##### Table of Contents



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
 Commission File Number 0-18277
 VICOR CORPORATION
  Delaware
    
    04-2742817(State of Incorporation)
    
    (I.R.S. Employer Identification No.)
 
 
 
 þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller Reporting Company o
 o þ
  Common Stock, $.01 par value  29,897,510Class B Common Stock, $.01 par value  11,767,052




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##### 



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




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




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FORM 10-QPART IITEM 1PAGE 2
  
 
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net revenues
    
    $
    51,278
    
    
    $
    47,693
    
    
    $
    154,044
    
    
    $
    141,880Cost of revenues
    
    
    29,375
    
    
    
    29,789
    
    
    
    88,568
    
    
    
    84,150Gross margin
    
    
    21,903
    
    
    
    17,904
    
    
    
    65,476
    
    
    
    57,730Operating expenses:Selling, general and administrative
    
    
    13,703
    
    
    
    12,314
    
    
    
    41,730
    
    
    
    36,490Research and development
    
    
    7,801
    
    
    
    7,735
    
    
    
    23,392
    
    
    
    22,802Gain from litigation-related settlements, net
    
    
    
    
    
    
    
    
    
    
    (177
    )
    
    
    (1,353
    )Total operating expenses
    
    
    21,504
    
    
    
    20,049
    
    
    
    64,945
    
    
    
    57,939Income (loss) from operations
    
    
    399
    
    
    
    (2,145
    )
    
    
    531
    
    
    
    (209
    )Other income (expense), net
    
    
    (230
    )
    
    
    1,242
    
    
    
    489
    
    
    
    3,725Income (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
    
    
    
    1,007Net income (loss)
    
    $
    609
    
    
    $
    543
    
    
    $
    (94
    )
    
    $
    3,838Net income (loss) per common share:Basic
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    (0.00
    )
    
    $
    0.09Diluted
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    (0.00
    )
    
    $
    0.09Shares used to compute net income (loss) per share:Basic
    
    
    41,660
    
    
    
    41,617
    
    
    
    41,646
    
    
    
    41,586Diluted
    
    
    41,685
    
    
    
    41,715
    
    
    
    41,646
    
    
    
    41,657Cash dividends per share
    
    $
    0.15
    
    
    $
    0.15
    
    
    $
    0.30
    
    
    $
    0.30




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FORM 10-QPART IITEM 1PAGE 3
  
 
 Nine Months EndedSeptember 30,2008
    
    
    2007Operating activities:Net income (loss)
    
    $
    (94
    )
    
    $
    3,838Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    7,824
    
    
    
    8,928Minority interest in net income of subsidiaries
    
    
    1,452
    
    
    
    179Long-term deferred revenue
    
    
    1,082
    
    
    
    Loss from equity method investment, net of tax
    
    
    1,049
    
    
    
    1,007Stock compensation expense
    
    
    881
    
    
    
    498Amortization 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
    
    
    
    155,636Additions to property, plant and equipment
    
    
    (6,557
    )
    
    
    (7,427
    )Purchase of equity method investment
    
    
    (1,000
    )
    
    
    (1,000
    )Proceeds from sale of equipment
    
    
    22
    
    
    
    108Change in restricted cash and cash equivalents
    
    
    54
    
    
    
    Increase in other assets
    
    
    (197
    )
    
    
    (85
    )Net cash provided by investing activities
    
    
    9,023
    
    
    
    45,172Financing activities:Proceeds from issuance of Common Stock
    
    
    197
    
    
    
    495Common 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
    
    
    
    13,644Cash and cash equivalents at beginning of period
    
    
    20,017
    
    
    
    35,860Cash and cash equivalents at end of period
    
    $
    25,436
    
    
    $
    49,504




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FORM 10-QPART IITEM 1PAGE 4
  
 
 1.
    
    Basis of PresentationThe 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 ConsolidationThe 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 InvestmentsThe 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.




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FORM 10-QPART IITEM 1PAGE 5
  
 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




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FORM 10-QPART IITEM 1PAGE 6
  
 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.




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FORM 10-QPART IITEM 1PAGE 7
  
 4.
    
    Fair Value MeasurementsThe 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.




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FORM 10-QPART IITEM 1PAGE 8
  
 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.




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FORM 10-QPART IITEM 1PAGE 9
  
 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):
 UsingSignificantQuoted Prices
    
    Other
    
    Significantin Active
    
    Observable
    
    Unobservable
    
    Total FairMarkets
    
    Inputs
    
    Inputs
    
    Value as of(Level 1)
    
    (Level 2)
    
    (Level 3)
    
    September 30, 2008Cash equivalents:Money market funds
    
    $
    17,022
    
    
    $
    
    
    
    $
    
    
    
    $
    17,022Certificate of deposit
    
    
    90
    
    
    
    
    
    
    
    
    
    
    
    90Short term investments:Auction rate securities
    
    
    
    
    
    
    50
    
    
    
    
    
    
    
    50Short term investments
    
    
    1,914
    
    
    
    
    
    
    
    
    
    
    
    1,914Long term investments:Auction rate securities
    
    
    
    
    
    
    
    
    
    
    36,090
    
    
    
    36,090Certificates of deposit
    
    
    450
    
    
    
    
    
    
    
    
    
    
    
    450Restricted 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 3Balance at the beginning of the period (1)
    
    $
    Transfers into Level 3 categorization
    
    
    38,500Redemption (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
 
 (1)
    
    The Company adopted SFAS 157 in January 2008 and, as such, had no beginning balance of
such assets.(2)
    
    On August 22, 2008, the Company received a partial redemption of $75,000 at par
value.(3)
    
    Partial redemption of $50,000 at par value received on October 10, 2008. 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




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FORM 10-QPART IITEM 1PAGE 10
  
 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 CompensationThe 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 EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Cost of revenues
    
    $
    24
    
    
    $
    12
    
    
    $
    69
    
    
    $
    36Selling, general and administrative (1)
    
    
    218
    
    
    
    104
    
    
    
    649
    
    
    
    268Research and development
    
    
    51
    
    
    
    61
    
    
    
    163
    
    
    
    194Total stock based compensation
    
    $
    293
    
    
    $
    177
    
    
    $
    881
    
    
    $
    498
 
 (1)
    
    The increase in selling, general and administrative stock-based compensation
expense in fiscal 2008 is primarily the result of acceleration of the service periods
used to amortize the cost of V*I Chip stock options granted to the Companys Chief
Executive Officer in 2007.




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##### Table of Contents



FORM 10-QPART IITEM 1PAGE 11
  
 6.
    
    Net Income (Loss) per ShareThe 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 EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Numerator:Net income (loss)
    
    $
    609
    
    
    $
    543
    
    
    $
    (94
    )
    
    $
    3,838Denominator:Denominator for basic income
per share (weighted average shares)
    
    
    41,660
    
    
    
    41,617
    
    
    
    41,646
    
    
    
    41,586Effect of dilutive securities:Employee stock options (1) (2)
    
    
    25
    
    
    
    98
    
    
    
    
    
    
    
    71Denominator for diluted income per
share (adjusted weighted-average shares
and assumed conversions)
    
    
    41,685
    
    
    
    41,715
    
    
    
    41,646
    
    
    
    41,657Basic income (loss) per share
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    (0.00
    )
    
    $
    0.09Diluted income (loss) per share
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    (0.00
    )
    
    $
    0.09
 
 (1)
    
    Options to purchase 1,020,897 and 952,363 shares of Common Stock were
outstanding for the three months ended September 30, 2008 and 2007, respectively, and
options to purchase 1,000,808 shares of Common Stock were outstanding for the nine
months ended September 30, 2007, respectively, but were not included in the computation
of diluted income per share because the options exercise prices were greater than the
average market price of the Common Stock and, therefore, the effect would have been
antidilutive.(2)
    
    Options to purchase 1,036,656 shares of Common Stock for the nine months ended
September 30, 2008 were not included in the calculation of net loss per share as the
effect would have been antidilutive. 7.
    
    InventoriesInventories 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.




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##### Table of Contents



FORM 10-QPART IITEM 1PAGE 12
  
 7.
    
    Inventories (continued)Inventories, net as of September 30, 2008 and December 31, 2007 were as follows (in
thousands):
 September 30, 2008
    
    
    December 31, 2007Raw materials
    
    $
    23,783
    
    
    $
    23,711Work-in-process
    
    
    3,296
    
    
    
    2,656Finished goods
    
    
    5,929
    
    
    
    4,35733,008
    
    
    
    30,724Inventory reserves
    
    
    (5,904
    )
    
    
    (7,646
    )Inventories, net
    
    $
    27,104
    
    
    $
    23,078
 8.
    
    InvestmentsIn 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.




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##### Table of Contents



FORM 10-QPART IITEM 1PAGE 13
  
 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
    
    
    2007Equity method goodwill
    
    $
    528
    
    
    $
    634Intangible 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 EndedSeptember 30
    
    
    September 302008
    
    
    2007
    
    
    2008
    
    
    2007Allocation of losses from equity
method
investment, net of tax
    
    $
    54
    
    
    $
    125
    
    
    $
    228
    
    
    $
    208Amortization of intangible assets
and other, net of tax
    
    
    33
    
    
    
    45
    
    
    
    115
    
    
    
    179Other than temporary
decline in investment
    
    
    
    
    
    
    
    
    
    
    706
    
    
    
    620Loss 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




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##### Table of Contents



FORM 10-QPART IITEM 1PAGE 14
  
 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 ofSeptember 30,
    
    December 31,2008
    
    2007(unaudited)Current assets
    
    $
    1,242
    
    
    $
    2,322Noncurrent assets
    
    
    3,057
    
    
    
    3,110Total assets
    
    
    4,299
    
    
    
    5,432Current liabilities
    
    
    1,589
    
    
    
    1,743Noncurrent liabilities
    
    
    447
    
    
    
    1,354Minority interests
    
    
    3,313
    
    
    
    3,615Total stockholders deficit
    
    
    (1,050
    )
    
    
    (1,280
    )
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(unaudited)2008
    
    2007
    
    2008
    
    2007Net revenue
    
    $
    737
    
    
    $
    894
    
    
    $
    3,180
    
    
    $
    1,576Gross margin
    
    
    138
    
    
    
    164
    
    
    
    953
    
    
    
    353Net loss
    
    
    (180
    )
    
    
    (517
    )
    
    
    (776
    )
    
    
    (919
    )




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##### Table of Contents



FORM 10-QPART IITEM 1PAGE 15
  
 9.
    
    Product WarrantiesThe 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 EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Balance at the beginning of the period
    
    $
    806
    
    
    $
    878
    
    
    $
    679
    
    
    $
    1,046Accruals for warranties for products
sold in the period
    
    
    32
    
    
    
    447
    
    
    
    300
    
    
    
    637Fulfillment 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 TaxesFor 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




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##### Table of Contents



FORM 10-QPART IITEM 1PAGE 16
  
 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 EndedSeptember 30
    
    September 302008
    
    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.




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##### Table of Contents



FORM 10-QPART IITEM 1PAGE 17
  
 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 EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net income (loss)
    
    $
    609
    
    
    $
    543
    
    
    $
    (94
    )
    
    $
    3,838Foreign currency translation (loss) gain
    
    
    (19
    )
    
    
    88
    
    
    
    55
    
    
    
    58Unrealized (losses) gains, net of tax,
on
available for sale securities
    
    
    (35
    )
    
    
    (2
    )
    
    
    (2,285
    )
    
    
    4Comprehensive 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 ContingenciesAt 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




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##### Table of Contents



FORM 10-QPART IITEM 1PAGE 18
  
 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 InformationThe 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
    
    Total2008:Net revenues
    
    $
    46,673
    
    
    $
    4,971
    
    
    $
    1,289
    
    
    $
    
    
    
    $
    (1,655
    )
    
    $
    51,278Income (loss) from
operations
    
    
    6,976
    
    
    
    (5,937
    )
    
    
    (683
    )
    
    
    (134
    )
    
    
    177
    
    
    
    399Total assets
    
    
    168,453
    
    
    
    16,846
    
    
    
    8,915
    
    
    
    94,103
    
    
    
    (109,296
    )
    
    
    179,021Depreciation and
amortization
    
    
    1,457
    
    
    
    678
    
    
    
    96
    
    
    
    382
    
    
    
    
    
    
    
    2,6132007:Net revenues
    
    $
    45,220
    
    
    $
    2,404
    
    
    $
    1,101
    
    
    $
    
    
    
    $
    (1,032
    )
    
    $
    47,693Income (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
    )
    
    
    191,241Depreciation and
amortization
    
    
    1,753
    
    
    
    519
    
    
    
    96
    
    
    
    376
    
    
    
    
    
    
    
    2,744




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##### Table of Contents



FORM 10-QPART IITEM 1PAGE 19
  
 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
    
    Total2008:Net revenues
    
    $
    141,646
    
    
    $
    12,479
    
    
    $
    3,624
    
    
    $
    
    
    
    $
    (3,705
    )
    
    $
    154,044Income (loss) from
operations
    
    
    20,773
    
    
    
    (18,694
    )
    
    
    (1,906
    )
    
    
    (243
    )
    
    
    601
    
    
    
    531Total assets
    
    
    168,453
    
    
    
    16,846
    
    
    
    8,915
    
    
    
    94,103
    
    
    
    (109,296
    )
    
    
    179,021Depreciation and
amortization
    
    
    4,467
    
    
    
    1,927
    
    
    
    287
    
    
    
    1,143
    
    
    
    
    
    
    
    7,8242007:Net revenues
    
    $
    136,697
    
    
    $
    4,797
    
    
    $
    3,378
    
    
    $
    
    
    
    $
    (2,992
    )
    
    $
    141,880Income (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
    )
    
    
    191,241Depreciation and
amortization
    
    
    5,779
    
    
    
    1,507
    
    
    
    308
    
    
    
    1,334
    
    
    
    
    
    
    
    8,928
 
 (1)
    
    $3,300,000 of total assets have been reclassified from the BBU to Corporate to
conform to the 2008 presentation. 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.
    
    DividendsOn 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.




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##### Table of Contents



FORM 10-QPART IITEM 1PAGE 20
  
 15.
    
    Impact of Recently Issued Accounting StandardsIn 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.




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FORM 10-QPART IITEM 2PAGE 21
  
  
 Item 2  Managements Discussion and Analysis of Financial Condition and Results of
Operations
  Overview




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FORM 10-QPART IITEM 2PAGE 22
  
      Critical Accounting Policies and Estimates
  Fair Value Measurements
 Fair Value Measurements




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FORM 10-QPART IITEM 2PAGE 23
  
  Results of Operations
 Three months ended September 30, 2008, compared to three months ended September 30, 2007
   Three Months EndedSeptember 30,
    
    Increase2008
    
    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




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FORM 10-QPART IITEM 2PAGE 24
  
  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
    %
 
 (1)
    
    Increase primarily attributed to annual compensation adjustments in May 2008,
an increase in stock compensation expense and increases in headcount.(2)
    
    Increase primarily attributed to $231,000 in increased commissions expense due
to increased revenues and $155,000 in increased compensation expense.(3)
    
    Increase primarily attributed to increases in advertising and web development
expenses.(4)
    
    Increase primarily attributed to annual compensation adjustments in May 2008
and increases in headcount.(5)
    
    Decrease primarily attributed to less legal activity related to the litigation
against Concurrent Computer Corporation settled in the third quarter of 2007.




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FORM 10-QPART IITEM 2PAGE 25
  
  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
    %
 
 (1)
    
    Increase primarily attributed to annual compensation adjustments in May 2008.(2)
    
    The Picor business unit provides engineering services to the BBU and V*I Chip segments
to support certain manufacturing processes and research and development activities. A decline in
services related to manufacturing processes resulted in a decrease in the amount of
charges allocated to cost of revenues.(3)
    
    Decrease primarily attributed to reduced expenses at Picor and the BBU.  Increase2008
    
    
    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
    )




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FORM 10-QPART IITEM 2PAGE 26
  
   Three Months EndedSeptember 30,2008
    
    2007(Benefit) provision for
income taxes
    
    $
    (527
    )
    
    $
    (1,616
    )Effective income tax rate
    
    
    (311.8
    )%
    
    
    (179.0
    )%




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FORM 10-QPART IITEM 2PAGE 27
  
 Nine months ended September 30, 2008 compared to nine months ended September 30, 2007
  Nine Months EndedSeptember 30,
    
    Increase2008
    
    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




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FORM 10-QPART IITEM 2PAGE 28
  
  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
    %
 
 (1)
    
    Increase primarily attributed to annual compensation adjustments in May 2008 and
increases in headcount. The increase in compensation expense included previously unidentified
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. The impact on the first quarter of 2008, as well as on prior periods, was not material.(2)
    
    Increase primarily attributed to $677,000 of increased commission expense due
to increased revenues, $294,000 in increased compensation expense, $39,000 of increased
employee benefit costs and $33,000 of increased facilities expense.(3)
    
    Increase primarily attributed to the late filings of the Companys 2007 Forms
10-Q and additional work related to accounting for the Companys investment in GWS.(4)
    
    Increase primarily attributed to increases in advertising and web development
expenses.(5)
    
    Increase primarily attributed to annual compensation adjustments in May 2008
and increases in headcount.(6)
    
    Decrease primarily attributed to a decrease in patent amortization expense of
$214,000.(7)
    
    Decrease primarily attributed to less legal activity related to the Ericsson
matter that settled in the first quarter of 2007 (see Note 12. Commitments and
Contingenciesin the Notes to Condensed Consolidated Financial
Statements in Part I  Item 1  Financial Statements) and to litigation against Concurrent Computer
Corporation settled in the third quarter of 2007.




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##### Table of Contents



FORM 10-QPART IITEM 2PAGE 29
  
  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
    %
 
 (1)
    
    The increase primarily attributed to annual compensation adjustments in May 2008.(2)
    
    Decrease attributed to reduced expenses at Picor and the BBU of $681,000,
partially offset by increases due to the re-engineering of certain V*I Chip materials
and processes of $474,000.




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##### Table of Contents



FORM 10-QPART IITEM 2PAGE 30
  
  Increase2008
    
    
    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
    )
 Commitments and Contingencies
   Nine months EndedSeptember 302008
    
    2007(Benefit) provision for
income taxes
    
    $
    65
    
    
    $
    (1,329
    )Effective income tax rate
    
    
    6.4
    %
    
    
    (37.8
    )%




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FORM 10-QPART IITEM 2PAGE 31




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FORM 10-QPART IITEM 2PAGE 32




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FORM 10-QPART IITEM 2PAGE 33
  
  Liquidity and Capital Resources




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FORM 10-QPART IITEM 2PAGE 34




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FORM 10-QPART IITEMS 3-4PAGE 35
   
 Item 3  Quantitative and Qualitative Disclosures About Market Risk
    
 Item 4  Controls and Procedures




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FORM 10-QPART IITEM 4PAGE 36




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FORM 10-QPART IITEM 4PAGE 37
     
    
    The Company has hired a new Chief Financial
Officer with the appointment of James A. Simms,
effective April 14, 2008.
    
    The Company has reorganized its Accounting
Department, in the process redefining certain
duties and responsibilities in order to address
specific weaknesses and deficiencies
identified. The Company also is assessing on
an ongoing basis the staffing requirements for
the Accounting Department so that it has the
resources and expertise to evaluate complex and
judgmental accounting, tax and financial
reporting issues.
    
    The Company is amending and expanding its disclosure controls and procedures,
including the implementation of a Disclosure Committee with responsibility for
oversight of implementation and execution of the disclosure controls and
procedures. The Disclosure Committee was officially established and began it
duties in connection with the Quarterly Report on Form 10-Q for the period
ended September 30, 2008.




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##### Table of Contents



FORM 10-QPART IIITEMS 1-1APAGE 38
  
   
 Item 1  Legal Proceedings
 Commitments and Contingencies
 
 Item 1A  Risk Factors
  Funds associated with certain of our auction rate securities may not be accessible in the
short term and we may be required to adjust the carrying value of these securities through
an impairment charge.




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##### Table of Contents



FORM 10-QPART IIITEMS 2-6PAGE 39
 
 
 Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
 Issuer Purchases of Equity Securities
 Maximum Number(or ApproximateTotal Number of
    
    
    Dollar Value) ofShares (or Units)
    
    
    Shares (or Units)Total Number
    
    
    
    
    
    
    Purchased as Part
    
    
    that May Yet Beof Shares (or
    
    
    
    
    
    
    of Publicly
    
    
    Purchased UnderUnits)
    
    
    Average Price Paid
    
    
    Announced Plans
    
    
    the Plans orPeriod
    
    Purchased
    
    
    per Share (or Unit)
    
    
    or Programs
    
    
    ProgramsJuly 1  31, 2008
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    8,541,000August 1  31, 2008
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    8,541,000September 1  30, 2008
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    8,541,000Total
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    8,541,000
  
 Item 3  Defaults Upon Senior Securities
  
 Item 4  Submission of Matters to a Vote of Security Holders
  
 Item 5  Other Information
  
 Item 6  Exhibits
 Exhibit Number
    
    Description31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 193431.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 193432.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002




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FORM 10-QPART IIPAGE 40
 
 SIGNATURES
  VICOR CORPORATIONDate:  November 6, 2008
    By:
    /s/ Patrizio VinciarelliPatrizio VinciarelliPresident, Chief Executive Officer
and Chairman of the Board
(Principal Executive Officer)Date:  November 6, 2008
    By:
    /s/ James A. SimmsJames A. SimmsVice President, Chief Financial Officer
(Principal Financial Officer)