Management's Discussion and Analysis of Financial Condition and Results of Operation June 30, 2009 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. 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 the derivation of a portion of the Company's sales in each quarter from orders booked in the same quarter, the Company's plans to invest in research and development and manufacturing equipment, the Company's belief regarding market risk being mitigated because of limited foreign exchange fluctuation exposure, the Company's continued success depending in part on its ability to attract and retain qualified personnel, the Company's belief that cash generated from operations and the total of its cash and cash equivalents and short-term investments will be sufficient for the foreseeable future, the Company's intention regarding protecting its rights under its patents and the Company's expectation that no current litigation or claims will have a material adverse impact on its financial position or results of operations. These statements are based upon the Company's current expectations and estimates as to the prospective events and circumstances which may or may not be within the Company's control and as to which there can be no assurance. Actual results could differ materially from those projected in the forward-looking statements as a result of various factors, including our ability to develop and market new products and technologies cost effectively, to leverage design wins into increased product sales, to continue to make progress with key customers and prospects, to decrease manufacturing costs, to enter into licensing agreements that amplify the market opportunity and accelerate market penetration, to realize significant royalties under license agreements, to achieve a sustainable increased bookings rate over a longer period, to hire key personnel and to continue to build our three business units, to successfully enforce our intellectual property rights, to successfully defend outstanding litigation, to successfully leverage the V*I Chips in standard products to promote market acceptance of Factorized Power Architecture, to develop or maintain an effective system of internal controls, to obtain required financial information for certain investments on a timely basis, and factors impacting the Company's various end markets, the impact of write-downs in the value of assets, the effects of equity accounting with respect to certain affiliates, the failure of auction rate securities to sell at their reset dates as well as those factors described in the risk factors set forth in the Company's Annual Report on Form 10-K for the year ended December 31, 2008, under Part I, Item I - "Business," 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 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 independent sales representative organizations in North and South America and, internationally, through independent distributors. Export sales as a percentage of total revenues for the six months ended June 30 were approximately 38% in 2009 and 43% in 2008, respectively.
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, and includes the operations of the Company's Westcor division, Vicor Customer 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 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.

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VICOR CORPORATION Management's Discussion and Analysis of Financial Condition and Results of Operation June 30, 2009 Revenues for the second quarter increased by 2.7% to $50,627,000, compared to $49,297,000 for the corresponding period a year ago, and increased 0.4% on a sequential basis from $50,448,000 for the first quarter of 2009. Gross margin increased to $22,598,000 for the second quarter of 2009, compared to $21,113,000 for the corresponding period a year ago, and increased on a sequential basis from $21,831,000 for the first quarter of 2009. Gross margin, as a percentage of revenue, increased to 44.6% for the second quarter of 2009 compared to 42.8% for the second quarter of 2008, and increased on a sequential basis from 43.3% for the first quarter of 2009. Net income (loss) attributable to Vicor Corporation for the second quarter was $1,341,000, or $0.03 per diluted share, compared to net income (loss) attributable to Vicor Corporation of $(1,323,000), or $(0.03) per diluted share, for the corresponding period a year ago and net loss attributable to Vicor Corporation of $(2,543,000), or $(0.06) per diluted share, for the first quarter of 2009.
Revenues for the six months ended June 30, 2009 decreased by 1.6% to $101,075,000, compared to $102,766,000 for the corresponding period a year ago. Net loss attributable to Vicor Corporation for the six months ended June 30, 2009 was $1,202,000, or $(0.03) per diluted share, compared to net loss attributable to Vicor Corporation of $703,000, or $(0.02) per diluted share, for the corresponding period a year ago. The net loss for the six month period was primarily due to an aggregate pre-tax charge of $3,957,000 for the cost of severance and other employee-related costs in connection with the Company's workforce reductions implemented in the first and second quarters of 2009.
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 0.79:1 for the second quarter of 2009, compared to 0.99:1 for the first quarter of 2009. Backlog, representing the total of purchase orders received for which product has not yet been shipped, was $41,515,000 at the end of the second quarter of 2009, as compared to $52,068,000 at the end of the first quarter of 2009.
Operating expenses for the three months ended June 30, 2009 decreased $1,389,000, or 6.3%, to $20,489,000 from $21,878,000 in 2008, principally due to decreases in selling, general and administrative expenses of $1,956,000 and research and development expenses of $469,000, offset by a pre-tax severance charge of $859,000 in connection with a workforce reduction completed in the second quarter of 2009. The key decreases in selling, general and administrative expenses were compensation expenses of $872,000, legal fees of $206,000, travel expenses of $198,000 and audit and tax fees of $158,000.
Operating expenses for the six months ended June 30, 2009 increased $720,000, or 1.7%, to $44,161,000 from $43,441,000 in 2008, principally due to an aggregate pre-tax severance charge of $3,957,000 in connection with workforce reductions completed in the first and second quarters of 2009, offset by a decreases in selling, general and administrative expenses of $3,185,000 and research and development expenses of $229,000. The key decreases in selling, general and administrative expenses were compensation expenses of $1,054,000, legal fees of $853,000, and audit and tax fees of $610,000.
Other income (expense), net for the three months ended June 30, 2009 decreased $277,000 to $193,000 from $470,000 in 2008. The primary reasons for the decrease were a decrease in interest income of $304,000.
Other income (expense), net for the six months ended June 30, 2009 decreased $1,359,000 to $311,000 from $1,670,000 in 2008. The primary reasons for the decrease were a decrease in interest income of $978,000 and a decrease in foreign currency gains of $205,000.
For the six months ended June 30, 2009, depreciation and amortization was $5,234,000, and capital additions were $2,749,000, compared to $5,211,000 and $4,169,000, respectively, for the first six months of 2008.
Inventories decreased by approximately $1,918,000 or 7.2% to $24,763,000 as compared with $26,681,000 at December 31, 2008. The decrease was primarily attributed to a decrease in BBU inventories of approximately $1,726,000 and a decrease in V*I Chip inventories of $436,000, offset by an increase in Picor's inventories of $244,000.

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VICOR CORPORATION Management's Discussion and Analysis of Financial Condition and Results of Operation June 30, 2009 Critical Accounting Policies and Estimates Please refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2008, for a complete summary of the critical accounting policies and estimates.
Three months ended June 30, 2009 compared to three months ended June 30, 2008 Net revenues for the second quarter of 2009 were $50,627,000, an increase of $1,330,000 or 2.7%, as compared to $49,297,000 for the same period a year ago, and an increase of 0.4% on a sequential basis from the first quarter of 2009.
The components of revenue were as follows (dollars in thousands):

Three Months Ended June 30, Increase (decrease) 2009 2008 $ % BBU $ 47,621 $ 45,963 $ 1,658 3.6% V*I Chip 2,431 3,129 (698 ) (22.3)% Picor 575 205 370 180.5% Total $ 50,627 $ 49,297 $ 1,330 2.7% Book-to-Bill Ratio 0.79:1 1.01:1

Orders during the quarter decreased by 20.0% compared with the first quarter of 2009. This decrease was caused by a decrease in BBU orders of 20.8% and a decrease in V*I Chip orders during the period of 9.8%. The quarterly book-to-bill ratio has been volatile and management believes that the ratio is not always an accurate indicator of the amount or timing of future revenue. However, given the magnitude of the ratio's decline for the second quarter, and our backlog at June 30, 2009, management anticipates the Company will experience a sequential decline in revenue for the third quarter of 2009.
Gross margin for the second quarter of 2009 increased $1,485,000, or 7.0%, to $22,598,000 from $21,113,000 in the second quarter of 2008, and increased to 44.6% from 42.8% as a percentage of net revenues. The primary component of the increase in gross margin dollars and percentage were the increase in net revenues, a more favorable product mix, principally due to increased shipments of higher gross margin brick and Vicor Custom Power products and a decrease in shipments of lower gross margin V*I Chip products, along with lower brick production costs.
Selling, general and administrative expenses were $12,019,000 for the period, a decrease of $1,956,000, or 14.0%, as compared to $13,975,000 for the same period in 2008. Selling, general and administrative expenses as a percentage of net revenues, decreased to 23.7% from 28.3% for the same period in 2008.

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VICOR CORPORATION Management's Discussion and Analysis of Financial Condition and Results of Operation June 30, 2009 The components of the $1,956,000 decrease were as follows (in thousands): Increase (decrease) Compensation $ (872 ) (14.1)% (1) Legal fees (206 ) (41.8)% (2) Travel expenses (198 ) (31.2)% (3) Commissions expense (185 ) (15.2)% (4) Audit and tax fees (158 ) (29.8)% (5) Advertising expenses (156 ) (21.5)% (6) Training expenses (143 ) (33.4)% International office expenses (85 ) (57.8)% Vicor Japan expenses (76 ) (7.9)% Vicor Custom Power related expenses 179 17.6% (7) Other, net (56 ) (3.5)% $ (1,956 ) (14.0)%

(1) Decrease primarily attributable to the workforce reductions completed in the first and second quarters of 2009.

(2) Decrease primarily attributed to a decrease in activity associated with the Company's lawsuit brought against certain of its insurance carriers with respect to the Ericsson, Inc. settlement of product liability litigation in the second quarter of 2009 compared to 2008.

(3) Represents an overall reduction in travel across all business units and functional groups.

(4) Decrease primarily attributed to the changes in the mix of revenues subject to commissions.

(5) Decrease primarily attributed to the late filings of our 2007 Forms 10-Q and additional work related to accounting for our investment in GWS in the first quarter of 2008.

(6) Decrease is primarily attributed to decreased advertising in trade publications.

(7) Increase primarily attributed to $132,000 in increased commissions expense due to increased revenues at Vicor Custom Power subsidiaries.

Research and development expenses were $7,611,000 for the period, a decrease of $469,000, or 5.8%, as compared to $8,080,000 for the same period in 2008. As a percentage of net revenues, research and development decreased to 15.0% from 16.4%.

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VICOR CORPORATION Management's Discussion and Analysis of Financial Condition and Results of Operation June 30, 2009 The components of the $469,000 decrease were as follows (in thousands): Increase (decrease) Vicor Custom Power related expenses $ 218 37.0% (1) Picor non-recurring engineering charges 159 (83.4)% (2) Facility expenses 58 15.8% Project materials (247 ) (23.4)% (3) Compensation (299 ) (5.5)% (4) Deferred costs (339 ) 100.0% (5) Other, net (19 ) (2.2)% $ (469 ) 5.8%

(1) Increase primarily attributed to increased outside services of $128,000 and an increase in compensation expense of $94,000.

(2) The Picor business unit provides engineering services to BBU and V*I Chip to support certain manufacturing processes and research and development activities. A decline in services related to manufacturing processes resulted in an increase in the amount of charges allocated to research and development expense.

(3) Decrease primarily attributed to a decrease in project materials associated with V*I Chip products.

(4) Decrease primarily attributed to the workforce reductions that were completed in the first and second quarters of 2009.

(5) Decrease primarily attributed to an increase in deferred costs associated with certain non-recurring engineering projects for which the related revenues have been deferred.

During the second quarter of 2009, senior management authorized additional reductions in its workforce. The Company completed the workforce reduction in the second quarter of 2009 and recorded a pre-tax charge for severance and other employee-related costs of $859,000 in the second quarter of 2009.
The major changes in the components of the other income (expense), net were as follows (in thousands):

Increase 2009 2008 (decrease) Interest income $ 216 $ 520 $ (304 ) Foreign currency gains (losses) 63 (59 ) 122 Unrealized loss on auction rate securities rights (145 ) - (145 ) Unrealized gain on trading securities 494 - 494 Credit loss on available for sale securities (473 ) - (473 ) Other 38 9 29 $ 193 $ 470 $ (277 )

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 increase in foreign currency gains is due to favorable exchange rates in the second quarter of 2009 as compared to 2008. The Company's exposure to market risk for fluctuations in foreign currency exchange

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VICOR CORPORATION Management's Discussion and Analysis of Financial Condition and Results of Operation June 30, 2009 rates relates primarily to the operations of VJCL. The functional currency of the Company's subsidiaries in Europe and Hong Kong is the U.S. dollar. The unrealized gains (losses) and credit loss on the Company's auction rate securities and securities rights results from the change in fair value of these investments during the period.
Income (loss) before income taxes was $2,302,000 for the second quarter of 2009 compared to $(295,000) for the same period in 2008.
The provision for income taxes and the effective income tax rate for the three months ended June 30, 2009 and 2008 were as follows (dollars in thousands):

Three Months Ended June 30, 2009 2008 Provision for income taxes $ 544 $ 350 Effective income tax rate 23.6% (118.6%)

The lower effective income tax rate for the three months ended June 30, 2009 compared to the same period in 2008 is principally due to the higher income
(loss) before income taxes than in 2008. Loss from equity method investment (net of tax) decreased from $172,000 in the second quarter of 2008 to $0 in 2009. This was due to the allocation of equity method losses in the second quarter of 2008 and bringing the investment balance in GWS to zero as of December 31, 2008. Net income of noncontrolling interest decreased $89,000 to $417,000 in the second quarter of 2009 from $506,000 for the same period in 2008. This was due to lower net income at certain entities in which the Company holds a noncontrolling interest. Basic and diluted income (loss) per share attributable to Vicor Corporation was $0.03 for the second quarter of 2009 compared to $(0.03) for the second quarter of 2008. Six months ended June 30, 2009 compared to six months ended June 30, 2008 Net revenues for the six months of 2009 were $101,075,000, a decrease of $1,691,000 or 1.6%, as compared to $102,766,000 for the same period a year ago. The components of revenue were as follows (dollars in thousands):

Six Months Ended June 30, Increase (decrease) 2009 2008 $ % BBU $ 96,382 $ 94,973 $ 1,409 1.5% V*I Chip 3,707 7,407 (3,700 ) (50.0)% Picor 986 386 600 155.4% Total $ 101,075 $ 102,766 $ (1,691 ) -1.6% Book-to-Bill Ratio 0.89:1 1.00:1

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VICOR CORPORATION Management's Discussion and Analysis of Financial Condition and Results of Operation June 30, 2009 Orders during the period decreased by 17.3% compared with the second half of 2008. This decrease was caused by a decrease in BBU orders during the period of 20.3%, offset by an increase in V*I Chip orders of 35.7%. The book-to-bill ratio for the first six months of 2009 was 0.89:1 as compared to 1.00:1 for the same period a year ago, and 1.06:1 for the second half of 2008.
Gross margin for the first six months of 2009 increased $856,000, or 2.0%, to $44,429,000 from $43,573,000 and increased to 44.0% from 42.4% as a percentage of net revenues compared to the same period a year ago. The primary component of the increase in gross margin dollars and percentage was due to a more favorable product mix, principally due to increased shipments of higher gross margin products from the Vicor Custom Power subsidiaries and a decrease in shipments of lower gross margin V*I Chip products.
Selling, general and administrative expenses were $24,842,000 for the period, a decrease of $3,185,000, or 11.4%, as compared to $28,027,000 for the same period in 2008. As a percentage of net revenues, selling, general and administrative expenses decreased to 24.6% from 27.3%.
The components of the $3,185,000 decrease were as follows (in thousands):

Increase (decrease) Compensation $ (1,054 ) (8.7)% (1) Legal fees (853 ) (58.6)% (2) Audit and tax fees (610 ) (45.1)% (3) Travel expenses (376 ) (33.0)% (4) Advertising expenses (290 ) (21.1)% (5) Commissions expense (245 ) (10.6)% (6) Training expenses (192 ) (24.6)% International office expenses (76 ) (38.1)% Vicor Custom Power related expenses 612 29.6% (7) Other, net (101 ) (2.0)% (3,185 ) (11.4)%

(1) Decrease primarily attributable to the workforce reductions completed in the first and second quarters of 2009.

(2) Decrease primarily attributed to a decrease in activity associated with the Company's lawsuit brought against certain of its insurance carriers with respect to the Ericsson, Inc. settlement of product liability litigation in the first two quarters of 2009 compared to 2008.

(3) Decrease primarily attributed to the late filings of our 2007 Forms 10-Q and additional work related to accounting for our investment in GWS in the first quarter of 2008.

(4) Represents an overall reduction in travel across all business units and functional groups.

(5) Decrease primarily attributed to decreased advertising in trade publications.

(6) Decrease primarily attributed to lower revenues and the changes in the mix of revenues subject to commissions.

(7) Increase primarily attributed to $600,000 in increased commissions expense due to increased revenues at Vicor Custom Power subsidiaries.

Research and development expenses decreased $229,000, or 1.5%, to $15,362,000 from $15,591,000. As a percentage of net revenues, research and development remained flat at 15.2%.

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VICOR CORPORATION Management's Discussion and Analysis of Financial Condition and Results of Operation June 30, 2009 The components of the $229,000 decrease were as follows (in thousands): Increase (decrease) Deferred costs $ (576 ) 100.0% (1) Project materials (324 ) (17.8)% (2) Compensation (72 ) (0.7)% Travel Expenses (52 ) (35.6)% Vicor Custom Power related expenses 421 37.6% (3) Picor non-recurring engineering charges 365 87.4% (4) Facilities expenses 128 17.1% Other, net (119 ) (7.2)% $ (229 ) (1.5)%

(1) Decrease primarily attributed to an increase in deferred costs capitalized for certain non-recurring engineering projects for which the related revenues have been deferrred.

(2) Decrease primarily attributed to a decrease in project materials associated with V*I Chip products.

(3) Increase primarily attributed to increases in compensation expense of $163,000, outside services of $146,000 and sub-contract labor of $44,000.

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