent liabilities			447				1,354
Minority interests			3,313				3,615
Total stockholders’ deficit			(1,050	)			(1,280	)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
						(unaudited)
		2008				2007				2008				2007
Net revenue		$	737			$	894			$	3,180			$	1,576
Gross margin			138				164				953				353
Net loss			(180	)			(517	)			(776	)			(919	)

		FORM 10-Q
		PART I
		ITEM 1
		PAGE 15

VICOR CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)
September 30, 2008
(Unaudited)

9.		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 expenses in the accompanying condensed consolidated balance sheets.
		Product warranty activity for the three and nine months ended September 30, 2008 and 2007 was as follows (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Balance at the beginning of the period		$	806			$	878			$	679			$	1,046
Accruals for warranties for products sold in the period			32				447				300				637
Fulfillment of warranty obligations			(70	)			(306	)			(141	)			(443	)
Revisions of estimated obligations			80				(54	)			10				(275	)
Balance at the end of the period		$	848			$	965			$	848			$	965

		The Company accounts for extended warranty provisions in accordance with FASB Technical Bulletin 90-1, “Accounting for Separately Priced Extended Warranty and Product Maintenance Contracts”.
10.		Income Taxes
		For 2008, the tax provision is based on the estimated 2008 annual effective tax rate, which includes estimated federal, state and foreign income taxes on the Company’s projected annual pre-tax income and estimated federal and state income taxes for certain minority-owned subsidiaries that are not part of the Company’s consolidated income tax returns, offset by the expected utilization of federal and foreign net operating loss carryforwards. In the third quarter of 2008, the Company reduced its tax reserves by $1,123,000 due to closing tax periods in certain jurisdictions. The 2008 tax provision also includes discrete items, principally for increases in accrued interest for potential liabilities and expense associated with a reduction in state income tax refunds receivable. In 2007, the tax provision was based on an estimated 2007 annual effective tax rate, which included estimated federal, state and foreign income taxes on the Company’s projected annual pre-tax income, estimated federal and state income taxes for certain minority-owned subsidiaries that are not part of the Company’s consolidated income tax returns, and increases in accrued interest for potential liabilities, offset by the expected utilization of foreign net operating loss carryforwards and the release of certain valuation allowances related to temporary book versus tax differences. In the third quarter of 2007, the Company reduced its tax reserves by $1,517,000 due to closing tax periods in certain jurisdictions. The expense was also offset by discrete items

		FORM 10-Q
		PART I
		ITEM 1
		PAGE 16

VICOR CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)
September 30, 2008
(Unaudited)

10.		Income Taxes (continued)
		representing a reduction in tax reserves in the second quarter of 2007 and refunds of interest received and recorded as a benefit during the first quarter of 2007 as final settlement related to the audit of the Company’s federal tax returns for the tax years 1994 through 2002 by the Internal Revenue Service.
		The provision for income taxes and the effective income tax rate for the three and nine months ended September 30, 2008 and 2007 were as follows (dollars in thousands):

		Three Months Ended								Nine Months Ended
		September 30								September 30
		2008				2007				2008				2007
(Benefit) provision for income taxes		$	(527	)		$	(1,616	)		$	65			$	(1,329	)
Effective income tax rate			(311.8	)%			(179.0	)%			6.4	%			(37.8	)%

The effective income tax rate for the three months ended September 30, 2008 and 2007 is a benefit, principally due to a reduction in tax reserves due to closing tax periods in certain jurisdictions in each period described above. The higher income tax rate benefit for the three months ended September 30, 2008 compared to the same period in 2007 is due to lower income (loss) before income taxes in 2008. The decrease in the effective income tax rate for the nine months ended September 30, 2008 compared to the comparable period in 2007 is due to a lower reduction in tax reserves due to closing tax periods in certain jurisdictions and higher projected annual pre-tax income and therefore, higher estimated federal and state income taxes for one of the minority owned subsidiaries that are not part of the Company’s consolidated income tax return in 2008. In addition, the Company reversed approximately $300,000 of excess tax reserves in the second quarter of 2007 and recorded a discrete item of $169,000 representing refunds of interest received and recorded as a benefit during the first quarter of 2007 in connection with the Internal Revenue Service audit noted above.

		FORM 10-Q
		PART I
		ITEM 1
		PAGE 17

VICOR CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)
September 30, 2008
(Unaudited)

11.		Comprehensive Income (Loss)
		The following table sets forth the computation of “Comprehensive income (loss)” for the three and nine months ended September 30 (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Net income (loss)		$	609			$	543			$	(94	)		$	3,838
Foreign currency translation (loss) gain			(19	)			88				55				58
Unrealized (losses) gains, net of tax, on available for sale securities			(35	)			(2	)			(2,285	)			4
Comprehensive income (loss)		$	555			$	629			$	(2,324	)		$	3,900

		As of September 30, June 30 and March 31, 2008, the Company performed a valuation of its Failed Auction Securities (see Note 3). Based on those valuations, the Company recorded a reduction in the aggregate value of these investments of $35,000, $250,000 and $2,000,000 for each of the first three quarters ended September 30, 2008, respectively, which the Company believes represents a temporary decline in value.
12.		Commitments and Contingencies
		At September 30, 2008, the Company had approximately $1,055,000 of capital expenditure commitments.
		As previously disclosed, the Company received total payments of $1,770,000 in the second quarter of 2007 in full settlement of patent infringement litigation against Artesyn Technologies, Inc., Lucent Technologies Inc., and the Tyco Power Systems unit of Tyco International Ltd. (which had acquired the Power Systems business of Lucent Technologies). The full amount of the payments, net of a $177,000 contingency fee accrued by the Company for its litigation counsel, was included in the second quarter of 2007 in “Gain from litigation related settlements, net” in the accompanying condensed consolidated statement of operations. The Company was informed by its litigation counsel that the full amount of the contingency fee was waived and, therefore, the related accrual of $177,000 was reversed in the second quarter of 2008.
		On February 22, 2007, the Company announced it had reached an agreement in principle with Ericsson, Inc., the U.S. affiliate of LM Ericsson, to settle a lawsuit brought by Ericsson against the Company in California state court. Under the terms of the settlement agreement entered into on March 29, 2007, after a court ordered mediation, the Company paid $50.0 million to Ericsson, of which $12.8 million was reimbursed by the Company’s insurance carriers. Accordingly, the Company recorded a net loss of $37.2 million from the litigation-related settlements in the fourth quarter of 2006. The Company is

		FORM 10-Q
		PART I
		ITEM 1
		PAGE 18

VICOR CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)
September 30, 2008
(Unaudited)

12.		Commitments and Contingencies (continued)
		seeking further reimbursement from its insurance carriers. The Company’s decision to enter into the settlement followed an adverse ruling by the court in January 2007 in connection with a settlement between Ericsson and co-defendants Exar Corporation (“Exar”) and Rohm Device USA, LLC (“Rohm”), two of the Company’s component suppliers prior to 2002. The Company’s writ of mandate appeal of this ruling was denied in April, 2007. In September 2007, the Company filed a notice of appeal of the court’s decision upholding the Ericsson-Exar-Rohm settlement, which is pending. In December 2007, the court awarded Exar and Rohm amounts for certain statutory and discovery costs associated with this ruling. The Company accrued $240,000 in the second quarter of 2007, included in “Gain from litigation-related settlements, net” in the accompanying condensed consolidated statement of operations as a result of the court’s decision, of which $78,000 of the award was paid in the second quarter of 2008.
		In addition, the Company is involved in certain other litigation and claims incidental to the conduct of its business. While the outcome of lawsuits and claims against the Company cannot be predicted with certainty, management does not expect any current litigation or claims to have a material adverse impact on the Company’s financial position or results of operations.
13.		Segment Information
		The Company has organized its business segments according to its key product lines. The Brick Business Unit segment (“BBU”) designs, develops, manufactures and markets the Company’s modular power converters and configurable products. The V*I Chip segment consists of V*I Chip Corporation, a wholly owned subsidiary that designs, develops, manufactures and markets the Company’s Factorized Power Architecture products. The Picor segment consists of Picor Corporation, a majority-owned subsidiary of the Company that designs, develops, manufactures and markets power management integrated circuits and related products for use in a variety of power system applications. Picor develops these products to be sold as part of the Company’s products or to third parties for separate applications.
		The following table provides segment financial data as of and for the three months ended September 30 (in thousands):

		BBU				V*I Chip				Picor				Corporate				Eliminations				Total
2008:
Net revenues		$	46,673			$	4,971			$	1,289			$	—			$	(1,655	)		$	51,278
Income (loss) from operations			6,976				(5,937	)			(683	)			(134	)			177				399
Total assets			168,453				16,846				8,915				94,103				(109,296	)			179,021
Depreciation and amortization			1,457				678				96				382				—				2,613
2007:
Net revenues		$	45,220			$	2,404			$	1,101			$	—			$	(1,032	)		$	47,693
Income (loss) from operations			4,718				(6,179	)			(697	)			(126	)			139				(2,145	)
Total assets (1)			135,602				12,078				7,348				110,563				(74,350	)			191,241
Depreciation and amortization			1,753				519				96				376				—				2,744

		FORM 10-Q
		PART I
		ITEM 1
		PAGE 19

VICOR CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)
September 30, 2008
(Unaudited)

13.		Segment Information (continued)
		The following table provides segment financial data as of and for the nine months ended September 30 (in thousands):

		BBU				V*I Chip				Picor				Corporate				Eliminations				Total
2008:
Net revenues		$	141,646			$	12,479			$	3,624			$	—			$	(3,705	)		$	154,044
Income (loss) from operations			20,773				(18,694	)			(1,906	)			(243	)			601				531
Total assets			168,453				16,846				8,915				94,103				(109,296	)			179,021
Depreciation and amortization			4,467				1,927				287				1,143				—				7,824
2007:
Net revenues		$	136,697			$	4,797			$	3,378			$	—			$	(2,992	)		$	141,880
Income (loss) from operations			18,485				(17,816	)			(1,995	)			691				426				(209	)
Total assets (1)			135,602				12,078				7,348				110,563				(74,350	)			191,241
Depreciation and amortization			5,779				1,507				308				1,334				—				8,928

		The elimination for total assets is principally related to inter-segment receivables due to the BBU segment for the funding of V*I Chip segment operations and for the purchase of equipment for both V*I Chip and Picor segments.
14.		Dividends
		On March 14, 2008, the Company’s Board of Directors approved a cash dividend of $0.15 per share of the Company’s stock. The total dividend of approximately $6,245,000 was paid on April 18, 2008, to shareholders of record at the close of business on April 2, 2008.
		On August 7, 2008, the Company’s Board of Directors approved a cash dividend of $0.15 per share of the Company’s stock. The total dividend of approximately $6,249,000 was paid on September 10, 2008 to shareholders of record at the close of business on August 25, 2008.
		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. The Board of Directors anticipates reviewing its dividend policy on a semi-annual basis.
		During the third quarter of 2008, a subsidiary paid a total of $1,290,000 in dividends, of which $658,000 was paid to an outside shareholder and accounted for as a reduction in minority interests.

		FORM 10-Q
		PART I
		ITEM 1
		PAGE 20

VICOR CORPORATION

Notes to Condensed Consolidated Financial Statements (Continued)
September 30, 2008
(Unaudited)

15.		Impact of Recently Issued Accounting Standards
		In December 2007, the FASB issued SFAS 141 (revised 2007), Business Combinations (“SFAS 141R”). SFAS 141R changes accounting for acquisitions that close beginning in 2009. More transactions and events will qualify as business combinations and will be accounted for at fair value under the new standard. SFAS 141R promotes greater use of fair values in financial reporting. Some of the changes will introduce more volatility into earnings. SFAS 141R is effective for fiscal years beginning on or after December 15, 2008. The Company has not determined the impact, if any, SFAS 141R will have on its financial position or results of operations.
		In December 2007, the FASB issued SFAS 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of Accounting Research Bulletin No. 51, “Consolidated Financial Statements” (“SFAS 160”). SFAS 160 will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008. SFAS 160 requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. The Company has not determined the impact, if any, SFAS 160 will have on its financial position or results of operations.
		In April 2008, the FASB issued FASB Statement of Position No. 142-3, Determination of the Useful Life of Intangible Assets (“FSP FAS 142-3”), which amends factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142, Goodwill and Other Intangible Assets. The standard is expected to improve the consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure its fair value. FSP FAS 142-3 is effective for fiscal periods beginning on or after December 15, 2008. The Company has not determined the impact, if any, FSP FAS 142-3 will have on its financial position or results of operations.

		FORM 10-Q
		PART I
		ITEM 2
		PAGE 21

VICOR CORPORATION

Management’s Discussion and Analysis of
Financial Condition and Results of Operations

September 30, 2008

Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations

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. Any statement in this report that is not a statement of historical fact is a forward-looking statement, and, the words “believes,” “expects,” “anticipates,” “intend,” “estimate,” “plans,” “assumes,” “may,” “will,” “would,” “should,” “continue,” “prospective,” “project,” and other similar expressions identify forward-looking statements. Forward-looking statements also include statements regarding bookings, shipments, revenue, the pace of new design wins with early adopters and gaining broader product acceptance within the Company’s target markets, and plans to expand capacity with incremental investments in equipment. These statements are based upon the Company’s current expectations and estimates as to the prospective events and circumstances that 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 those economic, business, operational and financial considerations set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, under Part I, Item I — “Business,” “—Competition,” “—Patents,” and “—Licensing,” under Part I, Item 1A — “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 this report may not be exhaustive. Therefore, the information contained in this report 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.

Overview

Vicor Corporation designs, develops, manufactures and markets modular power components and complete power systems based upon a portfolio of patented technologies. The Company sells its products primarily to the electronic data processing, industrial control, military electronics, and telecommunications markets, through a network of independent sales representative organizations in North and South America and, internationally, through independent distributors. Export sales as a percentage of total revenues for the nine months ended September 30, were approximately 43% in 2008 and 36% in 2007, respectively. The Company has organized its business segments according to its key product lines. The Brick Business Unit segment (“BBU” or “Brick”) designs, develops, manufactures and markets the Company’s modular power converters and configurable products, and includes the operations of the Company’s Westcor division, Vicor Integration Architects (“VIAs”) and Vicor Japan Company, Ltd. (“VJCL”). The V*I Chip segment consists of V*I Chip Corporation, a wholly owned subsidiary which designs, develops, manufactures and markets the Company’s Factorized Power Architecture (“FPA”) products. The Picor segment consists of Picor Corporation, a majority-owned subsidiary of Vicor, which designs, develops, manufactures and markets Power Management Integrated Circuits and related products for use in a variety of power system applications. Picor develops these products to be sold as part of Vicor’s products or to third parties for separate applications.

		FORM 10-Q
		PART I
		ITEM 2
		PAGE 22

VICOR CORPORATION

Management’s Discussion and Analysis of
Financial Condition and Results of Operations
September 30, 2008
(Continued)

Revenues for the third quarter increased by 7.5% to $51,278,000, compared to $47,693,000 for the corresponding period a year ago, and increased 4.0% on a sequential basis from $49,297,000 for the second quarter of 2008. Gross margin increased to $21,903,000 for the third quarter of 2008, compared to $17,904,000 for the corresponding period a year ago, and increased on a sequential basis from $21,113,000 for the second quarter of 2008. Gross margin, as a percentage of revenue, increased to 42.7% for the third quarter of 2008 compared to 37.5% for the third quarter of 2007, and decreased on a sequential basis from 42.8% for the second quarter of 2008. Net income for the third quarter was $609,000, or $0.01 per diluted share, compared to net income of $543,000, or $0.01 per diluted share, for the corresponding period a year ago and net loss of $(1,323,000), or $(0.03) per diluted share, for the second quarter of 2008.

For the nine months ended September 30, 2008, revenues increased by 8.6% to $154,044,000 from $141,880,000 for the corresponding period a year ago. Net loss for the nine months ended September 30, 2008 was $(94,000), or $(0.00) per diluted share, compared to net income of $3,838,000 or $0.09 per diluted share, for the corresponding period a year ago.

The book-to-bill ratio, calculated by the dollar amount of orders placed with scheduled delivery dates within one year divided by the net revenues in the respective period, was 1.20:1 for the third quarter of 2008 as, compared to 1.01:1 for the second quarter of 2008. Backlog at the end of the third quarter of 2008 was $56.4 million, as compared to $46.3 million at the end of the second quarter of 2008.

For the nine months ended September 30, 2008, depreciation and amortization was $7,824,000, a decrease of approximately $1,104,000 for the corresponding period a year ago, and capital additions were $6,557,000, a decrease of approximately $870,000 for the corresponding period a year ago.

Inventories increased by approximately $4,026,000 or 17.4% to $27,104,000 as compared with $23,078,000 at December 31, 2007, primarily to meet the increased demand.

Critical Accounting Policies and Estimates

Please refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, for a complete summary of the critical accounting policies and estimates.

Fair Value Measurements

In September 2006, FASB issued SFAS 157, Fair Value Measurements, which provides guidance on how to measure assets and liabilities that are recorded at fair value. SFAS 157 does not expand the use of fair value to any new circumstances, but does require additional disclosures in both annual and quarterly reports. The Company adopted SFAS 157 and its related amendments for financial assets and liabilities effective as of January 1, 2008. SFAS 157 will be effective for non-financial assets and liabilities in financial statements issued for

		FORM 10-Q
		PART I
		ITEM 2
		PAGE 23

VICOR CORPORATION

Management’s Discussion and Analysis of
Financial Condition and Results of Operations
September 30, 2008
(Continued)

fiscal years beginning after November 15, 2008. The primary impact of adopting SFAS 157 was on the fair value measurement and disclosures related to the Company’s investments in auction rate securities, discussed below.

Results of Operations

Three months ended September 30, 2008, compared to three months ended September 30, 2007

Net revenues for the third quarter of 2008 were $51,278,000, an increase of $3,585,000 or 7.5%, as compared to $47,693,000 for the same period a year ago, and an increase of 4.0% on a sequential basis from the second quarter of 2008.

The components of revenue were as follows (dollars in thousands):

		Three Months Ended
		September 30,								Increase
		2008				2007				$				%
BBU		$	46,673			$	45,219			$	1,454				3.2	%
V*I Chip			4,315				2,291				2,024				88.3	%
Picor			290				183				107				58.5	%
Total		$	51,278			$	47,693			$	3,585				7.5	%
Book-to- Bill Ratio			1.20:1				1.17:1

Orders during the third quarter of 2008 increased by 24.0%, compared to the second quarter of 2008. This increase was caused by an increase in BBU orders during the period of 32.4%, offset by a decrease in V*I Chip orders.

Gross margin for the third quarter of 2008 increased $3,999,000, or 22.3%, to $21,903,000 from $17,904,000 for the third quarter of 2007, and increased to 42.7% from 37.5% as a percentage of net revenues. The primary component of the change in gross margin dollars and gross margin percentages was an increase in net revenues, improved product mix and pricing, and improved BBU manufacturing efficiency, as well as an issue with certain product returns and warranty expense in 2007. During the third quarter of 2007, the Company replaced certain products and established reserves for future replacements of these products, which were manufactured with a purchased component that exhibited an unacceptable failure rate. As a result, gross margin in the third and second quarters of 2007 were negatively impacted by approximately $720,000 and $260,000, respectively, from a combination of product returns which affected net revenues and charges to cost of revenues for warranty costs.

Selling, general and administrative expenses were $13,703,000 for the period, an increase of $1,389,000, or 11.3%, as compared to $12,314,000 for the same period in 2007. As a percentage of net revenues, selling, general and administrative expenses increased to 26.7% from 25.8%.

		FORM 10-Q
		PART I
		ITEM 2
		PAGE 24

VICOR CORPORATION

Management’s Discussion and Analysis of
Financial Condition and Results of Operations
September 30, 2008
(Continued)

The components of the $1,389,000 increase were as follows (in thousands):

		Increase (decrease)
Compensation expenses		$	712				13.7	%  (1)
Vicor Integration Architects (“VIA”) related expenses			364				44.5	%  (2)
Advertising expense			226				40.1	%  (3)
Vicor Japan related expenses			105				13.2	%  (4)
Audit and tax fees			73				20.1	%
Stockholder reporting			59				119.7	%
Travel expense			58				12.5	%
Legal fees			(265	)			(35.2	)% (5)
Other, net			57				1.7	%
		$	1,389				11.3	%

Research and development expenses were $7,801,000 for the period, an increase of $66,000, or 0.9%, as compared to $7,735,000 for the same period in 2007. As a percentage of net revenues, research and development decreased from 16.2% to 15.2% primarily due to the increase in net revenues.

		FORM 10-Q
		PART I
		ITEM 2
		PAGE 25

VICOR CORPORATION

Management’s Discussion and Analysis of
Financial Condition and Results of Operations
September 30, 2008
(Continued)

The components of the $66,000 increase were as follows (in thousands):

		Increase (decrease)
Compensation		$	288				5.7	%  (1)
Picor non-recurring engineering charges			130				77.2	%  (2)
Consulting			45				165.3	%
Test agency			36				211.4	%
Project materials			(431	)			(41.2	)% (3)
Other, net			(2	)			(0.1	)%
		$	66				0.9	%

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

										Increase
		2008				2007				(decrease)
Interest income		$	356			$	983			$	(627	)
Minority interest in net income of subsidiaries			(501	)			(90	)			(411	)
Foreign currency (losses) gains			(124	)			185				(309	)
Other			39				164				(125	)
		$	(230	)		$	1,242			$	(1,472	)

The decrease in interest income is due to lower average balances on the Company’s cash equivalents and short and long-term investments as well as a decrease in interest rates. The decrease in “Minority interest in net income of subsidiaries” is due to higher income at certain entities in which the Company holds a minority interest. The increase in foreign currency losses is due to unfavorable exchange rates in the third quarter of 2008 as compared to 2007. The Company’s exposure to market risk for fluctuations in foreign currency exchange rates relates primarily to the operations of Vicor Japan Co. Ltd. (“VJCL”). The functional currency of the Company’s subsidiaries in Europe and Hong Kong is the U.S. dollar.

		FORM 10-Q
		PART I
		ITEM 2
		PAGE 26

VICOR CORPORATION

Management’s Discussion and Analysis of
Financial Condition and Results of Operations
September 30, 2008
(Continued)

“Income (loss) before income taxes” was $169,000 for the third quarter of 2008 compared to ($903,000) for the same period in 2007.

The provision for income taxes and the effective income tax rate for the three months ended September 30, 2008 and 2007 were as follows (dollars in thousands):

		Three Months Ended
		September 30,
		2008				2007
(Benefit) provision for income taxes		$	(527	)		$	(1,616	)
Effective income tax rate			(311.8	)%			(179.0	)%

The effective income tax rate for the three months ended September 30, 2008 and 2007 is a benefit, principally due to a reduction in tax reserves due to closing tax periods in certain jurisdictions in each period. The higher income tax rate benefit for the three months ended September 30, 2008 compared to the same period in 2007 is due to lower income (loss) before income taxes in 2008.

“Loss from equity method investment, net of tax” decreased $83,000 to $87,000 from $170,000 for the same period in 2007, principally due to lower equity method losses allocated to the Company.

Basic and diluted “Net income per common share” was $0.01 for the third quarter of 2008 compared to $0.01 for the third quarter of 2007.

		FORM 10-Q
		PART I
		ITEM 2
		PAGE 27

VICOR CORPORATION

Management’s Discussion and Analysis of
Financial Condition and Results of Operations
September 30, 2008
(Continued)

Nine months ended September 30, 2008 compared to nine months ended September 30, 2007

Net revenues for the first nine months of 2008 were $154,044,000, an increase of $12,164,000, or 8.6%, as compared to $141,880,000 for the same period a year ago. The components of revenue were as follows (dollars in thousands):

		Nine Months Ended
		September 30,								Increase
		2008				2007				$				%
BBU		$	141,646			$	136,696			$	4,950				3.6	%
V*I Chip			11,722				4,570				7,152				156.5	%
Picor			676				614				62				10.1	%
Total		$	154,044			$	141,880			$	12,164				8.6	%
Book-to-Bill Ratio			1.06:1				1.09:1

Orders during the period increased by 3.2% sequentially, compared with the last nine months of 2007.

Gross margin for the first nine months of 2008 increased $7,746,000, or 13.4%, to $65,476,000 from $57,730,000, and increased to 42.5% from 40.7% as a percentage of net revenues for the same period a year ago. The primary component of the change in gross margin dollars and gross margin percentage was the increase in net revenues from the sale of both BBU and V*I Chip products, improved product mix and pricing, and improved BBU manufacturing efficiency, as well as an issue with certain product returns and warranty expense in 2007. During the third quarter of 2007, the Company replaced certain products and established reserves for future replacements of these products, which were manufactured with a purchased component that exhibited an unacceptable failure rate. As a result, gross margin in the third and second quarters of 2007 were negatively impacted by approximately $720,000 and $260,000, respectively, from a combination of product returns which affected net revenues and charges to cost of revenues for warranty costs.

Selling, general and administrative expenses were $41,730,000 for the first nine months of 2008, an increase of $5,240,000, or 14.4%, over the same period in 2007. As a percentage of net revenues, selling, general and administrative expenses increased to 27.1% from 25.7%.

		FORM 10-Q
		PART I
		ITEM 2
		PAGE 28

VICOR CORPORATION

Management’s Discussion and Analysis of
Financial Condition and Results of Operations
September 30, 2008
(Continued)

The components of the $5,240,000 increase were as follows (in thousands):

		Increase (decrease)
Compensation expense		$	2,587				16.7	%  (1)
VIA related expenses			1,108				51.8	%  (2)
Audit and tax fees			680				61.5	%  (3)
Advertising expense			470				27.8	%  (4)
Vicor Japan related expenses			467				20.5	%  (5)
Training, consultants and computer expense			253				28.7	%
Travel expense			247				17.5	%
International office expense			102				57.0	%
Employment recruiting			(134	)			(56.6	)%
Bad debt expense			(205	)			(88.1	)%
Depreciation and amortization			(211	)			(7.7	)% (6)
Legal fees			(434	)			(18.3	)% (7)
Other, net			310				5.4	%
		$	5,240				14.4	%

Research and development expenses increased $590,000, or 2.6%, to $23,392,000 from $22,802,000. As a percentage of net revenues, research and development expenses decreased to 15.2% from 16.1% primarily due to the increase in net revenues.

		FORM 10-Q
		PART I
		ITEM 2
		PAGE 29

VICOR CORPORATION

Management’s Discussion and Analysis of
Financial Condition and Results of Operations
September 30, 2008
(Continued)

The components of the $590,000 increase were as follows (in thousands):

		Increase (decrease)
Compensation		$	703				4.6	%  (1)
Travel			80				62.4	%
Project materials			(207	)			(7.8	)% (2)
Other, net			14				0.3	%
		$	590				2.6	%

In the second quarter of 2007, the Company received total payments of $1,770,000 in full settlement of the Company’s patent infringement litigation against Artesyn Technologies, Inc., Lucent Technologies Inc., and the Tyco Power Systems unit of Tyco International Ltd. (which had acquired the Power Systems business of Lucent Technologies). The full amount of the payments, net of a $177,000 contingency fee accrued by the Company for its litigation counsel, has been included in “Gain from litigation-related settlements, net” in the accompanying condensed consolidated statement of operations. The Company was informed by its litigation counsel that the full amount of the contingency fee was waived and, therefore, the related accrual of $177,000 was reversed in the second quarter of 2008.

On February 22, 2007, the Company announced that it had reached an agreement in principle with Ericsson, Inc., the U.S. affiliate of LM Ericsson, to settle a lawsuit brought by Ericsson against the Company in California state court. Under the terms of the settlement agreement entered into on March 29, 2007, after a court ordered mediation, the Company paid $50.0 million to Ericsson, of which $12.8 million was reimbursed by the Company’s insurance carriers. Accordingly, the Company recorded a net loss of $37.2 million from the litigation-related settlements in the fourth quarter of 2006. The Company is seeking further reimbursement from its insurance carriers. The Company’s decision to enter into the settlement followed an adverse ruling by the court in January 2007 in connection with a settlement between Ericsson and co-defendants Exar Corporation (“Exar”) and Rohm Device USA, LLC (“Rohm”), two of the Company’s component suppliers prior to 2002. The Company’s writ of mandate appeal of this ruling was denied in April, 2007. In September 2007, the Company filed a notice of appeal of the court’s decision upholding the Ericsson-Exar-Rohm settlement, which is pending. In December 2007, the court awarded Exar and Rohm amounts for certain statutory and discovery costs associated with this ruling. The Company accrued $240,000 in the second quarter of 2007, included in “Gain from litigation-related settlements, net” in the accompanying condensed consolidated statement of operations as a result of the court’s decision, of which $78,000 of the award was paid in the second quarter of 2008.

		FORM 10-Q
		PART I
		ITEM 2
		PAGE 30

VICOR CORPORATION

Management’s Discussion and Analysis of
Financial Condition and Results of Operations
September 30, 2008
(Continued)

The major changes in the components of “Other income (expense)” for the nine months ended September 30, net were as follows (in thousands):

										Increase
		2008				2007				(decrease)
Interest income		$	1,779			$	3,494			$	(1,715	)
Minority interest in net income of subsidiaries			(1,452	)			(179	)			(1,273	)
Foreign currency gains			79				149				(70	)
Other			83				261				(178	)
		$	489			$	3,725			$	(3,236	)

The decrease in interest income is due to lower average balances on the Company’s cash equivalents and short and long-term investments, principally due to the $37,200,000 net payment to Ericsson made at the end of March 2007 (see Note 12. Commitments and Contingencies in the Notes to Condensed Consolidated Financial Statements in Part I — Item 1 — Financial Statements), as well as a decrease in interest rates. The decrease in “Minority interest in net income of subsidiaries” is due to higher income at certain entities in which the Company holds a minority interest. The decrease in foreign currency gains is due to unfavorable exchange rates in 2008 as compared to 2007. The Company’s exposure to market risk for fluctuations in foreign currency exchange rates relates primarily to the operations of Vicor Japan Co. Ltd. (“VJCL”). The functional currency of the Company’s subsidiaries in Europe and Hong Kong is the U.S. dollar.

“Income (loss) before income taxes” was $1,020,000 for the first nine months of 2008 compared to $3,516,000 for the same period in 2007.

The provision for income taxes and the effective income tax rate for the nine months ended September 30, 2008 and 2007 were as follows (dollars in thousands):

		Nine months Ended
		September 30
		2008				2007
(Benefit) provision for income taxes		$	65			$	(1,329	)
Effective income tax rate			6.4	%			(37.8	)%

		FORM 10-Q
		PART I
		ITEM 2
		PAGE 31

VICOR CORPORATION

Management’s Discussion and Analysis of
Financial Condition and Results of Operations
September 30, 2008
(Continued)

The decrease in the effective income tax rate for the nine months ended September 30, 2008 compared to the comparable period in 2007 is due to a lower reduction in tax reserves due to closing tax periods in certain jurisdictions and higher projected annual pre-tax income and therefore, higher estimated federal and state income taxes for one of the minority — owned subsidiaries that are not part of the Company’s consolidated income tax return in 2008. In addition, the Company reversed approximately $300,000 of excess tax reserves in the second quarter of 2007 and recorded a discrete item of $169,000 representing refunds of interest received and recorded as a benefit during the first quarter of 2007 in connection with the Internal Revenue Service audit noted above.

“Loss from equity method investment, net of tax” increased $42,000 to $1,049,000 from $1,007,000 for the same period in 2007.

Basic and diluted “Net income (loss) per common share” was $(0.00) for the first nine months of 2008, compared to $0.09 for the first nine months of 2007.

As discussed in Note 3 to the condensed consolidated financial statements presented herein, the Company adopted SFAS 157 for measuring and reporting the “fair value” of financial assets and liabilities as of January 1, 2008. SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (i.e., an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. As discussed in Note 3 to the condensed consolidated financial statements presented herein, SFAS 157 provides guidance on how to measure fair value in the absence of quoted market prices or other observable data. SFAS 157 defines “Level 3 Inputs” as unobservable inputs supported by little or no market activity. Such inputs, reflecting the use of significant management judgment, are utilized to develop analyses and pricing models similar to those used by market participants (i.e., buyers, sellers, and the broker-dealers responsible for execution of the Dutch auction pricing mechanism by which each issue’s interest rate was set).

As of September 30, 2008, the Company held $38,425,000 in auction rate securities, consisting of debt obligations of municipal and corporate issuers. The interest rates for these securities are reset at auction at regular intervals ranging from seven to 90 days. The auction rate securities held by the Company have historically traded at par and are callable at par at the option of the issuer. At September 30, 2008, the majority of the auction rate securities held by the Company were AAA/Aaa rated by the major credit rating agencies, with most collateralized by student loans guaranteed by the U.S. Department of Education under the Federal Family Education Loan Program.

Until February 2008, the auction rate securities market was highly liquid. Starting the week of February 11, 2008, a substantial number of auctions failed, meaning that there was not enough demand to sell all of the securities that holders offered for sale. The consequences of a failed auction are (a) an investor must hold the specific security until the next scheduled auction (unless that investor chooses to sell the security to a third party outside of the auction process) and (b) the interest rate on the security generally resets to an interest rate set forth in the security’s indenture. The principal associated with these failed auctions will not be accessible to the Company until a successful auction occurs, a buyer is found outside of the auction process, the security is called, or the underlying securities have matured. As a result, the Company continued to classify the Failed Auction Securities as long-term as of September 30, 2008, having classified them as long-term as of March 31, 2008.

		FORM 10-Q
		PART I
		ITEM 2
		PAGE 32

VICOR CORPORATION

Management’s Discussion and Analysis of
Financial Condition and Results of Operations
September 30, 2008
(Continued)

Management is not aware of any reason to believe any of the issuers of the Failed Auction Securities held by the Company are presently at risk of default. Through September 30, 2008, the Company has continued to receive interest payments on the Failed Auction Securities in accordance with their terms. Management believes the Company ultimately should be able to liquidate all of its auction rate security investments without significant loss primarily due to the collateral securing the substantial majority of the underlying obligations. However, current conditions in the auction rate securities market have lead management to conclude the recovery period for the Failed Auction Securities exceeds 12 months. As a result, the Company continued to classify these investments as long-term as of September 30, 2008.

Based on SFAS 157 and the fair value measurements described in Note 3 to the condensed consolidated financial statements presented herein, the fair value of the Failed Auction Securities at September 30, 2008, was estimated by the Company to be approximately $36,090,000, compared to a par value of $38,375,000, net of a $50,000 redemption received at par value on October 10, 2008. Management considers this $2,285,000 difference to be temporary and has recorded this amount as an unrealized loss, net of taxes, in “Accumulated other comprehensive (loss) income” on the consolidated balance sheet. In making this determination, management considered the financial condition and near-term prospects of the issuers, the magnitude of the losses compared to the investments’ cost, the length of time the investments have been in an unrealized loss position, the assumed low probability that the Company will be unable to collect all amounts due according to the contractual terms of the security, whether the security has been downgraded by a rating agency, and the Company’s ability and intent to hold these investments until the anticipated recovery in market value occurs. If current market conditions deteriorate further, the Company may be required to record additional unrealized losses in other comprehensive income. If the credit rating of the security issuers deteriorates, or the anticipated recovery in the market values does not occur, the Company may be required to adjust the carrying value of these investments through impairment charges recorded in the consolidated statement of operations, and any such impairment adjustments may be material.

As of September 30, 2008, there was insufficient observable auction rate security market information available to determine the fair value of the Failed Auction Securities. As such, the Company’s investments in Failed Auction Securities were deemed to require valuation using Level 3 inputs. Consistent with SFAS 157, management, after consulting with outside experts, valued the Failed Auction Securities using analyses and pricing models similar to those used by market participants. Management utilized a probability weighted discounted cash flow (“DCF”)
model to determine the estimated fair value of these securities as of September 30, 2008. The assumptions used in preparing the DCF model included estimates for the amount and timing of future interest, principal payments and the rate of return required by investors to own these securities in the current environment, and the estimated timeframe during which successful auctions for these securities might occur. In making these assumptions, management considered relevant factors including: the formula applicable to each security which defines the interest rate paid to investors in the event of a failed auction; forward projections of the interest rate benchmarks specified in such formulas; the likely timing of principal repayments; the probability of full repayment considering the guarantees by the U.S. Department of Education of the underlying student loans, guarantees by other third parties, and additional credit enhancements provided through other means; and publicly available pricing data for recently issued student loan asset-backed securities which are not subject to auctions. The estimate of the rate of return required by investors to own these securities also considered the currently reduced liquidity for auction-rate securities. An increase or decrease in the liquidity risk premium (i.e., the discount rate)

		FORM 10-Q
		PART I
		ITEM 2
		PAGE 33

VICOR CORPORATION

Management’s Discussion and Analysis of
Financial Condition and Results of Operations
September 30, 2008
(Continued)

of 100 basis points as used in the model would decrease or increase, respectively, the fair value of the Failed Auction Securities by approximately $500,000.

Liquidity and Capital Resources

At September 30, 2008, the Company had $25,436,000 in unrestricted cash and cash equivalents. The ratio of current assets to current liabilities was 4.3:1 at September 30, 2008 compared to 6.5:1 at December 31, 2007. Working capital decreased $48,070,000 from $114,924,000 at December 31, 2007 to $66,854,000 at September 30, 2008. The primary factors affecting the working capital decrease was due to the reclassification of $38,500,000 of short-term investments to long-term investments, an additional decrease in short-term investments of $17,026,000 and a decrease in accounts receivable of $3,177,000. These decreases were partially offset by an increase in unrestricted cash and cash equivalents of $5,419,000 and an increase in inventories of $4,026,000. The primary source of cash for the nine months ended September 30, 2008 was $16,701,000 in net sales of short-term investments and cash provided by operating activities of $9,423,000. The primary uses of cash for the nine months ended September 30, 2008, were for the payment of Common Stock dividends of $13,152,000, $6,557,000 for the purchase of equipment, and an additional investment of $1,000,000 in GWS made by the Company during February 2008.

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 did not repurchase shares of Common Stock
during the nine months ended September 30, 2008. As of September 30, 2008, the Company had approximately $8,541,000 remaining under the November 2000 Plan.

On March 14, 2008, the Company’s Board of Directors approved a cash dividend of $0.15 per share of the Company’s stock. The total dividend of approximately $6,245,000 was paid on April 18, 2008 to shareholders of record at the close of business on April 2, 2008.

On August 7, 2008, the Company’s Board of Directors approved a cash dividend of $0.15 per share of the Company’s stock. The total dividend of approximately $6,249,000 was paid on September 10, 2008 to shareholders of record at the close of business on August 25, 2008.

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. The Board of Directors anticipates reviewing its dividend policy on a semi-annual basis.

During the third quarter of 2008, a subsidiary paid a total of $1,290,000 in dividends, of which $658,000 was paid to an outside shareholder and accounted for as a reduction in minority interests.

The Company’s primary liquidity needs are for making continuing investments in manufacturing equipment, particularly equipment for the Company’s new Factored Power Architecture products and to upgrade manufacturing equipment utilized by the BBU. The Company believes cash generated from operations and the

		FORM 10-Q
		PART I
		ITEM 2
		PAGE 34