Overview

We design, develop, manufacture and market modular power components and complete power systems based upon a portfolio of patented technologies. We sell our products primarily to customers in the higher-performance, higher-power segments of the power systems market, including telecommunications and networking infrastructure, enterprise and high performance computing, industrial automation, vehicles and transportation, and defense electronics, through a network of 22 independent sales representative organizations in North and South America and, internationally, through 40 independent distributors. Export sales as a percentage of total revenues were approximately 42% in 2008, and 37% in 2007 and 2006, respectively. We have organized our business segments according to our key product lines. The Brick Business Unit segment ("BBU") designs, develops, manufactures and markets modular power converters and configurable products, and includes the operations of our Westcor division, Vicor Custom Power 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 our FPA products. The Picor segment consists of Picor Corporation, a majority-

owned subsidiary of Vicor, which designs, develops, manufactures and markets integrated circuits and related products for use in a variety of power management and power system applications. Picor develops these products to be sold as part of Vicor's products or to third parties for separate applications.

For the year ended December 31, 2008 revenues increased to $205,368,000 from $195,827,000 in 2007. We had a loss before taxes of ($931,000) in 2008 as compared to income before taxes of $5,459,000 in 2007. We reported a net loss in 2008 of ($3,595,000) as compared to net income of $5,335,000 in 2007, and a diluted loss per share of ($.09) in 2008 as compared with a diluted income per share of $.13 in 2007.

The book to bill ratio for the third and fourth quarters of 2008 was 1.20:1 and 0.93:1, respectively. The book to bill ratio for the year ended December 31, 2008 was 1.03:1 compared with 1.05:1 in 2007. In light of the fact that bookings and sales can vary significantly from quarter to quarter, we do not believe this quarterly and annual change in the book to bill ratio is indicative of a trend at this time. We ended 2008 with approximately $52,700,000 in backlog, compared to $46,500,000 at the end of 2007.

The gross margin for 2008 increased to 42.0%, compared with 40.3% in 2007. The primary components of the increase in gross margin dollars and percentage were an increase in revenues, improved product mix and pricing, and lower product returns and warranty expenses.

Operating expenses for 2008 increased $9,489,000, or 12.2%, from $77,938,000 in 2007 to $87,427,000 in 2008. Selling, general and administrative expenses increased $7,287,000, research and development expenses increased $1,026,000, and (Gain) loss from litigation settlements, net decreased $1,176,000. The key operating expense increases were in compensation expense, advertising expenses, legal, audit and tax fees, and expenses at our Vicor Custom Power locations, particularly commissions expense due to increased Vicor Custom Power revenues, and compensation and related personnel expenses at VJCL.

Other income (expense), net decreased $4,177,000 from $4,388,000 in 2007 to $211,000 in 2008. The primary reasons for the decrease were a decrease in interest income of $2,346,000 and an increase in minority interest in net income of subsidiaries of $1,278,000.

Loss from equity method investment (net of tax) increased $549,000 to $1,688,000 from $1,139,000 for 2007. This was principally due to an adjustment to the carrying value of our investment in Great Wall Semiconductor Corporation ("GWS") reflecting a decline in value judged to be other- than-temporary of $706,000 in the second quarter and $555,000 in the fourth quarter of 2008, respectively, bringing the investment balance to zero as of December 31, 2008. The decision to reduce the remaining investment balance to zero was based on GWS' continued operating losses, the impact of the current global economic crisis on the current and short-term outlook for its operations, a negative working capital position as of December 31, 2008, and a valuation based on discounted cash flows.

In 2008, depreciation and amortization was $10,500,000, a decrease of approximately $1,100,000 from 2007, and capital additions were $8,300,000, a decrease of approximately $1,600,000 from 2007. Because of the amount of assets that either are now or will be fully depreciated in 2009, we expect depreciation and amortization to be less in 2009 than 2008.

Inventories increased by approximately $3,600,000, or 15.6%, to $26,700,000 in 2008, as compared with $23,100,000 at the end of 2007. The increase was primarily due to a $1,400,000 increase in V*I Chip inventories and a $1,300,000 decrease in overall inventory reserves.

The following table sets forth certain items of selected consolidated financial information as a percentage of net revenues for the periods indicated. This table and the subsequent discussion should be read in conjunction with the selected financial data and the Consolidated Financial Statements and related footnotes contained elsewhere in this report.

                                                        Year Ended December 31,
                                                     2008         2007        2006

     Net revenues                                     100.0 %      100.0 %     100.0 %
     Gross margin                                      42.0 %       40.3 %      42.6 %
     Selling, general and administrative expenses      27.4 %       25.0 %      24.2 %
     Research and development expenses                 15.3 %       15.5 %      16.3 %
     Income (loss) before income taxes                 (0.5 )%       2.8 %     (14.6 )%

Critical Accounting Policies and Estimates

Management's Discussion and Analysis of Financial Condition and Results of Operations discusses our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition, allowance for doubtful accounts, inventories, investments, intangible assets, income taxes, impairment of long-lived assets, contingencies and litigation. Management bases its estimates and judgments on historical experience, knowledge of current conditions and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following accounting policies involve its more significant judgments and estimates used in the preparation of its Consolidated Financial Statements in this Form 10-K.

Allowance for Doubtful Accounts

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments, based on assessments of customers' credit-risk profiles and payment histories. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

Inventories

We employ a variety of methodologies to estimate allowances for its inventory for estimated obsolescence or unmarketable inventory, based upon its known backlog and historical usage, and assumptions about future demand and market conditions. For BBU products produced at our Andover facility, our principal manufacturing location, the model used is based upon a comparison of on-hand quantities to projected demand, such that amounts of inventory on hand in excess of a three-year projected usage are fully reserved. Since V*I Chip products are at a relatively early stage, a one-year projected usage assumption is used. While we have used our best efforts and believe we have used the best available information to estimate future demand, due to uncertainty in the economy and our business and the inherent difficulty in predicting future demand, it is possible that actual demand for our products will differ from our estimates. If actual future demand or market conditions are less favorable than those projected by management, additional inventory reserves for existing inventories may need to be recorded in future periods.

Fair Value Measurements

In September 2006, FASB issued Statement of Financial Accounting Standards ("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. We 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 fiscal years beginning after November 15, 2008. The primary impact of adopting SFAS 157 was on the fair value measurement and disclosures related to our investments in auction rate securities, discussed below.

As discussed below, we elected fair value accounting for the ARS rights in accordance with SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities. The election was made to mitigate volatility in earnings caused by accounting for the acquisition of these rights and the underlying auction rate securities under different methods.

Short Term and Long-Term Investments

Our short-term and long-term investments are classified as "available-for-sale" or "trading" securities. "Available-for-sale" securities are recorded at fair value, with the unrealized gains and losses, net of tax, reported in "Accumulated other comprehensive (loss) income," a separate component of Stockholders' Equity. "Trading" securities are carried at fair value with unrealized gains or losses reported in "Other income (expense), net" in the Consolidated Statement of Operations.

As of December 31, 2008, we held $38,325,000 of Failed Auction 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. Our Failed Auction Securities have historically traded at par and are callable at par at the option of the issuer. On December 31, 2008, the majority of our Failed Auction Securities 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. 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.

In order to record the value of our Failed Auction Securities appropriately each quarter, we have estimated their market value and recorded an impairment charge. Through the third quarter of 2008, we classified all of our Failed Auction Securities as "available-for-sale" and their impairment was considered temporary. As such, quarterly temporary impairment charges were made to "Accumulated other comprehensive (loss) income" (i.e., the recorded value of the Failed Auction Securities declined by the impairment charge, as did our Stockholders' Equity). During the fourth quarter of 2008, we entered into a settlement agreement with UBS giving us the contractual right to sell certain securities (with a par value of $18,300,000 at year-end) purchased through a broker-dealer affiliate of UBS to UBS at par during a period of time beginning June 30, 2010, through July 2, 2012. Because we intend to exercise this right and no longer intend to hold these securities to maturity, we reclassified these securities as "trading." In order to record the fair value of these securities appropriately, we reversed the accumulated temporary impairment recorded as a reduction of Stockholders' Equity and recorded a charge to our Consolidated Statements of Operations of $2,238,000, reflecting our estimate at year-end of the "other-than-temporary" decrease in their carrying value from par value. However, we also recorded the receipt as of the contractual right as a gain on our Consolidated Statements of Operations, thereby largely offsetting the other than temporary impairment charge. The balance of our holdings of Failed Auction Securities is made up of securities (with a par value of $20,000,000 at year-end) purchased through a broker-dealer affiliate of Bank of America, N.A. ("BofA"). These Failed Auction Securities, with a total par value of $20,000,000, remain classified as "available-for-sale", as it is our intention to hold these securities to maturity or other such time as we may obtain par value through an arms' length sale. In order to record the fair value of these securities appropriately, we recorded a temporary impairment charge to "Accumulated other comprehensive (loss) income" of $2,100,000, reflecting our estimate of the additional decrease in their carrying value at year-end.

Pursuant to our settlement agreement with UBS, we are entitled to receive interest payments on our Failed Auction Securities in accordance with their terms. We also may be eligible to borrow at "no net cost" from UBS an amount up to 75% of the market value of the Failed Auction Securities held with UBS. The terms and conditions of the settlement offer include a release of claims against UBS and its affiliates. The right is a

separate freestanding instrument accounted for separately from the Failed Auction Securities and is being accounted for as a purchased put option. In accordance with SFAS 159, we elected fair value accounting for the right. The election was made to mitigate volatility in earnings caused by accounting for the acquisition of the right and the underlying securities under different methods.

As of December 31, 2008, there was insufficient observable auction rate security market information available to determine the fair value of the Failed Auction Securities as well as the right obtained in our settlement with UBS. As such, our 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 model to determine the estimated fair value of these securities as of December 31, 2008. The right was initially recorded at a fair value of approximately $1,926,000, with the offset recorded as an unrealized gain in "Other income (expense), net." As a result of entering into this agreement with UBS, we intend to exercise the put option on June 30, 2010, and do not intend to hold the associated Failed Auction Securities until recovery or maturity. Therefore, the total amount of the Failed Auction Securities previously reported as "available-for-sale" has been transferred to "trading" securities. Based on the fair value measurements described above and in more detail in Note 5 to our Consolidated Financial Statements, we estimated the fair value of the Failed Auction Securities held with UBS on December 31, 2008 to be approximately $16,062,000, compared with a par value of $18,300,000. The difference of $2,238,000 has been recorded as an unrealized loss in "Other income (expense), net" in the Consolidated Statements of Operations. Based on the fair value measurements described in Note 5 to our Consolidated Financial Statements, we estimated the fair value of the Failed Auction Securities held with BofA on December 31, 2008, to be approximately $16,666,000, compared with a par value of $20,000,000, net of a $25,000 redemption received at par value on January 5, 2009. We consider this $3,334,000 difference to be temporary and have 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, we 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 we 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 our ability and intent to hold these investments until the anticipated recovery in market value occurs. If current market conditions deteriorate further, we may be required to record additional unrealized losses. If the credit rating of the security issuers deteriorates, or the anticipated recovery in the market values does not occur, we may be required to adjust the carrying value of these investments through impairment charges recorded in the Consolidated Statements of Operations, and any such impairment adjustments may be material in amount. The fair values of the Failed Auction Securities held with UBS and BofA decreased approximately $2,175,000 and $1,189,000, respectively, compared to the fair values as of September 30, 2008, primarily due to our decision to increasing the expected time to recovery assumptions in our valuation analyses.

Other Investments

The accounting for investment transactions is reviewed for compliance with Accounting Principles Board Opinion No. 18, The Equity Method for Accounting for Investments in Common Stock (APB 18) and/or FASB Interpretation No. 46 Revised (FIN 46R), Consolidation of Variable Interest Entities. We periodically evaluate our investment in GWS to determine if there are any events or circumstances that are 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 we identify an impairment indicator, we will estimate the fair value of the investment and compare it to its carrying value. If the fair value of the investment is less than its carrying value, the investment is impaired and we make a determination

as to whether the impairment is "other-than-temporary". For "other-than-temporary" impairments, we recognize an impairment loss equal to the difference between an investment's carrying value and its fair value. During 2008, the equity method investment in GWS was adjusted for a decline in value judged to be "other-than - temporary" of $706,000 in the second quarter and $555,000 in the fourth quarter of 2008, respectively, bringing the investment balance to zero as of December 31, 2008. Our decision to reduce the value of the investment to zero was based on GWS' continued operating losses, the impact of the current global economic crisis on the current and short-term outlook for its operations, a negative working capital position as of December 31, 2008, and a valuation based on discounted cash flows.

Long-Lived Assets

We evaluate the recoverability of our identifiable intangible assets, goodwill and other long-lived assets in accordance with SFAS 142, Goodwill and Other Intangible Assets and SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which generally requires that the recoverability of these assets be assessed when events or circumstances indicate a potential impairment. We periodically assess the remaining use of fixed assets based upon operating results and cash flows from operations. Equipment has been written-down as a result of these assessments as necessary. Goodwill is tested for potential impairment at least annually at the reporting unit level.

Stock-Based Compensation

We account for stock-based compensation in accordance with SFAS 123R, Share Based Payment, which requires that stock-based compensation expense associated with stock options and related awards be recognized in the Consolidated Statement of Operations. Determining the amount of stock-based compensation requires us to develop estimates to be used in calculating the grant-date fair value of stock options. We calculate the grant-date fair values using the Black-Scholes valuation model. The use of this widely-accepted model requires us to make estimates for the following assumptions: expected volatility, expected term, risk-free interest rate, expected dividend yield and forfeiture rate. Changes in any of these assumptions may have an impact on the amount of stock-based compensation recorded.

Product Warranties

We generally warrant our products for a period of two years. Vicor maintains allowances for estimated product returns under warranty based upon a review of known or potential product failures in the field and upon historical patterns of product returns. If unforeseen product issues arise or product returns increase above expected rates, additional allowances may be required.

Income Taxes

We account for income taxes in accordance with SFAS 109, Accounting for Income Taxes and FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("FIN 48"). SFAS 109 requires that deferred tax assets and liabilities be recognized using enacted rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. SFAS 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized. We have assessed the need for a valuation allowance against these deferred tax assets and concluded that a valuation allowance for a significant portion of the deferred tax assets is warranted on December 31, 2008. In reaching this conclusion, we evaluated all relevant criteria including the existence of significant temporary differences reversing in the carryforward period, primarily depreciation. The valuation allowance against these deferred tax assets may require adjustment in the future based on changes in the mix of temporary differences, changes in tax laws, and operating performance. In addition, the assessment of the valuation allowance requires us to make estimates of future taxable income and to estimate reversals of temporary differences. Changes in the assumptions or other circumstances may require additional valuation allowances if actual reversals of temporary differences differ from those estimates.

FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with SFAS 109. FIN 48 prescribes a two-step process to determine the amount of tax benefit to recognize. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon examination by a tax authority. If the tax position is deemed "more-likely-than-not" to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50 percent likelihood of being realized upon ultimate settlement. If the tax position does not meet the "more-likely-than-not" threshold then it is not recognized in the financial statements. In accordance with FIN 48, the Company accrues interest and penalties, if any, related to unrecognized tax benefits as a component of income tax expense. If the judgments and estimates made by us are not correct, the unrecognized tax benefits may have to be adjusted, and the adjustments could be material.

Contingencies

From time to time, we receive notices for product failure claims or that our products or manufacturing processes may be infringing the patent or intellectual property rights of others or for other matters. We periodically assess each matter to determine if a contingent liability should be recorded in accordance with SFAS 5, Accounting for Contingencies. In making this assessment, we may consult, depending on the nature of the matter, with external legal counsel and technical experts. Based on the information we obtain, combined with our judgment regarding all the facts and circumstances of each matter, we determine whether it is probable that a contingent loss may be incurred and whether the amount of such loss can be reasonably estimated. Should a loss be probable and reasonably estimable, we record a loss in accordance with SFAS 5. In determining the amount of the loss, we consider advice received from experts in the specific matter, current status of legal proceedings, if any, prior case history and other factors. Should the judgments and estimates made by us be incorrect, we may need to record additional contingent losses that could materially adversely impact our results of operations and financial position.

Year Ended December 31, 2008 compared to Year Ended December 31, 2007

Net revenues for fiscal 2008 were $205,368,000, an increase of $9,541,000, or 4.9%, as compared to $195,827,000 for the same period a year ago.

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

                                       December 31,                Increase
                                    2008          2007           $          %

             BBU                  $ 189,360     $ 185,827     $ 3,533        1.9 %
             V*I Chip                14,991         8,873       6,118       69.0 %
             Picor                    1,017         1,127        (110 )     (9.8 )%

             Total                $ 205,368     $ 195,827     $ 9,541        4.9 %

             Book-to-Bill Ratio      1.03:1        1.05:1

Orders for fiscal year 2008 increased by 2.7% compared with 2007. This increase was caused by an increase in BBU orders during the period of 3.2%, offset by a decrease in V*I Chip orders.

Gross margin for fiscal 2008 increased $7,276,000, or 9.2%, to $86,285,000 from $79,009,000 in 2007 and increased as a percentage of net revenues to 42.0% from 40.3%. 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 lower product returns and warranty expense than incurred in 2007. During the third quarter of 2007, we replaced certain products and established reserves for future replacements of these products, . . .