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 transition of the Company's business strategically and organizationally from serving a highly diversified customer base to serving an increasing number of large customers; the level of customer orders overall and, in particular, from large customers and the delivery lead times associated therewith; the financial and operational impact of customer changes to shipping schedules; the derivation of a portion of the Company's sales in each quarter from orders booked in the same quarter; the Company's ongoing development of power conversion architectures, switching topologies, packaging technologies, and products; the Company's plans to invest in expanded manufacturing, capacity, and the timing thereof; the Company's belief regarding currency 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 will be sufficient to fund operations for the foreseeable future; the Company's intentions regarding the declaration and payment of cash dividends; the Company's intentions 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 implied by forward-looking statements as a result of various factors, including the Company's ability to: hire and retain key personnel; develop and market new products and technologies cost effectively, and on a timely basis leverage the Company's new technologies in standard products to promote market acceptance of the Company's new approach to power system architecture; leverage design wins into increased product sales; continue to meet requirements of key customers and prospects; enter into licensing agreements increasing the Company's market opportunity and accelerating market penetration; realize significant royalties under such licensing agreements; achieve sustainable bookings rates for the Company's products across both markets and geographies; improve manufacturing and operating efficiencies; successfully enforce the Company's intellectual property rights; successfully defend outstanding litigation; and maintain an effective system of internal controls over financial reporting, including the Company's ability to obtain required financial information for investments on a timely basis, the Company's ability to assess the value of assets, including illiquid investments, and the accounting therefor. These and other factors that may influence actual results are described in the risk factors set forth in the Company's Annual Report on Form 10-K for the year ended December 31, 2011, 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 the Company's Annual Report on Form 10-K for the year ended December 31, 2011 may not be exhaustive. Therefore, the information contained therein 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. The Company sells its products primarily to customers in the higher-performance, higher-power segments of the power systems market, including aerospace and defense electronics, enterprise and high performance computing, industrial equipment and automation, telecommunications and network infrastructure, and vehicles and transportation.

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 also includes the operations of the Company's Westcor division, the six entities comprising Vicor Custom Power, and the BBU operations of Vicor Japan Company, Ltd. ("VJCL"). The VI Chip segment includes VI Chip Corporation, which designs, develops, manufactures and markets the Company's factorized power architecture ("FPA") products. The VI Chip segment also includes the VI Chip business conducted through VJCL. Picor Corporation 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 the Company's products or to third parties for separate applications.

The Company's bookings, revenues, and operating results in 2012 have been negatively impacted by general economic conditions. Some of the markets in which the Company has historically focused remain in a weakened state. In particular, expenditures in the defense electronics sector have declined from historical levels as a result of governmental budget constraints. In addition, VI Chip and Picor continue to be dependent on a limited number of customers, and the Company has experienced slower than expected growth from certain new product opportunities.

Revenues for the second quarter of 2012 decreased by 15.2% to $55,467,000, from $65,402,000 for the corresponding period in 2011, and decreased by 7.0% on a sequential basis from $59,668,000 for the first quarter of 2012. Export sales as a percentage of total revenues for the three months ended June 30, 2012 and 2011 were approximately 48% and 62%, respectively. Gross margin decreased to $24,106,000 for the second quarter of 2012 from $27,309,000 in the second quarter of 2011, and decreased on a sequential basis from $24,467,000 for the first quarter of 2012. Gross margin as a percentage of revenue increased to 43.5% for the second quarter of 2012 compared to 41.8% for the second quarter of 2011, and increased on a sequential basis from 41.0% for the first quarter of 2012. Net income attributable to Vicor Corporation for the second quarter of 2012 was $220,000, or $0.01 per diluted share, compared to net income attributable to Vicor Corporation of $3,066,000, or $0.07 per diluted share, in the second quarter of 2011, and net income attributable to Vicor Corporation of $326,000, or $0.01 per diluted share, for the first quarter of 2012.

Revenues for the six months ended June 30, 2012, decreased by 15.3% to $115,135,000, compared to $135,857,000 for the corresponding period in 2011. Export sales as a percentage of total revenues for the six months ended June 30, 2012 and 2011 were approximately 51% and 59%, respectively. Gross margin decreased to $48,573,000 for the six months ended June 30, 2012, compared to $57,763,000 for the corresponding period in 2011. Gross margin, as a percentage of revenue, decreased to 42.2% for the six months ended June 30, 2012, compared to 42.5% for the corresponding period a year ago. Net income attributable to Vicor Corporation for the six months ended June 30, 2012, was $546,000, or $0.01 per diluted share, compared to net income attributable to Vicor Corporation of $7,084,000, or $0.17 per diluted share, for the corresponding period a year ago.

Backlog, representing the total of orders for products for which shipment is scheduled within the next 12 months, was $42,219,000 at the end of the second quarter of 2012, as compared to $45,788,000 at the end of the first quarter of 2012.

Operating expenses for the three months ended June 30, 2012, increased $472,000, or 2.1%, to $23,397,000 from $22,925,000 for the corresponding period in 2011, due to an increase in selling, general and administrative expenses of $643,000, offset by a decrease in research and development expenses of $171,000. The primary increases in selling, general and administrative expenses were compensation expenses of $955,000 and travel expenses of $237,000, partially offset by decreases in outside services expense of $197,000, depreciation and amortization of $143,000, audit, tax, and accounting fees of $109,000 and facilities expenses of $80,000. The primary decreases in research and development expenses were compensation expenses of $261,000 and project and pre-production materials of $90,000, partially offset by increases in set-up and tooling expenses of $118,000 and supplies expenses of $66,000.

Operating expenses for the six months ended June 30, 2012 increased $441,000, or 0.9%, to $47,400,000 from $46,959,000 in 2011, due to an increase in selling, general and administrative expenses of $623,000, offset by a decrease in research and development expenses of $182,000. The primary increases in selling, general and administrative expenses were compensation expenses of $1,651,000, and travel expenses of $446,000, partially offset by decreases in legal fees of $483,000, commissions expense of $470,000, depreciation and amortization of $237,000, bad debt expense of $96,000, facilities expenses of $67,000, outside services expense of $37,000, and stockholder reporting expenses of $36,000. The primary decreases in research and development expenses were compensation expenses of $294,000 and outside services expense of $119,000, partially offset by increases in set-up and tooling expenses of $108,000, computer related expenses of $64,000, depreciation and amortization of $29,000, and travel expenses of $21,000.

"Other income (expense), net" for the three months ended June 30, 2012, decreased $464,000 to $82,000 compared to $546,000 for the corresponding period a year ago. The primary reasons for the decrease were decreases in credit gains on available for sale securities of $359,000, foreign currency gains of $84,000, and interest income of $28,000.

"Other income (expense), net" for the six months ended June 30, 2012, decreased $213,000 to $135,000 compared to $348,000 for the corresponding period in 2011. The primary reasons for the decrease were decreases in credit gains on available for sale securities of $363,000 and interest income of $79,000, partially offset by a decrease in foreign currency losses of $195,000.

For the six months ended June 30, 2012, depreciation and amortization totaled $5,244,000 and capital additions totaled $2,785,000, compared to $5,401,000 and $5,035,000, respectively, for the first six months of 2011.

Inventories decreased by approximately $5,022,000 or 14.0% to $30,730,000, compared to $35,752,000 at December 31, 2011. This decrease was associated with decreases in VI Chip and BBU inventories of $4,549,000 and $957,000, respectively, partially offset by an increase in Picor inventories of approximately $484,000. The overall decrease reflects an effort to manage the level of raw materials, in particular, in light of reduced bookings.

Critical Accounting Policies and Estimates

Please refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2011, for a complete summary of the critical accounting policies and estimates.

Three months ended June 30, 2012, compared to three months ended June 30, 2011

Net revenues for the second quarter of 2012, were $55,467,000, a decrease of $9,935,000 or 15.2% as compared to $65,402,000 for the same period a year ago, and decreased 7.0% on a sequential basis from the first quarter of 2012.

The components of net revenues for the three months ended June 30, were as follows (dollars in thousands):

                                                      Increase (decrease)
                            2012         2011            $              %
                BBU       $ 45,822     $ 49,066     $    (3,244 )       (6.6 )%
                VI Chip      9,069       14,685          (5,616 )      (38.2 )%
                Picor          576        1,651          (1,075 )      (65.1 )%

                Total     $ 55,467     $ 65,402     $    (9,935 )      (15.2 )%

The decrease in BBU revenues is attributed to a decrease in BBU component revenues of approximately $2,128,000 and a decrease in Westcor revenue of approximately $1,131,000, partially offset by an increase in Vicor Custom Power revenue of approximately $233,000. The decrease in VI Chip and Picor revenue is a result of lower bookings over the last three quarters and reflects a dependence on a limited number of customers. Revenue growth for both VI Chip and Picor is expected to decline in 2012. Orders during the three months ending June 30, 2012, increased by 1.7% compared with the first quarter of 2012, but were 6.2% lower than the same period in 2011.

Gross margin for the second quarter of 2012 decreased $3,203,000, or 11.7%, to $24,106,000 from $27,309,000 in the second quarter of 2011 due to a decrease in net revenues. Gross margin as a percentage of net revenues increased to 43.5% from 41.8%, primarily due to the shift to a larger proportion of higher margin BBU products.

Selling, general and administrative expenses were $13,665,000 for the quarter ended June 30, 2012, an increase of $643,000, or 4.9%, compared to $13,022,000 for the same period in 2011. Selling, general and administrative expenses as a percentage of net revenues increased to 24.6% from 19.9% for the same period in 2011, primarily due to a decrease in net revenues.

The components of the $643,000 increase in selling, general and administrative expenses were as follows (in thousands):

                                               Increase (decrease)
           Compensation                      $     955           13.3 %(1)
           Travel expenses                         237           45.1 %(2)
           Employment recruiting                    68          127.5 %
           Outside services                       (197 )        (31.5 )%(3)
           Depreciation and amortization          (143 )        (16.5 )%(4)
           Audit, tax, and accounting fees        (109 )        (47.1 )%
           Facilities expenses                     (80 )        (26.6 )%
           Other, net                              (88 )         (2.7 )%

                                             $     643            4.9 %

(1) Increase primarily attributed to an increase in headcount, annual compensation adjustments in May 2012, and an increase in fringe benefit expense due to increases in premiums for employee health benefits.

(2) Increase primarily attributed to increased travel by the Company's sales and marketing personnel and VJCL sales personnel.

(3) Decrease primarily attributed to overall decreased use of outside services throughout the Company.

(4) Decrease attributed to certain of the Company's corporate fixed assets becoming fully depreciated during 2012.

Research and development expenses were $9,732,000 for the quarter ended June 30, 2012, a decrease of $171,000, or 1.7%, compared to $9,903,000 for the same period in 2011. As a percentage of net revenues, research and development increased to 17.5% from 15.1% for the same period in 2011, primarily due to a decrease in net revenues.

The components of the $171,000 decrease in research and development expenses were as follows (in thousands):

                                                  Increase (decrease)
         Compensation                           $    (261 )         (3.7 )%(1)
         Project and pre-production materials         (90 )         (9.8 )%
         Outside services                             (89 )        (23.6 )%
         Set-up and tooling expenses                  118          445.0 %(2)
         Supplies expense                              66           39.2 %
         Employment recruiting                         28          315.0 %
         Deferred costs                                27          100.0 %
         Other, net                                    30            2.1 %

                                                $    (171 )         (1.7 )%

(1) Decrease attributed to reductions in VI Chip and Westcor headcount and a decrease in VI Chip and Picor stock compensation expense.

(2) Increase primarily attributed to an increase in tooling charges associated with the development of VI Chip products.

The significant changes in the components of the "Other income (expense), net" were as follows (in thousands):

                                                                          Increase
                                                    2012      2011       (decrease)
     Interest income                                $  40     $  68      $       (28 )
     Gain (loss) on disposals of equipment              9        (1 )             10
     Foreign currency gains                            -         84              (84 )
     Credit gain on available for sale securities       1       360             (359 )
     Other, net                                        32        35               (3 )

                                                    $  82     $ 546      $      (464 )

The decrease in credit gains on available-for-sale auction rate securities (i.e., the Company's auction rates securities held by Bank of America) was primarily due to the redemption at par by issuers of $7,800,000 of auction rate securities during the three months ended June 30, 2011 for which credit losses had previously been recorded. There were no redemptions during the three months ended June 30, 2012. The Company's exposure to market risk for fluctuations in foreign currency exchange 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 decrease in interest income for the period was due to lower average balances on the Company's long-term investments as well as a general decrease in interest rates.

Income before income taxes was $791,000 for the second quarter of 2012, compared to $4,930,000 for the same period in 2011.

The provision for income taxes and the effective income tax rate were as follows (dollars in thousands):

                                                2012        2011
                  Provision for income taxes   $  547      $ 1,726
                  Effective income tax rate      69.2 %       35.0 %

For the three months ended June 30, 2012 compared to 2011, the provision for income taxes decreased due to the decrease in income before income taxes. The increase in the effective tax rate for the three months ended June 30, 2012 compared to 2011 is primarily due to lower expected consolidated pre-tax income for 2012, high state tax expense from separate-company calculations due to expected taxable income from Vicor Corporation-only operations that cannot be offset by operating losses in other business segments, and the inability to generate federal research and development credits because such credits have not been extended by Congress for 2012.

Net income attributable to noncontrolling interest decreased $114,000 to $24,000 for the three months ended June 30, 2012 from $138,000 for the same period in 2011. This decrease was due to lower net income of entities in which the Company holds a noncontrolling equity interest (i.e., certain Vicor Custom Power subsidiaries).

Basic and diluted income per share attributable to Vicor Corporation was $0.01 for the second quarter of 2012, compared to $0.07 for the second quarter of 2011.

Six months ended June 30, 2012 compared to six months ended June 30, 2011

Net revenues for the six months ended June 30, 2012 were $115,135,000, a decrease of $20,722,000 or 15.3%, compared to $135,857,000 for the same period a year ago.

The components of net revenues for the six months ended June 30, were as follows (dollars in thousands):

                                                       Increase (decrease)
                           2012          2011             $              %
               BBU       $  90,757     $ 104,657     $   (13,900 )      (13.3 )%
               VI Chip      22,900        28,088          (5,188 )      (18.5 )%
               Picor         1,478         3,112          (1,634 )      (52.5 )%

               Total     $ 115,135     $ 135,857     $   (20,722 )      (15.3 )%

The decrease in BBU revenues is primarily attributed to a decrease in BBU component revenues of approximately $7,182,000, a decrease in Vicor Custom Power revenues of approximately $6,240,000, and a decrease in Westcor revenues of approximately $1,170,000, partially offset by an increase in VJCL revenues of $687,000. The decrease in Vicor Custom Power revenue was due to a decrease in defense electronics bookings and the completion of two major programs in the first quarter of 2011. The decrease in VI Chip and Picor revenues is a result of lower bookings and reflects a dependence on a limited number of customers. Overall bookings during the six months ended June 30, 2012 decreased by 3.1% compared with the last six months of 2011. This decrease was attributed to decreases in VI Chip and Picor orders of 30.5% and 24.5%, respectively, partially offset by an increase in BBU orders of 3.0%.

Gross margin for the first six months of 2012 decreased $9,190,000, or 15.9%, to $48,573,000 from $57,763,000 compared to the same period a year ago, due to a decrease in net revenues. Gross margin as a percentage of net revenues decreased to 42.2% from 42.5%, due to a decrease in net revenues, but was partially offset by higher average selling prices for BBU and VI Chip products.

Selling, general and administrative expenses were $27,825,000 for the six months ended June 30, 2012, an increase of $623,000, or 2.3%, compared to $27,202,000 for the same period in 2011. Selling, general and administrative expenses as a percentage of net revenues increased to 24.2% from 20.0% for the same period in 2011, primarily due to the decrease in net revenues.

The components of the $623,000 increase in selling, general and administrative expenses were as follows (in thousands):

                                              Increase (decrease)
            Compensation                    $   1,651           11.3 %(1)
            Travel expenses                       446           46.8 %(2)
            Advertising expenses                   47            4.3 %
            Legal fees                           (483 )        (29.3 )%(3)
            Commissions expense                  (470 )        (15.1 )%(4)
            Depreciation and amortization        (237 )        (14.1 )%(5)
            Bad debt expense                      (96 )       (340.5 )%
            Facilities expenses                   (67 )        (10.1 )%
            Outside services                      (37 )         (3.5 )%
            Stockholder reporting expense         (36 )        (27.5 )%
            Other, net                            (95 )         (4.2 )%(6)

                                            $     623            2.3 %

(1) Increase primarily attributed to an increase in headcount, annual compensation adjustments in May 2012, and an increase in fringe benefit expense due to increases in premiums for employee health benefits.

(2) Increase primarily attributed to increased travel by the Company's sales and marketing personnel and VJCL sales personnel.

(3) Decrease in legal fees attributed to a decrease in legal expenses associated with the patent infringement claim filed against the Company during the first quarter of 2011 by SynQor, Inc. See Note 10 to the Condensed Consolidated Financial Statements.

(4) Decrease primarily attributed to the decrease in net revenues subject to commissions.

(5) Decrease attributed to certain of the Company's corporate fixed assets becoming fully depreciated during 2012.

(6) Other, net consists of several items, none of which was individually material.

. . .