<PAGE>
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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549
                               _________________

                                    FORM 10-K
(Mark One)
          [X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
                   For the Fiscal Year Ended December 31, 1999
                                       OR
          [ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
                        For the transition period from to
                         Commission File Number 0-27460

                     PERFORMANCE TECHNOLOGIES, INCORPORATED
             (Exact name of registrant as specified in its charter)
                               -------------------
                Delaware                                 16-1158413
    (State or other jurisdiction of         (I.R.S. Employer Identification No.)
     incorporation of organization)
                                                              14620
  315 Science Parkway, Rochester New York                  (Zip Code)
 (Address of principal executive offices)
       Registrant's telephone number, including area code: (716) 256-0200
                             ______________________

           Securities registered pursuant to section 12(b) of the Act:
                                      NONE
                            ------------------------

           Securities registered pursuant to section 12(g) of the Act:
                     COMMON STOCK, par value $.01 per share
                                (Title of Class)

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .

         Indicate by check mark if disclosure of delinquent  filers  pursuant to
Item 405 of Regulation S-K is not contained  herein,  and will not be contained,
to the best of  registrant's  knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. [ ]

         The aggregate  market value of the voting stock held by  non-affiliates
of the registrant as of the close of business on March 3, 2000 was approximately
$233,000,000.

         The number of shares outstanding of the registrant's Common Stock, $.01
par value, was approximately 13,211,000 as of March 3, 2000.

                       Documents Incorporated by Reference
         The information  called for by Part III is incorporated by reference to
the definitive  Proxy  Statement for the Annual Meeting of  Stockholders  of the
Company to be held May 31, 2000,  which  will be filed with the  Securities  and
Exchange Commission not later than 120 days after December 31, 1999.
________________________________________________________________________________

<PAGE>

                     Performance Technologies, Incorporated
                       Index to Annual Report on Form 10-K

                                                                            Page
PART I

Item 1           Business                                                    1
Item 2           Properties                                                  12
Item 3           Legal Proceedings                                           12
Item 4           Submission of Matters to a Vote of Security Holders         12


PART II

Item 5           Market for the Registrant's Common Equity and
                   Related Stockholder Matters                               12
Item 6           Selected Financial Data                                     13
Item 7           Management's Discussion and Analysis of Financial
                   Condition and Results of Operations                       14
Item 7A          Qualitative and Quantitative Disclosures
                   About Market Risk                                         21
Item 8           Financial Statements and Supplementary Data                 21
Item 9           Changes in and Disagreements with Accountants on
                   Accounting and Financial Disclosure                       34
PART III

Item 10          Directors and Executive Officers of the Registrant          34
Item 11          Executive Compensation                                      34
Item 12          Security Ownership of Certain Beneficial Owners and
                   Management                                                34
Item 13          Certain Relationships and Related Transactions              34
Item 14          Exhibits, Financial Statement Schedules, Reports
                   on Form 8-K                                               35
Signatures                                                                   36



EXHIBIT 3        Articles of Incorporation
  EXHIBIT 3.2    Certificate of Amendment
EXHIBIT 4        Instruments Defining Rights of Security Holders
  EXHIBIT 4.3    June 1998 Amendment to the Stock Option Plan
  EXHIBIT 4.4    February 2000 Amendment to the Stock Option Plan
EXHIBIT 27       Financial Data Schedule (FDS)


<PAGE>

PART I

ITEM 1 - Business

Overview

Performance Technologies, Incorporated (the "Company") provides high performance
communications,  networking and signaling  products to the leading suppliers for
the next generation networks. These products are positioned to take advantage of
opportunities presented by the network convergence of voice and data, the growth
of the Internet and new wireless telephone services.  The Company's  engineering
efforts are directed  toward  developing  standard  products for three  distinct
communications   markets:   Signaling   Gateways,    Ethernet   Switching,   and
Telecommunications  and Wide  Area  Connectivity.  The  Company's  products  are
targeted at customers in the  following  sectors:  telecommunications  equipment
manufacturers,  telecommunications  service  providers  and  operators  such  as
ILEC's,  CLEC's,  ISP's  RBOC's,   international  wireless  carriers,  financial
services, defense, and public safety.

Since its founding in 1981,  the Company has  consistently  designed  innovative
solutions for a variety of computer and  communications  architectures and has a
rich history of adapting its products to a constantly changing technology-driven
marketplace. The Company has focused its efforts on providing unique application
solutions, where reliability and performance are key customer concerns.

Recent Developments

During  1999,  the  Company  embarked  on an  expansion  plan  resulting  in the
acquisition of MicroLegend  Telecom  Systems,  Inc.  ("MicroLegend"),  a company
specializing  in Signaling  System 7 (SS7)  products.  SS7 is the  industry-wide
standard  signaling  protocol  used by  traditional  public  switched  telephone
networks  and more  recently by wireless  communication  networks  and  Internet
Protocol  (IP) voice and data  networks.  The Company  introduced  its first SS7
products  in  1997,  and  in  1999,  the  Company  introduced  Channel7(TM),   a
comprehensive  hardware and SS7 software product that provides telecom equipment
manufacturers   with  enabling  SS7  technology  (based  on  standard  hardware,
operating system software and SS7 control  software) they can easily bundle with
their software solutions, rather than develop the product internally.

MicroLegend  significantly strengthens the Company's SS7 market opportunities by
expanding its SS7 product  breadth and its ability to leverage their  technology
in the telecommunications  marketplace.  MicroLegend has an internally developed
SS7 protocol  software stack that can be utilized to develop new SS7 application
products for the rapidly  expanding  wireless  communications  and Voice-over-IP
(VoIP) markets.

Currently,  MicroLegend  markets SS7/IP signaling  gateways and SS7 servers that
provide the interface between traditional public switched telephone networks and
Internet Protocol (IP) voice and data networks. These SS7 product solutions have
been installed for signaling  interoperability  between ANSI (American  National
Standards Institute) SS7, ITU-T (International  Telecommunications Union) C7 and
many  national  variants  in public  networks  worldwide  such as Japan,  China,
Brazil, Mexico and Europe.

Industry Overview

The communications and networking  industry is undergoing a profound and radical
change as a result of the  Telecommunications  Act of 1996. The  consequences of
this significant regulatory decision,  combined with the unprecedented growth of
the Internet,  have increased the mounting pressure from vendors and users alike
to converge the traditional  voice  communications  network with the data driven
Internet.  Furthermore,  the accelerating  growth of wireless  communications is
forcing  service  providers to improve  infrastructure  processes  and to expand
product offerings. As a result,  substantial opportunities exist for the Company
to supply infrastructure related products that address the evolving technologies
and  applications  required to create the next  generation  public  wireline and
wireless networks.

                                       1
<PAGE>

An essential element of the convergence paradigm, especially in the voice-driven
applications  arena, is the SS7 network  signaling  protocol.  Signaling plays a
vital role in the  implementation  of many new  services,  such as local  number
portability  (LNP),  800/900 toll-free  services,  wireless  roaming,  telephone
calling cards, call waiting, caller ID and greater cellular coverage. SS7 is now
the  most  pervasive  signaling  architecture  used  by  the  leading  telephone
operators and wireless carriers worldwide.  Although  convergence of traditional
voice networks and IP based data networks is causing  unprecedented  change, one
thing remains certain,  circuit-switched  equipment in public telephone networks
will still need to communicate effectively with the packet-switched equipment in
data networks  worldwide.  This can only be achieved  through the use of the SS7
signaling  protocol.  The  Company  plans  to play an even  greater  role in the
convergence  marketplace  and the  evolution  of the  current  public  telephone
network into the next generation network.

The demand for enhanced,  value-added  services (described above) is driving the
next  generation,  network  convergence.   High-volume  growth  is  expected  to
characterize  VoIP gateway  sales as quality of service,  interoperability,  and
billing  capabilities  improve.  Cahners  In-Stat  Group,  an industry  analyst,
predicts VoIP gateway sales will reach $3.7 billion by the end of 2003, assuming
interoperability  between different gateway vendor's equipment.  This will allow
carriers to effectively  hand off traffic to one another and bill accurately for
calls.  Another similar  forecast from the Synergy  Research Group estimated the
worldwide  VoIP  equipment  market was $782 million in 1999 and is forecasted to
climb to $5.7 billion by 2002.

For the SS7 market,  industry  analysts,  VDC research,  estimated the worldwide
market for SS7 products at $12 billion for 1998.  VDC expects the growth rate of
the SS7 market to be 17% or greater over the next 5 years.

Ethernet  switching  represents  about 17 percent of the $21  billion  worldwide
Local Area Network market, according to International Data Corporation, industry
analysts,  and is  expected  to nearly  triple in size to provide $11 billion in
2003. With the pace of convergence accelerating, the classical demarcation lines
are  blurring.  Ethernet  is now  finding  applications  beyond the  traditional
enterprise  into  the MAN  (Metropolitan  Area  Network)  and  for  connectivity
deployment  within  Carriers  Points-of-Presence  (POP's)  and  Central  Offices
(CO's).

The  growth in the Wide Area  Networking  (WAN)  communications  market is being
driven  by the  expansion  of the  Internet,  wireless  communications  and  the
convergence occurring between voice and data communications. According to recent
market studies, the WAN segment of the  telecommunications  connectivity markets
was  approximately  $1 billion in 1999 and is forecasted to grow to $4.8 billion
in 2003.

These  impressive  growth  projections,  combined with other market trends,  are
expected  to drive the  networking  equipment  and  communications  industry  to
experience a substantial  increase in demand  during the next five years.  A new
breed of service providers are now busy building their infrastructures to create
the next  generation  public  network,  where the Internet will be used to carry
real-time voice and video traffic. Although VoIP technology is at an early stage
of  development,  market  analysts  estimate a large  demand for  products  that
exploit this technology given its potential to save money.  Management  believes
that   the   Company's   SS7   Signaling   Gateway,   Ethernet   Switching   and
Telecommunications  connectivity  products will play a significant role as these
new VoIP infrastructures are built.

                                       2
<PAGE>


Strategy

The Company is well positioned to capitalize on the  opportunities  presented by
network  convergence,  the growth of the  Internet  and new  wireless  telephone
services.  The  Company's  objective is to provide  standard,  high  performance
communications,  data networking and signaling products to the leading suppliers
for the next  generation of wireless and VoIP  networks.  Key  components of the
Company's business strategy include:

Addressing  High-Growth  Communications  Markets.  The Company will  continue to
develop  standard,  high  performance  communications,  networking and signaling
products for high growth  markets.  In particular,  the Company is targeting two
particular high-growth markets:

o        Wireless   communications  -  The   accelerating   growth  in  wireless
         communications  and the  demand  for  new,  Internet  related  wireless
         services are forcing wireless carriers to improve their infrastructure.
         The Company will continue to focus on developing high performance, high
         reliability SS7 signaling and telecommunications  connectivity products
         for this market.

o        Voice-over-IP - There are significant marketplace pressures to converge
         the  traditional  voice  communications  network  with the data  driven
         Internet.   Voice-over-IP   (VoIP)   gateway   systems   enable   voice
         communications  to  travel  over  data  networks.   VoIP  gateways  are
         comprised of five elements:  voice  communication  processing,  digital
         signal processing,  data aggregation (packet switching),  SS7 signaling
         and call control. The Company currently markets products to VoIP system
         manufacturers that enable the voice  communications  processing and SS7
         signaling,  and expects to offer data  aggregation  (packet  switching)
         products to these suppliers around mid-year 2000.

Exploit  Technological   Competencies.   In  the  development  of  creative  and
innovative  products,  the Company will continue to build on its core  knowledge
and   expertise   in   communications   technologies,   particularly   in  voice
communication processing, data networking and signaling control. Management will
continue to leverage its core  competencies  as a leading  supplier of Signaling
Gateways,  Ethernet Switching and  Telecommunications  Connectivity products for
carrier-class environments. The Company will continue to enhance the performance
of its existing  products and to develop new products  that address the changing
needs of its customers.

Leverage Software Expertise.  The Company has a growing communications  software
expertise in signaling, data networking and telecommunications. In addition, the
Company  has  invested  substantially  in  developing   "high-availability"  and
"hardened"  software  implementations  used in both local area network switching
products and wide area telecommunications  applications.  Management believes an
important  element of the Company's  future product  strategy is to increase its
software Intellectual Property in its products.

Expand International  Markets.  Telecommunications  markets are international in
scope.  Global demand for communications and networking products is being driven
by  an  increasing   need  to  successfully   deploy   advanced   communications
infrastructures.  Outside of North  America,  the Company  markets its  products
primarily  in  Western  Europe  and  the  Asia  Pacific  region.  As part of its
international  growth plan,  the Company has been  investing in the expansion of
its marketing,  sales and support operations in these specific geographic areas.
The  Company  now  operates a sales and  support  office in the United  Kingdom,
providing  coverage to Western European markets.  In the Asia Pacific region, it
relies on agents to establish  both OEM and  distribution  channels.  Predicated
upon  revenue  growth,  the Company  expects to open a direct  sales and service
center  in the  Asia  Pacific  region  over  the next  eighteen  months.  Direct
shipments to international customers amounted to 16% of revenue in 1999.


                                       3
<PAGE>

Products

The Company develops and markets high performance communications, networking and
signaling  products to the leading  suppliers for the next generation  networks.
The Company has pioneered  many recent  innovations  in networking  and computer
technologies  including proprietary ASICs for Ethernet switches,  and innovative
"hot  swap" and  "failover"  architectures  to enhance  equipment  availability,
reliability  and  performance.  The Company will continue to design new products
for standard hardware and operating systems. During 2000 and beyond,  management
will focus on the  development  and delivery of new  products in three  distinct
communications markets: Signaling Gateways, Ethernet Switching and Communication
Servers,  and  Telecommunications  and WAN Connectivity  employing  standardized
platforms.

Signaling  Gateway  Products.  The Company's  Signaling Gateway product line was
initially  developed to address custom turnkey  solutions for specific  customer
requirements.   Recognizing  the  need  to  bridge  signaling   traffic  between
traditional telephone networks and IP-based data networks,  the Company sold the
industry's first IP-enabled Signaling System 7 (SS7) server in 1997. Since 1997,
the  Company's  SS7/IP   Signaling   Gateway  product  has  evolved  to  support
applications such as international wireless roaming,  Voice-over-IP and enhanced
Internet-driven   services.   Numerous  wireless  carriers  have  installed  the
Company's SS7/IP Signaling Gateway to allow their customers to travel to various
countries  around the world and to initiate  and receive  telephone  calls as if
they were at home.  In  addition,  the  SS7/IP  Signaling  Gateway is used for a
variety of  applications  ranging  from "front ends" for  distributed  IP-hosted
databases,  to long-haul  transmission of SS7 messages delivered seamlessly over
IP  networks.   Customers   continue  to  develop   other  unique  and  creative
applications  for wireless and  convergent  networks,  utilizing  the  Company's
SS7/IP Signaling Gateway.

The Company's product line includes: SS7/IP Signaling Gateways, which bridge SS7
networks and Internet Protocol data networks;  SS7 Routing Systems, which extend
traditional  MTP message  routing  with  enhanced  capabilities  such as n-digit
global  title  translation  and routing  based on message  parameters;  SS7 Link
Concentration, which reduce SS7 link costs by concentrating network traffic from
many  under-utilized  SS7  links  onto  fewer,  long-haul  links;  SS7  Protocol
Conversion,  which  provides  interoperability  between  ANSI SS7,  ITU-T C7 and
numerous  national  variants.  The  entire  range of  SS7/IP  Signaling  Gateway
products  uses an  internally  developed,  network-proven,  object-oriented  SS7
protocol stack.

In  mid-1999,  the  Company  introduced  a new  family  of  Application  Program
Interface (API) plug-ins for its SS7/IP Signaling Gateway product.  The plug-ins
enable  Internet  Protocol  (IP) voice and data  network  service  providers  to
quickly and effectively  offer  applications  that utilize SS7 service  oriented
(TCAP) messages.

Conforming to its high availability  philosophy, a fault tolerant version of its
popular  Versatile  Signaling Point (VSP) SS7 signaling  platform was introduced
during  1999.  The new product  family,  called the VSP 500 Series,  has a fault
tolerant architecture designed specifically for telecommunications  applications
with stringent  survivability  and availability  requirements.  The architecture
enables the system to operate  continuously despite the occurrence of any single
point of failure.  In addition,  the VSP runs on a carrier-class NEBS compatible
unit,  in rack  mountable  hardware  that was  engineered  specifically  for the
stringent telecommunications application environments.

In  mid-1999,  the Company  also  announced  support for the new Simple  Control
Transmission  Protocol (SCTP) standard for signaling convergence between SS7 and
IP  networks.  The  inclusion  of this  industry  standard  protocol  will allow
customers to integrate  their SS7 and IP  signaling  networks  reliably and with
greater efficiency.

The Internet Engineering Task Force (IETF) developed SCTP. SCTP will enhance the
interoperability  of SS7 and IP networks  and allow  packet  networks to process
signaling messages with the same degree of reliability and efficiency  available
in SS7 signaling  networks.  The Company has been a  contributing  member of the
SCTP design team  throughout the development  period.  With a firm commitment to
the  adoption  of  industry  standards  and a first  hand  understanding  of the
protocol's  inner workings,  the Company will  incorporate  SCTP into its SS7/IP
Signaling  Gateway  offering.  The Company  continues to work with the IETF, the
PacketCable group and other standards bodies to develop  signaling  protocols to
operate at other layers of the networking communications stack.

                                       4
<PAGE>


Customers for the signaling  gateway products include Alcatel Inc., Bell Canada,
Bridgewater,  Cisco Systems,  Ericsson,  GTE Corporation,  Lucent  Technologies,
Motorola Corporation,  Nortel Networks,  Simplified Telesys, Swisscom, Telcordia
(Bellcore),  Teleglobe,  and Telus.  Ethernet Switching and Communication Server
products.  The Nebula 8000 Fault Tolerant switch,  released in November 1999, is
being targeted  towards  server centric  applications  in server  clusters.  The
Nebula switch technology supports a redundant switch fabric designed for maximum
availability and its architecture can sustain operation in the event of a single
point of failure. The implementation of the Gigabit connectivity feature for the
Nebula product line has been submitted to Beta testing and if all goes well will
be released for production during the second quarter of 2000. The NEBS compliant
design   effort   for  the   Nebula   4000  and  6000   models   applicable   to
telecommunications  applications is nearly  completed and should undergo testing
during  the second  quarter of 2000.  As the next  generation  telecom  platform
architecture is implemented for Voice-over-IP,  there is a requirement to handle
IP  traffic.  The  Nebula  technology  will be  expanded  into a family  of high
performance  100Mbit/Gigabit Ethernet Switches that are specifically targeted at
next generation telecom platforms.  The Company's capabilities in fault tolerant
Ethernet switch  architectures,  cPCI packaging and "Hot Swap" availability will
be implemented into a third  generation  switch  subsystem.  This subsystem will
initially  find  application  as  a  data  aggregation   device   integrated  in
carrier-class Voice over IP systems or in network edge access devices.

During 1999, the Company  announced the introduction of its latest IP based Wide
Area Network (WAN) to Local Area Network (LAN) based communications  server, the
MPS800.  The MPS800  Multi-Protocol  Communication  Server  represents  the next
generation of the Company's MPS600 Server.  The MPS800 provides one 10/100Base-T
Ethernet  port and  eight  high  speed  WAN  serial  ports,  making it ideal for
intelligent  WAN  bridging,  T1/E1  multiplexing  and remote  WAN  connectivity.
Virtually  all computers  and  workstations  equipped with TCP/IP on the LAN can
access  information from these  communication  servers.  The Company's  complete
suite of WAN  protocol  products is  available  on the MPS800,  including  Frame
Relay,   X.25,   HDLC,  Radar  Receiver,   Synchronous  Bit  Stream   Interface,
Asynchronous Data Transfer, DDCMP and others.

Communications  servers  are  multipurpose   LAN-to-WAN  bridging  systems.  The
products  in this  category  include a low cost,  limited  server  solution  for
installations  requiring from one to six WAN  connections and up to two Ethernet
LAN  connections.  Using  unique  software,  the  communications  servers can be
configured to provide a variety of protocol  packages and  supporting  protocols
including   SS7    conversion    applications,    bisynchronous,    asynchronous
communications  financial  market  feeds  and  radar  receivers.  The  Company's
communication  server  products  can be  found in data  collection  applications
including  NASA's  deep  space  network,  in air  traffic  control  centers  for
retrieving  radar data from  remote  radar  antenna  sites and in the US Weather
Service  infrastructure  for  retrieving  weather  satellite  and radar  images.
Management  believes  there  will be  increasing  demand and  applicability  for
communications servers such as the MPS800.

Telecommunications   and  WAN  Connectivity   products.  The  Company's  overall
Telecommunications  and WAN  Connectivity  strategy  is to develop  and  provide
products to the leading telecommunications  suppliers that enable voice and data
communications.   These  products  are  comprised  of  hardware,   software  and
subsystems  that  support a  variety  of open  system  platforms  and  operating
systems.  These open systems include CompactPCI (cPCI),  PCI, PMC, SBus and VME.
Management  believes  that the  Company's  cPCI  products  are some of the first
products  available to cPCI users for  high-speed  WAN  communications.  Product
applications  cover many uses  including  high-speed  Internet  connections  for
server products and T1/E1 products used for SS7. To support these  applications,
the Company's  products are  "intelligent,"  with embedded  microprocessors  and
memory.  This  architecture  allows  lower-level  protocols  to be  "off-loaded"
thereby greatly improving overall system performance and efficiency.

                                       5
<PAGE>


The Company offers systems support for its products across a spectrum of popular
operating  systems including UNIX, Sun  Microsystems'  Solaris(TM),  Microsoft's
Windows NT(TM),  Wind River's VxWorks and Linux. The Company offers an extensive
suite of advanced  communication  software consisting of Frame Relay, SS7, X.25,
and HDLC. The Company also offers ProtoKit,  a development  environment allowing
customers to integrate its specific protocols with adapters,  as well as ComLink
and  ChanneLink,  development  packages  designed for  operation  with Sun's WAN
protocols in a Solaris environment.  The Company's channelized support for T1/E1
data rates and software protocol tool kits for specialized  customer development
further expand the software portfolio.

In June 1999, the Company introduced Channel7(TM),  a comprehensive hardware and
SS7  software  solution  that  provides  telecom  equipment  manufacturers  with
enabling  technology for a broad range of applications  and systems.  Based on a
standardized  cPCI platform,  Channel7 is a highly  configurable,  scaleable and
high   performance   solution  for  developing   SS7  network   systems  and  is
complementary to the MicroLegend SS7/IP gateway system products.  SS7 technology
is a basic  building  block for  applications  such as  Voice-over-IP  Gateways,
cellular  roaming  support,  Caller  ID and call  routing  to Call  Centers.  To
accelerate Channel7's acceptance in the marketplace,  PTI partnered with several
SS7  application  engineering  firms and  Channel7 was verified for use with Sun
Microsystems' new Netra(TM) ft 1800 fault tolerant telecom server systems.

Customers for the Company's  Telecommunications  and WAN  Connectivity  products
include Lucent  Technologies,  Compaq Corporation,  QualComm Inc., Alcatel Inc.,
Motorola Corporation, ADC Telecom and Sun Microsystems.


Sales, Marketing and Distribution

The Company  markets its  products  worldwide  to a broad  spectrum of customers
through  various  channels  including  OEMs,  VARs,   distributors  and  systems
integrators.  Greater than 90% of the Company's North American  business is sold
through the Company's  direct sales force to OEMs and systems  integrators.  The
remainder is sold to end users through distributors and VARs.

Due to the  technical  nature  of the  Company's  products  sold to OEMs,  it is
essential  that the  Company's  salespeople  are  technically  oriented  and are
knowledgeable in the network and communications  fields. To supplement its sales
force, the Company has application engineers who assist prospective customers in
determining if the Company's products will meet their requirements.

The Company's  corporate  headquarters  are in  Rochester,  N.Y. It has regional
sales and support facilities near Hartford, Connecticut,  Chicago and the United
Kingdom,  as well as co-located  sales and engineering  operations in San Diego,
California. The SS7 Signaling Gateway group has a sales and engineering facility
in Ottawa,  Canada, with an additional  engineering  facility in Raleigh,  North
Carolina.  Currently,  25  sales,  marketing  and  support  personnel  sell  the
Company's products.  In addition,  independent sales  representatives and agents
covering  selected   geographic  areas  nationally  and   internationally,   and
distributors or integrators handling selected products, supplement the Company's
direct sales team on a worldwide basis.

A highly focused group of  distributors,  VARs and  integrators  are involved in
selling the  Company's  network and fault  tolerant  switching  products.  These
distributors,  VARs and integrators,  who have "vertical market" business focus,
are managed by the Company's direct sales force.  Several  marketing  strategies
are used to support these third party  organizations  including  advertising  in
trade  publications,  sponsoring customer training sessions and participating in
trade shows throughout North America, Western Europe and the Pacific Rim.

OEM customers  typically  provide the Company with a rolling forecast for orders
placed  two to three  months in  advance  of  shipment.  VARs,  integrators  and
distributors typically provide the Company with orders placed 30 days in advance
of shipment.  Sales of the Company's  products to OEM customers are subject to a
number of factors outside the Company's control, including pricing, availability
and acceptance of these products by the OEMs customers and potential customers.

The Company executes various ongoing  marketing  strategies  designed to attract
new OEM and  end-user  customers  and to  stimulate  additional  purchases  from
existing customers. These strategies include direct mail campaigns and catalogue
distribution,   direct   telemarketing,   special   pricing   programs,   active
participation  in  technical   standards  groups,   participation  in  national,
international  and regional trade shows and selected trade press  advertisements
and technical  articles and an active campaign to direct potential  customers to
the Company's web site.

                                       6
<PAGE>


International  sales  represented  16% of  the  Company's  net  sales  in  1999.
Management  believes that  international  markets represent  important  untapped
opportunities for its products. Management believes that it can develop expanded
sales  channels  and  marketing  alliances  with  respect  to new  and  existing
international  markets  and  is  actively  pursuing  these  relationships.   The
Company's   products  are  currently  sold  by  approximately  25  international
distributors  throughout  the major  industrialized  countries  in Europe and in
Asia.  The  Company  also  operates a sales and  marketing  office in the United
Kingdom to better support its Western European  customers.  International  sales
are  subject  to  import  and  export   controls,   transportation   delays  and
interruptions,   foreign  currency  exchange  rates,  and  foreign  governmental
regulations.  All payments for  shipments  from the United States to outside the
United  States are made in U. S.  dollars and all payments  for  shipments  from
Canada to Canada are made in Canadian dollars.

Customers

The Company has over 200 active customers worldwide, including major OEMs, VARs,
systems  integrators,  and  educational/research   organizations.  Many  of  the
Company's major customers are Fortune 500 companies. In 1999, the largest single
customer  represented 23% of sales (Lockheed  Martin  Corporation),  and the top
four customers accounted for 43% of 1999 revenue.

Generally, the Company's customers can be characterized as either technical OEMs
or systems  end-users.  The technical  OEMs  assemble  products or systems for a
specific end use, using  components  and subsystems  supplied by vendors such as
the   Company.   Examples  of  technical   OEM  products  and  systems   include
sophisticated  enterprise  servers with high speed WAN  interconnections  to the
Internet or private  communication  networks with specialized Signaling System 7
server clusters for 800/900 toll-free service implementations.

The systems end-user customers require products to be  self-installing  and have
limited knowledge of the product's  internal  operation.  The Company's products
that fit into this  description  are SS7/IP  Gateway  and  Communication  server
products,  PCIBus LAN products (Ethernet and FDDI), Ethernet switch products and
selected Wide Area Communications products.

Backlog

At February 1, 2000, the backlog of scheduled orders was $11.1 million, compared
to $8.2 million at March 7, 1999. Although orders are subject to cancellation in
the normal course of business,  historically  the Company has filled most of its
firm orders. (See Management's  Discussion & Analysis included elsewhere in this
report).

Seasonality

The  Company's  business is  generally  not  considered  to have large  seasonal
swings, but some of the business is project-related,  driven by customer demand,
which can cause quarterly fluctuations in revenue.

Environmental Matters

The Company does not believe that compliance  with federal,  state or local laws
or regulations  relating to the protection of the  environment  has any material
effect on its capital expenditures, earnings or competitive position.

                                       7
<PAGE>

Competition

The market for communications and networking  products is intensely  competitive
and characterized by rapid technological  innovations,  resulting in new product
introductions and frequent  advances in  price/performance  ratios.  Competitive
factors in this industry include product performance and functionality,  product
quality and  reliability,  customer service and support,  marketing  capability,
corporate   reputation  and  brand   recognition,   and  increases  in  relative
price/performance ratios. In the Telecommunications and WAN connectivity market,
the Company's  products  compete with products from Natural Micro Systems,  Adax
Incorporated,  Radisys Corporation, SBS Technology and LAN Media Corporation. In
the LAN Interface product market, the Company competes with Network  Peripherals
Inc., and Interphase Corporation.

In the enterprise  Ethernet Switching market, the Company is focusing on a niche
application,  fault  tolerance.  Many of the  companies  in this market focus on
broad  applications  products and have greater technical and capital  resources,
more marketing  capability,  larger research and  development  staffs and better
production facilities than the Company. These competitors include Cisco Systems,
3Com Corp,  Extreme  Networks  and  Cabletron.  In the past several  years,  the
network and telecommunications  industry has become increasingly concentrated as
a result of consolidations  in the market.  These  consolidations  are likely to
permit the Company's  competitors to devote  significantly  greater resources to
the  development and marketing of new  competitive  networking  products and the
marketing of existing  products  through their larger  distribution  networks to
their larger installed  customer bases.  Increased  competition  could result in
price  reductions,  reduced margins and loss of market share, all of which would
materially and adversely affect the Company's  business,  operating  results and
financial condition.

In the  Signaling  System  7  market,  the  Company  competes  with  Ulticom,  a
subsidiary of Comverse Technologies, Trillium Digital Systems, Inc., Tekelec and
several larger companies that have proprietary SS7 technology and products.  The
SS7 market is growing rapidly and it is likely that more  competitors will enter
this market.

Research and Development

The Company's research and development expenses were approximately $7.9 million,
$5.1  million and $4.6  million  for 1999,  1998 and 1997,  respectively.  These
expenses consist primarily of employee costs and material consumed in developing
and designing new products. To a lesser degree, there have been expenses devoted
to software license/tools and contract product development.  The Company expects
research and development expenditures will continue to increase significantly in
2000.

The Company has developed significant core competencies  applicable to voice and
data  communications;  high availability,  redundant switching  technologies and
signaling  communications.  The  Company  has  also  invested  substantially  in
developing and expanding its communication and networking software competencies.
These  competencies  will  contribute  to the  development  of products for next
generation networks.

Proprietary Technology

The  Company's  success  depends upon  retaining  and  maximizing  the Company's
proprietary  technologies.  To date,  the  Company has relied  principally  upon
trademark,   copyright  and  trade  secret  laws  to  protect  its   proprietary
technology.  The  Company  generally  enters  into  confidentiality  or  license
agreements with its distributors,  customers and potential  customers and limits
access  to and  distribution  of the  source  code  to its  software  and  other
proprietary  information.  The Company's  employees are subject to the Company's
employment policy regarding confidentiality. The Company's software products and
accessories  are provided to customers  under license,  generally in the form of
object code, which provides a high degree of confidentiality with respect to the
intellectual  property value.  Much of the Company's  proprietary  technology is
found in the Company's source code that is embedded in silicon chips,  making it
extremely difficult to misappropriate or reverse engineer.  Such methods may not
afford   complete   protection   and  there  can  be  no   assurance   that  the

                                       8
<PAGE>

confidentiality agreements will not be breached, or that such agreements will be
enforceable,  or that the Company will have adequate remedies for any breach, or
that  the  Company's  trade  secrets  will  not  otherwise  become  known  to or
independently developed by competitors.  If patent applications are filed by the
Company  in the  future,  there  can be no  assurance  that any  patents  can be
granted,  or that,  if granted,  such  patents  would  provide the Company  with
meaningful protection from competition. The Company currently has an outstanding
patent  application  pending for a variety of aspects  associated with its fault
tolerant network switching products.  Management expects the U. S. Patent office
to render a ruling on this application in 2000.

There can be no  assurance  that  third  parties  will not  assert  intellectual
property infringement claims against the Company.  Although no written claims or
litigation  relating  to any such  matters  are  currently  pending  against the
Company,  the Company has not  conducted  any searches or obtained an opinion of
counsel with respect to its  proprietary  rights.  Accordingly,  there can be no
assurance  that no claims will be  initiated,  that the Company would prevail in
any such  litigation  seeking  damages or an injunction  against the sale of the
Company's  products,  or if necessary,  that the Company would be able to obtain
any necessary  licenses on reasonable terms or at all. Any such litigation could
be  protracted  and  costly  and could  have a  material  adverse  effect on the
Company's results of operations regardless of the outcome of the litigation.

Suppliers

To date,  the Company has  generally  been able to obtain  adequate  supplies of
components or has redesigned  specific products when adequate components are not
available. The Company obtains components on a purchase order basis and does not
generally have long-term contracts with any of these suppliers.

Manufacturing

The Company maintains a  state-of-the-art  manufacturing  facility in Rochester,
New  York.   This  facility   operates  under  an  integrated  MRP  system  that
significantly reduces lead-time,  inventories investments and facilitates demand
forecast. The Company is ISO 9002 certified for its manufacturing facilities and
quality management systems. By maintaining an in-house manufacturing capability,
management believes that the Company has, to a certain extent,  insulated itself
from the risks inherent with  subcontracted  manufacturing.  These risks include
timing  delays  that often  result  when  subcontractors  are unable to meet the
manufacturing requirements of their customers. In addition, through its in-house
manufacturing  capability,  the Company is able to maintain its quality  control
process  and the  timeliness  of  product  delivery.  The  Company  has  limited
alternative  capabilities  through  third  parties,  however,  to  perform  such
manufacturing  activities.  In the event of an interruption of production at its
manufacturing  facility,  the Company's  ability to deliver products in a timely
fashion would be compromised,  which would have a material adverse effect on the
Company's results of operations.

Employees

As of January 1, 2000, the Company had 190 full-time employees,  8 part time and
contract employees and 2 Engineering Cooperative employees.  Management believes
its  relations  with its employees  are good.  The  Company's  employees are not
subject to collective bargaining agreements.

These employees work in the following areas:

                  Research and Development                    87
                  Marketing and Sales                         22
                  Manufacturing                               55
                  General and Administrative                  26

Competition  for technical  personnel in the Company's  marketplace  is intense.
Management believes that the Company's future success will depend on its ability
to continue to attract and retain qualified personnel.

                                       9
<PAGE>

Risk Factors

Technological Change and New Product Introductions. The market for the Company's
products  is   characterized   by  rapid   technological   change  and  frequent
introduction  of  products  based on new  technologies.  As these  products  are
introduced,  the  standards of the industry  change.  Additionally,  the overall
communications  and  networking  industry  is  volatile  as the  effects  of new
technologies,  new standards,  new products and short life cycles  contribute to
changes in the  industry  and the  performance  of  industry  participants.  The
Company's  future  revenue will depend upon the Company's  ability to anticipate
technological  change and to develop and introduce  enhanced products of its own
on a timely  basis  that meet or exceed  new  industry  standards.  New  product
introductions could contribute to quarterly fluctuations in operating results as
orders for new  products  commence  and orders for  existing  products  decline.
Moreover,  significant  delays can occur  between a product's  introduction  and
commencement of volume production.  The inability to develop and manufacture new
products  in  a  timely  manner,  the  existence  of  reliability,   quality  or
availability  problems in the products or their component  parts, or the failure
to  achieve  market  acceptance  would  have a  material  adverse  effect on the
Company's revenue and operating results.

Competition. The communications,  networking and signaling business is extremely
competitive and the Company faces  competition  from a number of established and
emerging start-up companies.  Many of the Company's  principal  competitors have
established  brand name recognition and market positions and have  substantially
greater experience and financial resources to deploy on promotion,  advertising,
research and product development than the Company.  In addition,  as the Company
broadens its product  offerings,  it may face  competition from new competitors.
Companies in related markets could offer products with functionality  similar or
superior to that offered by the Company's products.  Increased competition could
result in price  reductions,  reduced  margins and loss of market share,  all of
which would materially and adversely affect the Company's  revenue and operating
results.  Major  networking  companies  have  recently  acquired  several of the
Company's  competitors.  These  acquisitions  are likely to permit the Company's
competition to devote  significantly  greater  resources to the  development and
marketing of new competitive  products and the marketing of existing competitive
products to their larger  installed  bases. The Company expects that competition
will  increase   substantially   as  a  result  of  these  and  other   industry
consolidations and alliances, as well as the emergence of new competitors. There
can be no assurance that the Company will be able to compete  successfully  with
its  existing or new  competitors  or that  competitive  pressures  faced by the
Company will not have a material  adverse  effect on the  Company's  revenue and
operating results.

Dependence  on Key  Customers.  There  can be no  assurance  that the  Company's
principal  customers  will  continue  to purchase  products  from the Company at
current levels.  Customers typically do not enter into long-term volume purchase
contracts  with the Company and customers have certain rights to extend or delay
the shipment of their  orders.  The loss of one or more of the  Company's  major
customers,  and the  reduction,  delay or  cancellation  of orders or a delay in
shipment  of the  Company's  products  to such  customers  would have a material
adverse effect on the Company's revenue and operating results. (See Management's
Discussion & Analysis included elsewhere in this report).

Potential Fluctuations in Annual and Quarterly Results. The Company's annual and
quarterly  operating results may in the future vary  significantly  depending on
factors  such as the timing and  shipment  of  significant  orders,  new product
introductions by the Company and its competitors,  market  acceptance of new and
enhanced versions of the Company's products,  changes in pricing policies by the
Company and its competitors,  the mix of distribution channels through which the
Company's products are sold,  inability to obtain sufficient supplies of sole or
limited  source  components  for the  Company's  products,  seasonal and general
economic  conditions.  The Company's  expense levels are based,  in part, on the
Company's  expectations as to future revenue. Since a substantial portion of the

                                       10
<PAGE>

Company's revenue in each quarter results from orders shipped in the final month
of that quarter,  revenue levels are extremely  difficult to predict. If revenue
levels are below  expectations,  revenue and operating results will be adversely
affected.  Net income  would be  disproportionately  affected by a reduction  in
revenue  because only a small portion of the Company's net expenses  varies with
its revenue.  (See Management's  Discussion and Analysis  included  elsewhere in
this report).

Dependence on Third Party Component  Suppliers.  Certain  components used in the
Company's products are currently  available to the Company from one or a limited
number of sources.  Although to date,  the  Company has  generally  been able to
obtain  adequate  supplies of these  components,  there can be no assurance that
future supplies will be adequate for the Company's needs or will be available on
prices and terms  acceptable  to the  Company.  The  Company's  inability in the
future to obtain sufficient limited-source components, or to develop alternative
sources,  could  result in delays in  product  introduction  or  shipments,  and
increased  component prices could negatively affect the Company's gross margins,
either of which will have a material adverse effect on the Company's revenue and
operating results.

Dependence  on  Internal  Manufacturing.  In order to avoid  relying  on outside
contract  manufacturers,  the Company  manufactures  all of its  products at its
Rochester,   New  York   facility.   The  Company  does  not  have   alternative
manufacturing  capabilities,  either  internally  or through third  parties,  to
perform those manufacturing functions. Even if the Company were able to identify
alternative third-party contract  manufacturers,  there can be no assurance that
the  Company  would be able to retain  their  services  on terms and  conditions
acceptable to the Company.  In the event of an interruption  in production,  the
Company may not be able to deliver products on a timely basis, which will have a
material adverse effect on the Company's revenue and operating results. Although
the Company currently has business interruption  insurance, no assurances can be
given that such insurance will adequately cover the Company's lost business as a
result of such an interruption.

Dependence on Proprietary  Technology.  The Company's  success  depends upon the
Company's proprietary technologies.  To date, the Company has relied principally
upon  trademark,  copyright  and trade  secret laws to protect  its  proprietary
technologies.  The  Company  generally  enters into  confidentiality  or license
agreements with its distributors,  customers and potential  customers and limits
access  to and  distribution  of the  source  code  to its  software  and  other
proprietary  information.  The Company's  employees are subject to the Company's
employment policy regarding confidentiality.  There can be no assurance that the
steps  taken  by the  Company  in  this  regard  will  be  adequate  to  prevent
misappropriation  of its  technologies or to provide an effective  remedy in the
event  of a  misappropriation  by  others.  The  Company  holds no  patents  but
currently  has a patent  review  pending.  There  can be no  assurance  that any
patents will be granted,  or that,  if granted,  such patents  would provide the
Company with meaningful protection from competition.

Although  management believes that the Company's products do not infringe on the
proprietary rights of third parties, there can be no assurance that infringement
claims will not be asserted, resulting in costly litigation in which the Company
may not ultimately  prevail.  Adverse  determinations  in such litigation  could
result in the loss of the Company's  proprietary rights,  subject the Company to
significant liabilities, require the Company to seek licenses from third parties
or prevent the Company from manufacturing or selling its products,  any of which
will have a material  adverse  effect on the  Company's  revenue  and  operating
results.

Because of the existence of a large number of patents in the computer networking
industry  and the rapid rate of issuance of new patents or new  standards  or to
obtain  important new  technology,  it may be necessary for the Company to enter
into technology licenses from others. There can be no assurance that these third
party  technology  licenses  will be  available  to the Company on  commercially
reasonable  terms.  The loss of or inability  to obtain any of these  technology
licenses  could result in delays or  reductions in product  shipments.  Any such
delays or reductions in product shipments will have a material adverse effect on
the Company's revenue and operating results.

                                       11
<PAGE>

Dependence  on  Personnel.  The  Company's  success  depends  on  the  continued
contributions of its personnel,  many of whom would be difficult to replace.  It
will also  depend on its  ability  to  attract  and  retain  skilled  employees.
Although the Company's employees are subject to the Company's  employment policy
regarding  confidentiality and ownership of inventions,  employees are generally
not subject to employment  agreements or non-competition  covenants.  Changes in
personnel could adversely affect the Company's operating results.

ITEM 2 - Properties

The  corporate  headquarters  are  located in 30,000  square  feet of office and
manufacturing space in Rochester,  New York. Corporate  headquarters include the
executive  offices,  along  with  the core  sales,  marketing,  engineering  and
manufacturing  operations for the telecommunications and switching groups of the
Company.  There is currently no excess office space in the  Rochester,  New York
facility.  Management  has  established  a project team to identify and secure a
suitable  facility  prior to the  expiration of the existing  lease in May 2001.
Management  believes  there are adequate  locations in and around the  Rochester
area to  construct  or acquire  the  necessary  facility to meet the current and
future requirements of the Company. The Company also leases office space for the
telecommunications  and switching groups to house software engineering and sales
people in San Diego, California and three other locations.

The Company's core  Signaling  Gateway group is located in 22,000 square feet in
an office building located in downtown Ottawa,  Canada. The Company has recently
completed  negotiations  for expanding this  facility.  The office lease in this
building expires in May 2003. As this group continues to grow, additional office
facilities  will  be  required,  probably  before  the  lease  expiration  date.
Additional  space  may  be  available  in the  same  office  building  or may be
available  in  nearby  locations.  The  Signaling  Gateway  group  also  has  an
engineering  operation  in  Raleigh,   North  Carolina.  At  the  present  time,
negotiations  are underway to expand this facility for an  additional  five year
term. As this group  continues to grow,  additional  office  facilities  will be
required.  Additional  space may be  available  in the same  office  building or
should be available in nearby locations.

ITEM 3 - Legal Proceedings

From time to time,  the  Company is involved  in  litigation  relating to claims
arising out of its  operations in the normal course of business.  The Company is
not a party to any  such  legal  proceedings,  the  adverse  outcome  of  which,
individually  or in the aggregate,  would have a material  adverse effect on the
Company's results of operations, financial condition or cash flows.

ITEM 4 - Submission of Matters to a Vote of Security Holders

No  matters  were  submitted  to a vote of  security  holders  during the fourth
quarter of the year ended December 31, 1999.

PART II

ITEM 5 - Market for the Registrant's Common Equity and Related Stockholder
 Matters

The Company's  Common Stock is traded on the NASDAQ National Market System under
the trading symbol "PTIX".  The following  table sets forth the high and the low
quarterly  closing  prices of the Common Stock during the two most recent years,
as  reported  on the NASDAQ  National  Market  System.  These  prices  represent
quotations  among  securities  dealers  without  adjustments for retail markups,
markdowns  or  commissions  and may not  represent  actual  transactions.  Where
appropriate, all prices have been adjusted for the Company's three-for-two stock
split effected September 1, 1999.

                                       12
<PAGE>


                  1999                                  High              Low
<TABLE>
         -----------------------------------------------------------------------
         <S>                                           <C>             <C>
         First Quarter                                 $10.58          $  6.42
         Second Quarter                                 14.37             7.50
         Third Quarter                                  28.19            12.17
         Fourth Quarter                                $24.56          $ 16.31

                  1998                                  High              Low
         -----------------------------------------------------------------------
         First Quarter                                 $12.83          $  8.75
         Second Quarter                                 10.17             6.83
         Third Quarter                                   7.75             6.00
         Fourth Quarter                                $ 9.00          $  6.00
</TABLE>

As of February 22, 2000,  there were 206 stockholders of record of the Company's
Common Stock.

To date,  the Company has not paid cash  dividends on its Common Stock and there
can be no assurances that the Company will do so at any time in the future.

ITEM 6 - Selected Financial Data
          (in thousands, except per share amounts)

<TABLE>

For the Years Ended December 31:    1999      1998      1997      1996     1995
--------------------------------------------------------------------------------
<S>                               <C>       <C>       <C>       <C>      <C>
Sales                             $44,494   $34,118   $32,435   $26,151  $19,403
Income from continuing operations   6,226     6,047     5,271     3,882    2,772
Basic earnings per share:
 Income from continuing
 operations (1)                   $   .47   $   .46   $   .41   $   .31  $   .30
 Weighted average common shares    13,165    13,077    13,012    12,695    9,051
Diluted earnings per share:
 Income from continuing
 operations (1)                   $   .45   $   .45   $   .39   $   .30  $   .30
 Weighted average common and
 common equivalent shares          13,789    13,517    13,449    13,038    9,101

Income from continuing operations
 (Excluding $1.7 million charge
 for acquisition expenses)        $ 7,970   $ 6,047   $ 5,271   $ 3,882  $ 2,772
Basic earnings per share:
 Income from continuing operations
 (Excluding $1.7 million charge
 for acquisition expenses) (1)    $   .61   $   .46   $   .41   $   .31  $   .30
Diluted earnings per share:
 Income from continuing operations
 (Excluding $1.7 million charge
 for acquisition expenses) (1)    $   .58   $   .45   $   .39   $   .30  $   .30


At December 31:                      1999      1998      1997      1996     1995
--------------------------------------------------------------------------------
Working capital                   $39,009   $32,221   $26,889   $21,362  $ 6,545
Total assets                       49,142    40,122    33,544    26,964   11,479
Long-term debt, less
 current portion                                  6        18        30       57
Total stockholders' equity        $40,828   $34,180   $28,661   $23,234  $ 7,869
</TABLE>

(1) All per share amounts have been adjusted where appropriate, for the
    three-for-two stock split effected in September 1999


                                       13
<PAGE>

ITEM 7 - Management's Discussion and Analysis of Financial Condition and Results
         of Operations

The  Company's  annual  operating  performance  is subject to various  risks and
uncertainties.  The following  discussion should be read in conjunction with the
Consolidated Financial Statements and related notes included elsewhere herein as
well as the  section  appearing  in Item 1 of this Form 10-K  under the  heading
"Risk  Factors."  The  Company's  future  operating  results  may be affected by
various  trends  and  factors,  which are beyond the  Company's  control.  These
include, among other factors, general business and economic conditions, rapid or
unexpected  changes in  technologies,  cancellation or delay of customer orders,
changes  in  the  product  or  customer  mix of  sales,  delays  in new  product
development,  customer  acceptance  of  new  products  and  customer  delays  in
qualification of products.

Matters discussed in Management's Discussion and Analysis of Financial Condition
and  Results of  Operations  and  elsewhere  in this Form 10-K  include  forward
looking  statements  within the meaning of Section 27A of the  Securities Act of
1933, as amended and Section 21E of the Securities Act of 1934, as amended,  and
are subject to the safe  harbor  provisions  of those  sections.  The  Company's
actual   results   could  differ   materially   from  those   discussed  in  the
forward-looking statements.

Overview

All  historical  financial  information  contained  herein has been  restated to
reflect the acquisition of MicroLegend  Telecom Systems,  Inc. during the fourth
quarter 1999.

The Company achieved record revenue of $44.5 million for 1999, compared to $34.1
million in 1998, an increase of 30%. The Company's compounded annual growth rate
for revenue over the past five years has been 29%. Adjusted net income for 1999,
which excludes  one-time  acquisition  expenses,  increased 32% to a record $8.0
million, or $.58 per share, compared to $6.0 million, or $.45 per share in 1998.
Actual net income for 1999,  including  the one-time  write-off  of  acquisition
expenses,  was $6.2 million in 1999, or $.45 per share.  Income from  continuing
operations has increased seven  consecutive years from 1993 through 1999 and for
all years as a publicly traded company.

The Company  completed the acquisition of MicroLegend  Telecom Systems,  Inc. in
December  1999.  This  acquisition  was accounted for as a pooling of interests;
accordingly,  all historical financial  information  contained in this Form 10-K
has been restated to reflect the  acquisition  of MicroLegend  Telecom  Systems,
Inc.  In  connection  with the  acquisition,  the  Company  recorded a one-time,
after-tax charge for acquisition costs of $1.7 million in 1999.

At the end of 1999, the Company had $31.8 million in cash, cash  equivalents and
marketable  securities and no long-term  debt.  For 1999, the Company  generated
income from operations,  excluding  depreciation  and  amortization  (EBITDA) of
$11.7  million and cash from  operating  activities  amounted  to $7.7  million,
compared  to $6.5  million  for  1998.  Return  on  equity,  excluding  one-time
acquisition charges,  for 1999 was 21% and return on assets,  excluding one-time
acquisition charges,  was 18%.  International sales amounted to $7.0 million and
$7.2 million in 1999 and 1998, respectively.

On September 1, 1999, the Company  effected a  three-for-two  stock split in the
form of a 50% stock dividend.

Performance  Technologies  provides  communications,  networking  and  signaling
products  to the  leading  suppliers  for the next  generation  networks.  These
products are  positioned  to take  advantage of  opportunities  presented by the
network  convergence  of voice and data,  the  growth  of the  Internet  and new
wireless  telephone  services.  The Company's  engineering  efforts are directed
toward developing products for three distinct communications markets:  Signaling
Gateways,  Ethernet Switching and Telecommunications and Wide Area Connectivity.
The  Company's  products are targeted at  customers  in the  following  sectors:
telecommunications equipment manufacturers, telecommunications service providers
and operators,  international wireless carriers and financial services, defense,
and public safety.

Signaling  Gateway  products:  The Company's  Signaling  Gateway product line is
comprised  of  SS7/IP  Signaling  Gateways,   SS7  Routing  Systems,   SS7  Link
Concentration, SS7 Protocol Conversion, and an SS7 Application Program Interface
(API). The entire range of SS7/IP Signaling  Gateway products uses an internally
developed network-proven, object-oriented SS7 protocol stack.

                                       14
<PAGE>

The Company's  SS7/IP  Signaling  Gateway is used for a variety of  applications
ranging   from   international   wireless   roaming,   Voice-over-IP,   enhanced
Internet-driven   services  and  for  "front  ends"  for  distributed  IP-hosted
databases,  to long-haul  transmission of SS7 messages delivered seamlessly over
IP  networks.   Customers   continue  to  develop   other  unique  and  creative
applications  for wireless and  convergent  networks,  utilizing  the  Company's
SS7/IP Signaling Gateway.

In  mid-1999,  the  Company  introduced  a new  family  of  Application  Program
Interface (API) plug-ins for its SS7/IP Signaling Gateway product.  The plug-ins
enable Internet  Protocol,  voice and data network service  providers to quickly
and effectively offer applications,  which utilize SS7 service,  oriented (TCAP)
messages.

Conforming to its high availability  philosophy, a fault tolerant version of its
popular  Versatile  Signaling Point (VSP) SS7 signaling  platform was introduced
during  1999.  The new product  family,  called the VSP 500 Series,  has a fault
tolerant architecture designed specifically for telecommunications  applications
with stringent  survivability  and availability  requirements.  The architecture
enables the system to operate  continuously despite the occurrence of any single
point of failure.

In  mid-1999,  the Company  also  announced  support for the new Simple  Control
Transmission  Protocol (SCTP) standard for signaling convergence between SS7 and
IP  networks.  The  inclusion  of this  industry  standard  protocol  will allow
customers to integrate  their SS7 and IP  signaling  networks  reliably and with
greater efficiency.

Customers  for  the  gateway   products   include  Alcatel  Inc.,  Bell  Canada,
Bridgewater,  Cisco Systems,  Ericsson,  GTE Corporation,  Lucent  Technologies,
Motorola Corporation,  Nortel Networks,  Simplified Telesys, Swisscom, Telcordia
(Bellcore), Teleglobe, and Telus.

Ethernet  Switching and  Communication  Server  products:  The Nebula 8000 Fault
Tolerant  switch,  released in November 1999, is being  targeted  towards server
centric  applications  in server  clusters.  The  switch  technology  supports a
redundant  switch fabric designed for maximum  availability and its architecture
can  sustain  operation  in  the  event  of  a  single  point  of  failure.  The
implementation of the Gigabit  connectivity  feature for the Nebula product line
has been  submitted  to Beta  testing and if all goes well will be released  for
production  during the second quarter of 2000. The NEBS compliant  design effort
for  the  Nebula  4000  and  6000  models   applicable   to   telecommunications
applications  is nearly  completed and should undergo  testing during the second
quarter  of 2000.  As the  next  generation  telecom  platform  architecture  is
implemented for Voice-over-IP,  there is a requirement to handle IP traffic. The
Nebula   technology  will  be  expanded  into  a  family  of  high   performance
100Mbit/Gigabit  Ethernet  Switches  that  are  specifically  targeted  at  next
generation  telecom  platforms.  The Company's  capabilities  in fault  tolerant
Ethernet switch  architectures,  cPCI packaging and "Hot Swap" availability will
be implemented into a third  generation  switch  subsystem.  This subsystem will
initially  find  application  as  a  data  aggregation   device   integrated  in
carrier-class Voice-over-IP systems or in network edge access devices.

With  the  pace of  voice  and  data  convergence  accelerating,  the  classical
demarcation lines are blurring.  Ethernet is now finding applications beyond the
traditional  enterprise  and into the MAN  (Metropolitan  Area  Network) and for
connectivity  deployment  within carriers Points of Presence (POP's) and Central
Offices (CO's).

During 1999,  the Company  announced  the  introduction  of its latest  Internet
Protocol  (IP) based Wide Area Network  (WAN) to Local Area Network  (LAN) based
communications server, the MPS800. The MPS800 provides one 10/100Base-T Ethernet
port and eight high-speed WAN serial ports,  making it ideal for intelligent WAN
bridging,  T1/E1  multiplexing  and  remote  WAN  connectivity.   Virtually  all
computers  and  workstations   equipped  with  TCP/IP  on  the  LAN  can  access
information from these  communication  servers.  The Company's complete suite of
WAN  protocol  products is  available on the MPS800.  The  communication  server
products from the Company can be found in data collection applications including
NASA's deep space network,  in air traffic control centers for retrieving  radar
data  from  remote  radar   antenna   sites  and  in  the  US  Weather   Service
infrastructure  for retrieving  weather  satellite and radar images.  Management
believes there will be increasing demand and  applicability  for  communications
servers such as the MPS800 in 2000.

                                       15
<PAGE>

Telecommunications  and Wide Area Connectivity  products:  The Company's overall
Telecommunications and Wide Area Connectivity strategy is to develop and provide
products to the leading telecommunications  suppliers that enable voice and data
communications. These products are comprised of hardware, software and subsystem
solutions that support a variety of open system platforms and operating systems.
These open systems include:  CompactPCI (cPCI),  PCI, PMC, SBus and VME. Product
applications  cover many uses  including  high-speed  Internet  connections  for
server  products and T1/E1  products used for SS7 products.  The Company  offers
systems support for its products across a spectrum of popular  operating systems
including UNIX, Sun Microsystem's Solaris(TM),  Microsoft's Windows NT(TM), Wind
River's  VxWorks and Linux.  The Company  offers an extensive  suite of advanced
communications  software  consisting of Frame Relay,  SS7,  X.25,  and HDLC. The
Company's  channelized  support for T1/E1 data rates and software  protocol tool
kits for specialized customer development further expand the software portfolio.

In June,  the Company  introduced  Channel7(TM),  a  comprehensive  hardware and
Signaling  System 7 (SS7)  software  product  that  provides  telecom  equipment
manufacturers  with enabling  technology for a broad range of  applications  and
systems.   Based  on  a  standardized  cPCI  platform,   Channel7  is  a  highly
configurable,  scaleable  and a high  performance  solution for  developing  SS7
network systems and is  complementary  to the MicroLegend  SS7/IP Gateway System
products.  Channel7 was the  Company's  first major  milestone in the  Signaling
System 7 marketplace.  SS7 technology is a basic building block for applications
such as Voice over IP Gateways,  cellular  roaming  support,  Caller ID and call
routing to Call Centers. To accelerate Channel7's acceptance in the marketplace,
PTI partnered with several SS7  application  engineering  firms and Channel7 was
verified for use with Sun  Microsystems'  new  Netra(TM) ft 1800 fault  tolerant
telecom server systems.

The  growth in the Wide Area  Networking  (WAN)  communications  market is being
driven  by the  expansion  of the  Internet,  wireless  communications  and  the
convergence  occurring between voice and data communications.  Customers include
Lucent Technologies,  Compaq Corporation,  QualComm Inc., Alcatel Inc., Motorola
Corporation, ADC Telecom and Sun Microsystems.

Results of Operations

The  following  table sets forth for the years  indicated  certain  consolidated
financial  data  expressed as a percentage of sales and is included as an aid to
understanding  the Company's  results and should be read in conjunction with the
selected  financial data and Consolidated  Financial  Statements  (including the
notes thereto) appearing elsewhere in this report:

                                             Year Ended December 31,
                                     1999            1998           1997
                                     ----            ----           ----
Sales                                100.0%          100.0%         100.0%
Cost of goods sold                    34.1            40.0           40.6
                                     -----           -----          -----
Gross profit                          65.9            60.0           59.4
                                     -----           -----          -----
Operating expenses:
   Selling and marketing              13.0            13.0           13.1
   Research and development           17.8            15.0           14.3
   General and administrative          8.4             8.9            9.3
   Acquisition charges                 3.9
                                     -----           -----          -----
         Total operating expenses     43.1            36.9           36.7
                                     -----           -----          -----
Income from operations                22.8            23.1           22.7

Other income, net                      3.3             3.8            3.3
                                     -----           -----          -----
Income before income taxes            26.1            26.9           26.0
Provision for income taxes            12.1             9.2            9.7
                                     -----           -----          -----
   Net income                         14.0%           17.7%          16.3%
                                     =====           =====          =====

Excluding one-time acquisition expenses:

Income before income taxes
  (Excluding $1.7 million charge
  for acquisition expenses)           30.0%           26.9%          26.0%
Provision for income taxes            12.1             9.2            9.7
                                      -----           -----          -----
   Adjusted Net income                17.9%           17.7%          16.3%
                                     =====           =====          =====

                                       16
<PAGE>

Year Ended December 31, 1999, compared with the Year Ended December 31, 1998

Sales. Sales for 1999 increased 30% to $44,494,000,  compared to $34,118,000 for
1998. For the years  indicated,  the Company's  sales are in one product segment
and are grouped into four product categories:  WAN communications  products, LAN
interface products, Network Switching products, and Other products.

WAN  communication  product  revenue,  which included the Channel7 and Signaling
Gateway products,  increased to $24,892,000 for 1999, compared to $21,433,000 in
1998. The Company  developed  several new CompactPCI WAN products,  the Channel7
product and broadened the Signaling Gateway product line during 1999. Management
expects  revenue from these new products to contribute to the Company's  revenue
growth in 2000.

Shipments of LAN interface  products amounted to 33% of sales in 1999,  compared
to 18% of sales in 1998.  The  largest  share  of the  Company's  LAN  interface
product business is generated from Commercial Off-the-Shelf (COTS) Department of
Defense projects. During 1998, a new follow-on Department of Defense procurement
contract  was awarded to the Company in  September,  after  having been  delayed
since the beginning of the year.  Beginning in April 1999, new follow-on  orders
were awarded to the Company  totaling $10.9 million.  Deliveries on these orders
began in the second  quarter  1999 and were  expected  to  continue  through the
second  quarter  of 2000.  At the end of 1999,  approximately  $1.0  million  of
product remained to be shipped on these orders.  Discussions are currently being
held to determine the customer's  procurement  requirements  after this contract
expires in June 2000. At the present time, PTI is unable to determine the extent
of a new follow-on  order, if any. Total LAN revenue in 1999 was greater than in
1998 due to the impact  (on 1998) of the delay in the award of the new  contract
and because the Company  received  significant  new Department of Defense orders
beginning in April 1999 that were shipped during the year.

     The  general  release of the  Nebula  8000 Fault  Tolerant  Network  Switch
product was delayed during 1999 due to technical issues revealed during the Beta
testing process.  The production release of the product occurred in mid-November
1999. As the product was brought to market, a number of new  opportunities  were
uncovered   for  the  high   availability,   redundant   switch  fabric  in  the
telecommunications market. As a result, in 2000, the Company has embarked on the
development of a family of third  generation,  high performance  100Mbit/Gigabit
Ethernet  Switch  subsystems  based on the cPCI  platform  standard.  These  new
products  are targeted  for  introduction  in 2000 and are expected to become an
integral part of the next generation networks.

Other  product  revenue   amounted  to $4.8  million in 1999,  compared  to $6.7
million in 1998.  Other  products  include the Company's  older/legacy  products
previously  grouped in Network System products,  Mass Storage Interface products
and  Inter-system  Connectivity  products.  Many of these  products  are project
oriented and shipments can fluctuate on a quarterly  basis.  Management  expects
revenue  from  these  products  to  continue  to  decline  during  2000 as these
technologies are replaced.

Gross Profit.  Gross profit consists of sales, less cost of goods sold including
materials costs, manufacturing expenses and amortization of software development
costs.  Gross  profit in 1999  increased  by  $8,831,000  to  $29,320,000,  from
$20,489,000 in 1998. Gross margin improved to 66% of sales in 1999,  compared to
60% in 1998.  Gross margin on the WAN, LAN and Other  products  improved  during
1999  primarily due to  manufacturing  efficiencies  based on higher volumes and
rising  sales of  separately  priced  communications  software.  Gross margin on
Signaling Gateway products  improved to approximately  80% in 1999,  compared to
67% in 1998 due to the  increased  value-added  for the software in the product.
Gross margin on the Nebula network switch subsystems  products  approximated 40%
in 1999.  The new family of cPCI  telecommunications  switches to be  introduced
during  2000 is  expected  to have a gross  margin  similar to the Wide Area and
Telecommunications Connectivity products.

                                       17
<PAGE>

Total Operating Expenses.  Total operating expenses increased to $19,173,000 for
1999,  from  $12,594,000  for 1998.  As a percentage of sales,  total  operating
expenses  increased  from  36.9% in 1998 to 39.2%  in 1999,  excluding  one-time
acquisition  charges of $1.7  million.  As a  percentage  of sales,  the Company
increased its investment in research and development during 1999 and reduced its
general and administrative expenses.

Selling and marketing  expenses increased to $5,767,000 in 1999, from $4,434,000
in 1998, or 13% of sales in 1999 and 1998.  The allowance for doubtful  accounts
was increased by $512,000 in late 1999 due to a significant OEM customer closing
their doors for  business in January  2000.  This  customer  did $1.3 million in
business  with the Company  during 1999.  The loss of this customer will have an
impact  on  the  Company's   business  in  2000.   Management  expects  to  more
aggressively  market its new products in 2000 and sales and  marketing  expenses
are expected to increase as a percentage of sales.

Research and development  expenses  increased to $7,906,000,  or 18% of sales in
1999, compared to $5,121,000,  or 15% of sales in 1998. During 1999, significant
development  efforts were  focused on bringing new products to market  including
new cPCI WAN  products,  Channel7,  the Nebula  8000 and the  Signaling  Gateway
products. The Company's engineering staff,  including MicroLegend,  increased by
21 people,  to 87  engineers  at the end of 1999.  The  increase in research and
development  expenses  for 1999 is  primarily  attributable  to  these  factors.
Management will continue to invest a significant percentage of sales in research
and development to bring new products to market.

General and  administrative  expense,  excluding one-time  acquisition  charges,
increased to $3,756,000,  or 8% of sales in 1999, compared to $3,039,000,  or 9%
of sales in 1998.  The Company  continues  to maintain  tight  control  over its
general  and   administrative   expenses  and  management  expects  general  and
administrative  expenses to decline as a percentage  of sales in 2000 as revenue
increases.  Acquisition  charges of $1,744,000  consisted  primarily of fees for
investment bankers, attorneys, accountants and other related charges.

Other Income,  net. Other income consists primarily of interest income from cash
equivalents and marketable securities.  The funds are primarily invested in high
quality Municipal and U.S. Treasury  securities with maturities of less than one
year.

Income Taxes. The provision for income taxes for 1999 is based upon the combined
federal  and  state  effective  tax rate of 46%,  compared  to 34% in 1998.  The
increase in the effective  tax rate for 1999 is primarily due to  non-deductible
acquisition charges.

Year Ended December 31, 1998, compared with the Year Ended December 31, 1997

Sales.  Sales for 1998 were  $34,118,000,  compared to $32,435,000 for 1997. The
Company's  sales are in one product  segment and are grouped  into five  product
categories:  WAN communications products (including MicroLegend's products), LAN
interface  products,  Network System products,  Mass Storage Interface products,
and Inter-system Connectivity products.

                                       18
<PAGE>

WAN communications  products  represented 63% of sales during 1998,  compared to
50% in  1997.  The  increase  in WAN  sales  is  primarily  attributable  to the
development of several new PCIBus products being sold to customers including Sun
Microsystems,  Compaq  Computers  and ADC  Telecom.  During  1998,  the  Company
experienced  a decline in VMEbus and SBus  revenue as  customers  moved to newer
technology.  The  Company  has  developed  several  new  WAN  products  for  the
CompactPCI   market  and  these   products   are  in   evaluation   by  numerous
telecommunications and defense suppliers.

Shipments of LAN interface  products amounted to 17% of sales in 1998 and 19% of
sales in 1997. The largest share of the Company's LAN interface product business
is  generated  from  Commercial   Off-the-Shelf  (COTS)  Department  of  Defense
projects. Defense project revenue declined in 1998 by 13% because the award of a
significant  multi-year  contract was delayed  until  mid-September  and interim
orders were not received  during the delay period.  Also in the third quarter of
1998, a significant contract was received from a new OEM customer for PCIBus LAN
products.  PCIBus products represented almost 13% of LAN revenue in 1998, versus
0% in 1997.

Shipments of Network Systems products  represented 6% of sales in 1998, compared
to 9% in 1997.  Network Systems products include  shipments of I/O subsystems to
an OEM  customer  and sales of  specialized  communication  server  hardware and
protocol software for specialty WAN applications.  As anticipated,  shipments to
the OEM  customer  declined  by  approximately  $1  million in 1998 and sales of
specialized  communication  servers also declined in 1998. The engineering staff
supporting  the server  business  was  reassigned  at the  beginning  of 1998 to
develop software for WAN communications products.

Shipments of Mass Storage  Interface  products for 1998 amounted to 8% of sales,
compared to 13% in 1997.  The  technologies  used in this market are moving from
SBus to PCIBus and from SCSI to Fibre  Channel.  The PCIBus  market has become a
commodity market with greater  competition and lower pricing.  While this market
was also  moving to the  Fibre  Channel  technology,  there  were  delays in the
adoption of standards.  As a result of these factors, the Company's Mass Storage
Interface products no longer effectively competed in the marketplace.

Shipments  of  Inter-system  Connectivity  products  represented  6% of sales i
1998,  compared  to 9% in  1997.  The  Company  is not investing in this group
of products.

Gross Profit.  Gross profit consists of sales, less cost of goods sold including
materials costs, manufacturing expenses and amortization of software development
costs.  Gross  profit in 1998  increased  by  $1,209,000  to  $20,489,000,  from
$19,280,000 in 1997.
Gross margin improved to 60% of sales in 1998, from 59% in 1997.

Total Operating Expenses.  Total operating expenses remained relatively constant
at 37% of sales  in 1998  and  1997.  As a  percentage  of  sales,  the  Company
increased  its  investment  in  research  and  development  during  1998,  while
controlling   sales  and  marketing   expenses  and  reducing  its  general  and
administrative expenses.

Selling and marketing  expenses increased to $4,434,000 in 1998, from $4,250,000
in 1997,  or 13% of sales in 1998 and 1997.  During  1998,  the Company  delayed
certain planned marketing and promotional  activities associated with the Nebula
8000 in order to coordinate spending with the product's availability. During the
second half of 1998, the sales and marketing  staffs of the network switch group
were increased in order to have a greater impact on sales in 1999.

Research and  development  expenses  increased by 10% to  $5,121,000,  or 15% of
sales in 1998, compared to $4,656,000,  or 14% of sales in 1997.  Recruiting and
hiring engineers continues to be one of the Company's greatest challenges at the
headquarters  office.  While a number of engineers  were hired during 1998,  the
Company  continues to actively  recruit to fill open  positions  and has engaged
outside  engineering  consultants  to  assist  in  development  activities.  The
increase in research and  development  expenses in 1998 was primarily the result
of new engineers hired,  higher costs of outside  engineering  consultants,  and
higher development costs for new products.

                                       19
<PAGE>

General  and  administrative  expenses  in  1998  were  $3,039,000  compared  to
$3,006,000  in 1997.  The Company  continues to maintain  tight control over its
general and administrative expenses.

Other Income,  net. Other income consists primarily of interest income from cash
equivalents and marketable securities.  The funds are primarily invested in high
quality Municipal and U.S. Treasury  securities with maturities of less than one
year.

Income  Taxes.  The  provision  for income  taxes for 1998 is based upon the
combined  federal  and state  effective  tax rate of 34%, compared to 38% in
1997.

Liquidity and Capital Resources

At December 31, 1999, the Company's  primary  source of liquidity  included cash
and cash  equivalents of $9,792,000,  marketable  securities of $22,007,000  and
available  borrowings of  $5,000,000  under a revolving  credit  facility with a
bank. No amounts were outstanding  under this credit facility as of December 31,
1999.  The Company had working  capital of  $39,009,000  at December  31,  1999,
compared to $32,221,000 at December 31, 1998.

Cash generated by operating activities was $7,674,000, $6,542,000 and $6,408,000
in  1999,  1998 and  1997,  respectively.  In  1999,  net  income  and  non-cash
adjustments  increased by $954,000,  plus net operating  assets and  liabilities
decreased by $154,000.

Cash used in  investing  activities  was  $23,222,000.  During  1999,  investing
activities  included the purchase of marketable  securities of $23,007,000,  the
maturity of marketable securities of $1,000,000, and capital equipment purchases
of $1,047,000.  Capital  equipment  purchases consist primarily of manufacturing
equipment,   office  equipment  and  computer  and  related  equipment  used  in
engineering.  In addition,  the Company capitalizes certain software development
costs.  Amounts  capitalized  and  included  within  investing  activities  were
$168,000, $761,000 and $809,000 in 1999, 1998 and 1997, respectively.

In March 1998,  the Board of Directors  authorized  the repurchase of up to $5.0
million of the Company's Common Stock. The Company repurchased a total of 45,000
shares at a total cost of $932,000 during 1999 and 78,000 shares at a total cost
of $736,000 in 1998.  During December 1999, the Board of Directors  withdrew the
common stock buy-back program.  Cash provided by financing activities of $78,000
for 1997 was  principally  the result of the exercise of stock  options less the
repayment of debt.

Impact of the Year 2000 Issue

Many  companies  were  facing  a  potential   issue  regarding  the  ability  of
information systems to accommodate the coming year 2000. The Year 2000 issue was
the result of computer  programs  using only the last two digits to indicate the
year. If uncorrected,  such computer programs would be unable to interpret dates
beyond  the year  1999,  which  could  cause  computer  system  failure or other
computer errors disrupting operations.  The Company recognized the importance of
the Year 2000 issue and created a  corporate-wide  Year 2000  project team whose
objective  was to ensure an  uninterrupted  transition  into the Year 2000.  The
project outcome was a success,  as the Company has not experienced any Year 2000
problems  since the date change on January 1, 2000.  Costs of the  project  were
estimated  to be  $150,000  and costs  during  the year 2000 do not appear to be
significant.

The Company has not experienced any material Year 2000 issues with key suppliers
and  customers  and  it  appears  that  such   organizations  have  successfully
transitioned to the Year 2000. However,  there can be no assurance that problems
will not arise for the Company, its suppliers, its customers or others with whom
the Company does business later in 2000, either in connection with the leap year
or with  systems  that have not yet been fully  tested.  The Company  intends to
continue to monitor its  compliance,  as well as the  compliance of others whose
operations are material to the Company's business.

                                       20
<PAGE>


ITEM 7A - Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to various market risks in the normal course of business,
primarily  interest rate risk and changes in the market value of its investments
and believes its exposure to such risk is minimal. The Company's investments are
made in accordance with the Company's investment policy and primarily consist of
U.S. Treasury securities,  municipal securities and corporate  obligations.  The
Company  does  not  participate  in  the  investment  of  derivative   financial
instruments.

ITEM 8 - Financial Statements and Supplementary Data

Index to Financial Statements:                                           Page

   Report of Independent Accountants                                      21
   Consolidated Balance Sheets at December 31, 1999 and 1998              22
   Consolidated Statements of Income for the Three Years Ended
     December 31, 1999                                                    23
   Consolidated Statements of Changes in Stockholders' Equity for the
     Three Years Ended December 31, 1999                                  24
   Consolidated Statements of Cash Flows for the Three Years Ended
     December 31, 1999                                                    25
   Notes to Consolidated Financial Statements                             26

Index to Financial Statement Schedules:

All schedules have been omitted  because they are not applicable or the required
information is shown in the financial statements or notes thereto.


                        Report of Independent Accountants

January 31, 2000

To the Board of Directors and Stockholders of
Performance Technologies, Incorporated

In our opinion, the consolidated financial statements listed in the accompanying
index  present  fairly,  in all material  respects,  the  financial  position of
Performance Technologies, Incorporated and its subsidiaries at December 31, 1999
and 1998,  and the results of their  operations and their cash flows for each of
the three years in the period  ended  December  31,  1999,  in  conformity  with
accounting  principles  generally accepted in the United States. These financial
statements   are  the   responsibility   of  the   Company's   management;   our
responsibility  is to express an opinion on these financial  statements based on
our audits.  We conducted  our audits of these  statements  in  accordance  with
auditing standards  generally accepted in the United States,  which require that
we plan and perform the audit to obtain  reasonable  assurance about whether the
financial  statements  are free of  material  misstatement.  An  audit  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the  financial   statements,   assessing  the  accounting  principles  used  and
significant  estimates made by management,  and evaluating the overall financial
statement  presentation.  We believe that our audits provide a reasonable  basis
for the opinion expressed above.

/s/PricewaterhouseCoopers LLP
-----------------------------
PricewaterhouseCoopers LLP
Rochester, New York

                                       21
<PAGE>

<TABLE>
             PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

<CAPTION>
                                     ASSETS

                                                       December 31,
                                                   1999            1998
                                                   ----            ----
<S>                                             <C>              <C>

Current assets:
   Cash and cash equivalents                     $ 9,792,000      $25,741,000
   Marketable securities                          22,007,000
   Accounts receivable, net                        9,474,000        5,808,000
   Inventories, net                                3,910,000        4,461,000
   Prepaid expenses and other                        684,000        1,087,000
   Deferred taxes                                  1,129,000          549,000
                                                 -----------      -----------
       Total current assets                       46,996,000       37,646,000

Equipment and improvements, net                    1,695,000        1,423,000
Software development, net                            451,000        1,053,000
                                                 -----------      -----------
       Total assets                              $49,142,000      $40,122,000
                                                 ===========      ===========


                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Current portion of long term debt             $     6,000      $    12,000
   Accounts payable                                  904,000        2,133,000
   Income taxes payable                            1,990,000          618,000
   Accrued expenses                                5,087,000        2,662,000
                                                 -----------        ---------
       Total current liabilities                   7,987,000        5,425,000

Long term debt, less current portion                                    6,000
Deferred taxes                                       327,000          511,000
                                                 -----------      -----------
       Total liabilities                           8,314,000        5,942,000
                                                 -----------      -----------

Stockholders' equity:
   Preferred stock-$.01 par value; 1,000,000
     shares authorized; none issued
   Common stock-$.01 par value; 15,000,000
     shares authorized; 13,186,526 and 9,632,144
     shares issued at December 31, 1999
      and 1998, respectively                         132,000           97,000
   Additional paid-in capital                     12,665,000       13,228,000
   Retained earnings                              28,003,000       21,777,000
   Treasury stock-at cost, 340,378 shares                            (917,000)
   Cumulative translation adjustments                 28,000           (5,000)
                                                 -----------      -----------
       Total stockholders' equity                 40,828,000       34,180,000
                                                 -----------      -----------
       Total liabilities and
        stockholders'equity                      $49,142,000      $40,122,000
                                                 ===========      ===========

<FN>
 The  accompanying  notes are an  integral  part of these financial statements.

</FN>
</TABLE>


                                       22
<PAGE>


<TABLE>
             PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
                                               Year Ended December 31,
                                          1999           1998           1997
                                          ----           ----           ----

<S>                                   <C>            <C>            <C>

Sales                                 $44,494,000    $34,118,000    $32,435,000
Cost of goods sold                     15,174,000     13,629,000     13,155,000
                                      -----------    -----------    -----------
Gross profit                           29,320,000     20,489,000     19,280,000
                                      -----------    -----------    -----------

Operating expenses:
   Selling and marketing                5,767,000      4,434,000      4,250,000
   Research and development             7,906,000      5,121,000      4,656,000
   General and administrative           3,756,000      3,039,000      3,006,000
   Acquisition charges                  1,744,000
                                      -----------    -----------    -----------
       Total operating expenses        19,173,000     12,594,000     11,912,000
                                      -----------    -----------    -----------
Income from operations                 10,147,000      7,895,000      7,368,000

Other income, net                       1,478,000      1,293,000      1,060,000
                                      -----------    -----------    -----------
Income before income taxes             11,625,000      9,188,000      8,428,000

Provision for income taxes              5,399,000      3,141,000      3,157,000
                                      -----------    -----------    -----------
       Net income                     $ 6,226,000    $ 6,047,000    $ 5,271,000
                                      ===========    ===========    ===========



Basic earnings per share              $       .47    $       .46    $       .41
                                      ===========    ===========    ===========

Diluted earnings per share            $       .45    $       .45    $       .39
                                      ===========    ===========    ===========





Net income available to
   common stockholders                $ 6,226,000    $ 6,047,000    $ 5,271,000
                                      ===========    ===========    ===========

Weighted average number of common
   shares used in basic earnings
   per share                           13,164,903     13,076,897     13,012,085
Common equivalent shares                  623,976        440,096        436,524
                                      -----------    -----------    -----------
Weighted average number of common
   shares used in diluted earnings
   per share                           13,788,879     13,516,996     13,448,609
                                      ===========    ===========    ===========



<FN>
  The  accompanying  notes are an  integral  part of these financial statements.
</FN>
</TABLE>

                                       23
<PAGE>

<TABLE>
             PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<CAPTION>
                                       Additional                         Other
                      Common Stock      Paid-in   Retained  Treasury  Comprehensive
                     Shares   Amount    Capital   Earnings   Stock       Income      Total
                   ------------------ ----------- --------- --------- -------------- ---------
<S>               <C>        <C>      <C>         <C>         <C>        <C>        <C>
Balance -
  January 1, 1997
   As previously
   reported       4,899,418 $ 49,000  $12,885,000 $ 9,930,000 $(157,000) $           $22,707,000
   MicroLegend
   Telecom Systems,
   Inc. pooling
   of interests   2,165,732   22,000      (22,000)    529,000              1,000         530,000
                 ----------  -------  ----------- ----------- ---------  -------     -----------
Balance -
  January 1,
    1997          7,065,150   71,000   12,863,000  10,459,000  (157,000)   1,000      23,237,000

1997 Net income                                     5,271,000                          5,271,000
Currency
 translation
 adjustment                                                              (41,000)        (41,000)
Exercise of
 options             51,325    1,000      104,000                                        105,000
Tax benefit
 option plan                               90,000                                         90,000
Three-for-two
stock split       2,463,989   24,000      (24,000)
Purchase of
 treasury
 stock - 106
  shares                                                         (1,000)                  (1,000)
                 ----------   ------  ----------- ----------- ---------  -------     -----------
Balance -
 December 31,
  1997            9,580,464   96,000   13,033,000  15,730,000  (158,000) (40,000)     28,661,000

1998 Net income                                     6,047,000                          6,047,000
Currency
 translation
 adjustment                                                               35,000          35,000
Exercise of
 options             51,680    1,000      101,000                                        102,000
Tax benefit
 option plan                               94,000                                         94,000
Purchase of
 treasury
 stock - 119,445
  shares                                                       (759,000)                (759,000)
                 ----------   ------  ----------- ----------- ---------  -------     -----------
Balance -
 December 31,
  1998            9,632,144   97,000   13,228,000  21,777,000  (917,000)  (5,000)     34,180,000

1999 Net income                                     6,226,000                          6,226,000
Currency
 translation
 adjustment                                                               33,000          33,000
Exercise of
 options              4,500               928,000               334,000                1,262,000
Issuance of
 options                                  715,000                                        715,000
Tax benefit
 option plan                               62,000                                         62,000
Three-for-two
stock split       3,735,056   37,000      (37,000)
Purchase of
 treasury
 stock - 91,584
  shares                                                     (1,650,000)              (1,650,000)
Retirement of
 treasury
 stock             (185,174)  (2,000)  (2,231,000)            2,233,000
                 ---------- --------  ----------- ----------- ---------  -------     -----------
Balance -
 December 31,
  1999           13,186,526 $132,000  $12,665,000 $28,003,000 $          $28,000     $40,828,000
                 ========== ========  =========== =========== =========  =======     ===========
<FN>
  The  accompanying  notes are an  integral  part of these financial statements.
</FN>

</TABLE>

                                       24
<PAGE>


<TABLE>
             PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
                                                 Year Ended December 31,
                                                1999         1998         1997
                                                ----         ----         ----
<S>                                         <C>         <C>          <C>
Cash flows from operating activities
   Net income                              $ 6,226,000  $ 6,047,000  $ 5,271,000
   Non-cash adjustments:
     Depreciation and amortization           1,545,000    1,208,000    1,618,000
     Provision for bad debts                   602,000       23,000       21,000
     Reserve for inventory obsolescence        779,000      802,000      262,000
     Deferred income taxes                    (764,000)      45,000       73,000
     Compensation expense                      715,000

   Changes in operating assets
     and liabilities:
      Accounts receivable                   (4,255,000)    (344,000)  (2,373,000)
      Inventories                             (228,000)  (1,934,000)     446,000
      Prepaid expenses and other               410,000     (345,000)     (57,000)
      Accounts payable accrued expenses      1,210,000      631,000      936,000
     Income taxes payable                    1,434,000      409,000      211,000
                                            ----------   ----------  -----------

Net cash provided by
 operating activities                        7,674,000    6,542,000   6,408,000
                                            ----------  -----------  -----------

Cash flows from investing activities
   Purchases of equipment and
   improvements, net                        (1,047,000)    (748,000)    (828,000)
   Capitalized software development           (168,000)    (761,000)    (809,000)
   Purchase of marketable securities       (23,007,000)  (5,698,000) (13,165,000)
   Maturities of marketable securities       1,000,000   18,010,000    7,100,000
                                            ----------  -----------  -----------

Net cash (used) provided by
 investing activities                      (23,222,000)  10,803,000   (7,702,000)
                                            ----------  -----------  -----------

Cash flows from financing activities
   Repayment of long-term debt                 (12,000)     (12,000)     (26,000)
   Exercise of stock options                   543,000       79,000      104,000
   Purchase of treasury stock                 (932,000)    (736,000)
                                            ----------  -----------  -----------

Net cash (used) provided by
 financing activities                         (401,000)    (669,000)      78,000
                                            ----------  -----------  -----------

Net (decrease) increase
 in cash and cash equivalents              (15,949,000)  16,676,000   (1,216,000)

Cash and cash equivalents
 at beginning of year                       25,741,000    9,065,000   10,281,000
                                            ----------  -----------  -----------

Cash and cash equivalents
 at end of year                            $ 9,792,000  $25,741,000  $ 9,065,000
                                           ===========  ===========  ===========


SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Interest paid                              $    15,000  $     4,000  $     4,000
Income taxes paid                          $ 4,319,000  $ 2,827,000  $ 2,865,000

Non-cash financing activity:
  Exercise of stock options using 46,849,
    1,800 and 106 shares of common stock
    in 1999, 1998 and 1997, respectively   $   718,000  $    23,000  $     1,000

<FN>
  The  accompanying  notes are an  integral  part of these financial statements.
</FN>
</TABLE>

                                       25
<PAGE>


             PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note A - Nature of Business and Summary of Significant Accounting Policies

The Company: Performance Technologies,  Incorporated (the Company) was formed in
1981 under the laws of the State of Delaware and maintains its corporate offices
in Rochester, New York. The Company designs, develops,  manufactures and markets
high   reliability,   and  high   availability   voice,   data   and   signaling
telecommunications products.

Segment Data,  Geographic  Information  and Significant  Customers:  The Company
operates in one industry  segment.  Export sales to customers outside the United
States  represent  16%,  21% and 9% of the  Company's  sales for the years ended
December 31, 1999,  1998 and 1997,  respectively.  For 1999, 1998 and 1997, four
customers  accounted for approximately  43%, 31% and 28%,  respectively,  of the
Company's sales, with no single customer  representing greater than 23%, 11% and
8%, respectively, of the Company's sales.

Principles of Consolidation:  The consolidated  financial statements include the
accounts of the Company and its wholly owned  subsidiaries.  Effective  December
10,  1999,  the  Company  merged  with   MicroLegend   Telecom   Systems,   Inc.
(MicroLegend),  which has been  accounted  for as a  pooling  of  interests  and
accordingly  all  prior  period  consolidated  financial  statements  have  been
restated to include the combined results (Note B). All intercompany transactions
have been eliminated.

Foreign Currency  Translation:  Canadian currency is the functional  currency of
the Company's Canadian subsidiary.  Assets and liabilities of foreign operations
are  translated to U.S.  dollars at current  rates of exchange,  and revenue and
expenses  are  translated  using  average  rates.  Gains and losses from foreign
currency  translation  are  included as a separate  component  of  stockholders'
equity.   Translation  adjustments  are  not  tax-effected  as  they  relate  to
investments  considered permanent in nature.  Foreign currency transaction gains
and losses are included in the Consolidated Statements of Income.

Use of Estimates:  The preparation of the consolidated  financial  statements in
conformity with generally accepted accounting  principles requires management to
make estimates and  assumptions  that affect the reported  amounts of assets and
liabilities and disclosure of contingent  assets and liabilities at year-end and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.

Concentration of Credit Risk:  Financial  instruments,  which potentially expose
the Company to significant concentrations of credit risk, consist principally of
bank  deposits,  marketable  securities  and  accounts  receivable.   Marketable
securities  consist  of  high  quality  short-term  interest  bearing  financial
instruments.  The Company performs ongoing credit  evaluations of its customers'
financial  condition and the Company  maintains an allowance  for  uncollectible
accounts  receivable  based upon the  expected  collectibility  of all  accounts
receivable.

Fair  Value of  Financial  Instruments:  The  carrying  amount of the  Company's
financial   instruments,   including  cash  and  cash  equivalents,   marketable
securities,  accounts receivable,  accounts payable,  accrued expenses and loans
approximates  their fair value at December  31,  1999,  as the maturity of these
instruments are generally short term.

Cash Equivalents:  The Company considers all highly liquid  investments
purchased with an original maturity of three months or less to be cash
equivalents.

                                       26
<PAGE>


Note A - Nature of Business and Summary of Significant Accounting Policies
(continued)

Marketable  Securities:  The Company has classified  all of its marketable  debt
securities  as held to  maturity  and has  accounted  for these  investments  at
amortized  cost.  Accordingly,  no adjustment  for  unrealized  holding gains or
losses has been  reflected in the  Company's  financial  statements.  Marketable
securities  classified as held to maturity are high credit quality securities in
accordance with the Company's investment policy.

Inventories:  Inventories  are  valued at the lower of cost or market  using the
first-in,  first-out method. The Company provides inventory reserves for excess,
obsolete  or  slow  moving  inventory  based  on  changes  in  customer  demand,
technology developments or other economic factors.

Revenue Recognition:  Revenue is recognized upon product shipment.  Arrangements
for  software  systems  requiring  significant  production,   modification,   or
customization  of software are  accounted for as a long-term  contract.  Revenue
from  consulting  and other  services is recognized at the time the services are
rendered.  Any anticipated losses on contracts are charged to operations as soon
as such losses are determined.  Revenue from software  maintenance  contracts is
recognized ratably over the contractual period, or as the service is performed.

Equipment  and  Improvements:  Equipment and  improvements  are recorded at cost
reduced by  accumulated  depreciation.  Depreciation  is provided  for using the
straight-line method over the following estimated useful lives:

     Machinery and equipment           3-10 years
     Software                             3 years
     Office furniture and equipment     3-5 years
     Leasehold improvements            the lesser of 10 years or the lease term

Upon retirement or disposal of an asset,  the asset and the related  accumulated
depreciation are eliminated from the accounts with gains or losses included as a
component of "Other income" in the Consolidated Statements of Income.

Long-Lived  Assets:  The Company regularly assesses all of its long-lived assets
for impairment when events or circumstances  indicate their carrying amounts may
not be  recoverable,  in  accordance  with  Statement  of  Financial  Accounting
Standards No. 121(SFAS 121), Accounting for the Impairment of Long-Lived Assets.
During  1998,  the  Company  recorded  a  charge  for the  remaining  amount  of
unamortized  goodwill  as its value had  significantly  decreased.  Amortization
expense for goodwill was $123,000 and $50,000 for 1998 and 1997.

Research  and  Development:  Research  and  development  costs are  expensed  as
incurred.

Advertising: Advertising costs are expensed as incurred and recorded in "Selling
and marketing" in the  Consolidated  Statements of Income.  Advertising  expense
amounted  to  $254,000,   $306,000  and  $341,000  for  1999,   1998  and  1997,
respectively.

Software  Development Costs:  Software  development costs incurred subsequent to
the  establishment of technological  feasibility and prior to general release of
the product are  capitalized  and amortized on a  product-by-product  basis over
their  estimated  remaining  economic life,  generally three years, or using the
ratio of  current  revenues  to  current  and  anticipated  revenues  from  such
software, whichever provides greater amortization.


                                       27
<PAGE>

Note A - Nature of Business and Summary of Significant Accounting Policies
(continued)

Income  Taxes:  The  Company  accounts  for  income  taxes  using  the asset and
liability  approach which requires  recognition of deferred tax  liabilities and
assets for the expected future tax consequences of temporary differences between
the  carrying  amounts  and the tax basis of such assets and  liabilities.  This
method utilizes enacted  statutory tax rates in effect for the year in which the
temporary  differences  are  expected to reverse and gives  immediate  effect to
changes in income tax rates upon enactment.  Deferred tax assets are recognized,
net of any valuation  allowance,  for deductible  temporary  differences and tax
credit  carryforwards.  Deferred  income tax expense  (benefit)  represents  the
change in net deferred tax asset and liability balances.

Earnings  Per Share:  Earnings per share is  presented  in  accordance  with the
provisions of SFAS No. 128,  "Earnings  Per Share." Basic  earnings per share is
computed by dividing  net income  available by the  weighted  average  number of
common  shares   outstanding  for  the  period.   Diluted   earnings  per  share
calculations  reflect the assumed  exercise  and  conversion  of employee  stock
options and warrants.

Stock-Based  Compensation:  Compensation costs are recognized in accordance with
Accounting  Principles Board (APB) Opinion No. 25,  "Accounting for Stock Issued
to Employees," based on the difference,  if any, between the quoted market price
of the  stock on the  grant  date  and the  exercise  date.  In  early  1999,  a
compensation  charge of $715,000  was  recorded to  operating  expenses  for the
issuance of stock  options  granted to  MicroLegend  employees  with an exercise
price below the fair market value of its common stock.

Note B - Business Combination

On December 10, 1999, MicroLegend Telecom Systems, Inc. was merged with and into
a subsidiary of the Company, and approximately 2,166,000 shares of the Company's
common stock were issued in exchange for all of the outstanding  common stock of
MicroLegend.   MicroLegend   develops  and  markets  Signaling  System  7  (SS7)
telecommunications  gateway  products  that  provide  signaling  and control for
wireless,  voice-over-IP  and other  packet  applications.  The  merger has been
accounted  for as a pooling  of  interests  under  Accounting  Principles  Board
Opinion No. 16. Accordingly,  all prior period consolidated financial statements
presented  have been  restated to include the  combined  results of  operations,
financial  position and cash flows of MicroLegend as though it had always been a
part of the Company.

Prior to the merger,  MicroLegend's  fiscal year ended on July 31. In  recording
the business  combination,  MicroLegend's prior period financial statements have
been restated to a year ended  December 31, to conform to the  Company's  fiscal
year-end.  There were no material adjustments required to conform the accounting
policies of the two  companies,  except for  recording a charge to  compensation
expense of $715,000 for the issuance of stock options in early 1999.  There were
no intercompany transactions requiring elimination.

The following information presents certain income statement data of the separate
 companies for the periods preceding the merger:
<TABLE>
<CAPTION>

                                    Nine months ended         Year ended
                                    September 30,             December 31,
                                        1999            1998            1997
                                        ----            ----            ----
                                    (unaudited)
<S>                                  <C>            <C>             <C>
Revenue:
 Performance Technologies, Inc.      $28,060,000    $30,202,000     $30,336,000
 MicroLegend Telecom Systems, Inc.     3,539,000      3,916,000       2,099,000
                                     -----------    -----------     -----------
                                     $31,599,000    $34,118,000     $32,435,000
                                     ===========    ===========     ===========

Net income (loss):
 Performance Technologies, Inc.      $ 5,665,000    $ 5,783,000     $ 5,131,000
 MicroLegend Telecom Systems, Inc.      (952,000)       264,000         140,000
                                     -----------    -----------     -----------
                                     $ 4,713,000    $ 6,047,000     $ 5,271,000
                                     ===========    ===========     ===========
</TABLE>

                                       28
<PAGE>


During the three months ending December 31, 1999, the Company  recorded a charge
to operating  expenses of approximately  $1.7 million,  or $.12 per common share
for costs pertaining to the merger  transaction.  Acquisition  charges consisted
primarily  of fees for  investment  bankers,  attorneys,  accountants  and other
related charges.

Note C - Accounts Receivable, Net

Accounts receivable consisted of the following:
<TABLE>
<CAPTION>
                                                       At December 31,
                                                        1999           1998
                                                        ----           ----
<S>                                                 <C>             <C>
Accounts receivable                                 $10,269,000     $ 6,001,000
Less:  allowance for doubtful accounts                 (795,000)       (193,000)
                                                    -----------     -----------
      Net                                           $ 9,474,000     $ 5,808,000
                                                    ===========     ===========
</TABLE>

Note D - Inventories, Net


Inventories consisted of the following:
<TABLE>
<CAPTION>
                                                       At December 31,
                                                        1999           1998
                                                        ----           ----
<S>                                                 <C>             <C>
Purchased parts and components                      $ 1,822,000     $ 1,941,000
Work in process                                       2,893,000       3,011,000
Finished goods                                          113,000         130,000
                                                    -----------     -----------
                                                      4,828,000       5,082,000
Less:  reserve for inventory obsolescence              (918,000)       (621,000)
                                                    -----------     -----------
      Net                                           $ 3,910,000     $ 4,461,000
                                                    ===========     ===========
</TABLE>

Note E - Equipment and Improvements, Net

Equipment and improvements consisted of the following:
<TABLE>
<CAPTION>

                                                      At December 31,
                                                        1999           1998
                                                        ----           ----
<S>                                                 <C>             <C>
Engineering equipment and software                  $ 2,839,000     $ 2,058,000
Manufacturing equipment                               1,332,000       1,269,000
Furniture and equipment                               1,254,000       1,047,000
Leasehold improvements                                  130,000         134,000
                                                    -----------     -----------
                                                      5,555,000       4,508,000
Less:  accumulated depreciation and amortization     (3,860,000)     (3,085,000)
                                                    ------------    -----------
       Net                                          $ 1,695,000     $ 1,423,000
                                                    ============    ===========
</TABLE>

Total  depreciation  and  amortization  expense for  equipment and  improvements
 for 1999,  1998 and 1997 was  $775,000,  $582,000 and $521,000, respectively.


                                       29
<PAGE>


Note F - Accrued Expenses

Accrued expenses consisted of the following:
<TABLE>
<CAPTION>
                                                       At December 31,
                                                        1999           1998
                                                        ----           ----
<S>                                                 <C>             <C>
Accrued compensation                                $ 2,702,000     $   984,000
Accrued professional services                         1,030,000         408,000
Deferred revenue                                        404,000         387,000
Other accrued expenses                                  951,000         883,000
                                                    -----------     -----------
      Total                                         $ 5,087,000     $ 2,662,000
                                                    ===========     ===========
</TABLE>


Note G - Credit Agreement

At December 31, 1999,  the Company had a revolving  credit loan agreement with a
bank  under  which it can  borrow up to $5  million.  Borrowings  bear  interest
ranging either at the bank's prime rate or one month LIBOR plus applicable basis
points as outlined in the  agreement.  Borrowings  are  collateralized  by trade
accounts receivable,  inventory, equipment, contract rights and intangibles. The
agreement  requires  the Company to meet  certain  financial  and  non-financial
covenants.  The Company was in  compliance  with such  covenants at December 31,
1999.  There were no balances  outstanding  under this agreement at December 31,
1999 and 1998. The annual fee on the credit loan agreement is immaterial.

Note H - Commitments

The Company leases  facilities and equipment under operating  leases.  Under the
terms of the facility  lease in  Rochester,  NY, which expires in the year 2001,
the Company  agrees to pay an annual rental of $270,000 with an adjustment  each
year based upon the Consumer  Price Index.  The Company is also  required to pay
their pro rata share of the real property  taxes and  assessments,  expenses and
other charges associated with this facility. The Company has the option to renew
the lease for two  successive  periods of five years each at an annual rental in
accordance  with the provisions of the lease  agreement.  The Company has leased
facilities in its other operating locations in North America that expire between
2003 through 2005.

Future minimum lease  payments for all operating  leases having a remaining term
in excess of one year at December 31, 1999 are as follows:

                                                            Operating Leases

          2000                                               $  785,000
          2001                                                  607,000
          2002                                                  460,000
          2003                                                  194,000
          2004 and thereafter                                   146,000
                                                             ----------
Total minimum lease payments                                 $2,192,000
                                                             ==========

Rental expense amounted to  $787,000, $590,000 and $629,000 for 1999, 1998 and
 1997, respectively.

Note I - Stockholders' Equity

The Company repurchased 44,735 and 78,437 of its common shares in 1999 and 1998,
respectively,  pursuant to its stock repurchase  program authorized by the Board
of Directors in 1998.  The total cost of  repurchasing  such shares was $932,000
and $736,000 in 1999 and 1998,  respectively.  On December 10, 1999, the Company
terminated  the stock  repurchase  program.  In connection  with the merger with
MicroLegend  Telecom  Systems,  Inc.,  the  Company  retired  185,174  shares of
Treasury  stock, at an average cost of $12.06 per share for a total cost of $2.2
million.

                                       30
<PAGE>

The Company  declared  three-for-two  stock splits of the Company's common stock
effected in the form of 50% stock dividends on the outstanding shares payable to
shareholders  of record as of August 26, 1999 and July 31, 1997, with respective
distribution  dates of  September  1, 1999 and  September  15,  1997.  Basic and
diluted earnings per share,  weighted  average number of shares  outstanding and
all applicable  footnotes have been adjusted to reflect the aforementioned stock
splits. All agreements concerning stock options and other commitments payable in
shares of the  Company's  common stock  provided for the issuance of  additional
shares due to the  declaration  of the stock  split.  An amount equal to the par
value of the common shares issued was transferred  from capital in excess of par
value to the common stock account.

Note J - Stock Option Plan

In 1986,  the Company  established  an Incentive  Stock Option Plan  pursuant to
which the  Board of  Directors  reserved  2,700,000  shares of common  stock for
grant.  Options  may be granted to any  officer or employee at not less than the
fair  market  value at the date of grant (not less than 110% of the fair  market
value in the case of holders of more than 10% of the  Company's  common  stock).
Options  granted  under the plan  generally  expire  five years from the date of
grant and generally  vest 20% after one year, 50% after two years and 100% after
three years.

With respect to non-qualified options, the Company recognizes a tax benefit upon
exercise  in an amount  equal to the tax effect of the  difference  between  the
option price and the fair market value of the common stock. Tax benefits related
to such non-qualified stock options are credited to additional paid-in capital.

The following table summarizes stock option activity under this plan:
<TABLE>
<CAPTION>
                                        Number   Weighted-Average    Option
                                      of Shares   Exercise Price   Price Range
                                      ---------   --------------   -----------
<S>                                    <C>            <C>         <C>
Outstanding at January 1, 1997         747,291        $3.90       $.81 -  $6.56
Granted                                214,875        $5.42      $4.83 -  $8.67
Exercised                              (98,427)       $1.07       $.81 -  $5.22
Expired                                 (3,487)       $3.28       $.81 -  $5.22
                                     ---------        -----      --------------
Outstanding at December 31, 1997       860,252        $4.60       $.89 -  $8.67
Granted                                228,375        $9.23      $6.17 -  $9.75
Exercised                              (77,520)       $1.31       $.89 -  $5.05
Expired                                 (1,500)       $8.49               $8.67
                                     ---------        -----      --------------
Outstanding at December 31, 1998     1,009,607        $5.89      $1.01 -  $9.75
Granted                                385,375       $13.60      $8.15 - $18.75
Exercised                             (253,164)       $4.91      $1.22 -  $9.75
Expired                                (26,400)       $8.49      $1.22 -  $9.17
                                     ---------        -----      --------------
Outstanding at December 31, 1999     1,115,418        $8.72      $1.22 - $18.75
                                     =========        =====      ==============
</TABLE>

At December  31,  1999,  576,700  options  were vested and 698,056  options were
available  for future grant under the stock  option plan.  At December 31, 1999,
112,500 warrants are held by two of the Company's directors at an exercise price
of $1.22 per share and expire in the year 2001.

The Company has adopted the disclosure only provisions of Statement of Financial
Accounting  Standards  No.  123,  "Accounting  for  Stock-Based   Compensation."
Accordingly, no compensation cost has been recognized for the stock option plan.
Had compensation  cost for the Company's stock option plan been determined based
on the fair value at the grant date for awards in 1999, 1998 and 1997 consistent
with the  provisions  of SFAS No. 123, the  Company's net income would have been
reduced  to the pro forma  amounts of  $4,765,000,  $4,881,000  and  $4,510,000,
respectively.  Basic earnings per share would have been reduced to the pro forma
amounts of $.36, $.37 and $.35,  respectively.  Diluted earnings per share would
have been reduced to the pro forma amounts of $.34, $.36 and $.34, respectively.
The  assumption  regarding the stock options  issued in 1999,  1998 and 1997 was
that 33% of such options vested annually. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following  weighted-average  assumptions  used for grants in 1999,  1998 and
1997:  dividend yield of 0%; expected  volatility of 65%, 62% and 61%; risk-free
interest rate of 5.4%,  5.5% and 6.5%;  and expected  lives of three in 1999 and
five years in 1998 and 1997, respectively.

                                       31
<PAGE>

Note K - Income Taxes

The provisions for income taxes were as follows:
<TABLE>
<CAPTION>

Current income taxes                 1999              1998             1997
                                     ----              ----             ----
<S>                              <C>               <C>              <C>
   Federal                       $ 4,603,000       $ 2,711,000      $ 2,814,000
   State                             765,000           450,000          374,000
   Foreign                           610,000           (40,000)          15,000
                                 -----------       -----------      -----------
                                   5,978,000         3,121,000        3,203,000
Deferred provision (benefit)        (579,000)           20,000          (46,000)
                                 -----------       -----------      -----------
   Total provision               $ 5,399,000       $ 3,141,000      $ 3,157,000
                                 ===========       ===========      ===========
</TABLE>

Reconciliation of the statutory U.S. federal income tax rate to effective rates
 were as follows:
<TABLE>
<CAPTION>

                                                 1999        1998        1997
                                                 ----        ----        ----
<S>                                              <C>         <C>         <C>
Federal income tax at statutory rate             35.0%       34.0%       34.0%
State tax provision, net of federal benefit       4.2         3.3         2.9
Acquisition charges                               6.0
Other                                             1.2        (3.1)        0.6
                                                 ----        ----        ----
   Effective tax rate                            46.4%       34.2%       37.5%
                                                 ====        ====        ====
</TABLE>

The Company's net deferred income tax balance consists of the following:
<TABLE>
<CAPTION>
                                                           At December 31,
Deferred tax liabilities                               1999             1998
------------------------                               ----             ----
<S>                                                  <C>              <C>
Capitalized software development cost, net           $ (189,000)      $(363,000)
Difference in tax basis of assets                      (138,000)        (23,000)
Investment tax credit                                                  (125,000)
                                                     ----------       ---------
   Total deferred tax liabilities                    $ (327,000)      $(511,000)
                                                     ----------       ---------

Deferred tax assets
Accrued vacation, payroll and other
 accrued expenses                                    $  550,000       $ 199,000
Inventory obsolescence reserve and
 other inventory related items                          213,000         188,000
Bad debt reserve                                        279,000          68,000
Research tax credits                                      6,000          27,000
Other                                                    81,000          67,000
                                                     ----------        --------
   Total deferred tax assets                          1,129,000         549,000
                                                     ----------        --------
     Net deferred tax asset                          $  802,000       $  38,000
                                                     ==========       =========
</TABLE>

As  of  December  31,  1999,  no  deferred  taxes  have  been  provided  on  the
undistributed earnings of the Company's Canadian subsidiary, as the Company does
not plan to initiate any action that would  require the payment of income taxes.
It is not  practicable  to estimate the amount of  additional  tax that might be
payable  on  these  undistributed  earnings.  Note  L -  Research  and  Software
Development Costs

The Corporation incurred research and software development costs relating to the
development of new products as follows:
<TABLE>
<CAPTION>
                                          1999           1998           1997
                                          ----           ----           ----
<S>                                   <C>             <C>            <C>
Gross expenditures for engineering
   and software development           $8,074,000      $ 5,938,000     $5,806,000
Less:  amounts capitalized              (168,000)        (817,000)    (1,150,000)
                                      ----------      -----------     ----------
   Net charged to operating expenses  $7,906,000      $ 5,121,000     $4,656,000
                                      ==========      ===========     ==========
</TABLE>


                                       32
<PAGE>

Software Development costs consisted of the following:
<TABLE>
<CAPTION>
                                                            At December 31,
                                                         1999           1998
                                                         ----           ----
<S>                                                  <C>              <C>
Capitalized software development costs                $ 2,729,000     $2,561,000
Less:  accumulated amortization                        (2,278,000)    (1,508,000)
                                                      -----------     ----------
   Net                                                $   451,000     $1,053,000
                                                      ===========     ==========
</TABLE>

Amortization of software  development  costs included in cost of goods sold was
$770,000,  $503,000,  and $1,047,000 for 1999, 1998 and 1997, respectively.

Note M - Employee Benefit Plans

The Company's  Retirement  Savings Plan  qualifies  under Section  401(k) of the
Internal Revenue Code. The Company's discretionary matching contributions to the
plan were $116,000,  $86,000 and $92,000 for 1999, 1998 and 1997,  respectively.
In  conjunction  with the Company's  Flexible  Benefits  plan,  the Company made
additional discretionary qualified contributions to employee accounts which vest
immediately  amounting  to $134,000,  $128,000  and $108,000 for 1999,  1998 and
1997, respectively.

Note N - Transactions with Related Parties

The Company  leases its primary  facility in Rochester,  New York from an entity
controlled  by two directors of the Company,  one of whom is an officer.  During
1999, 1998, and 1997, the Company paid rent of $323,000,  $319,000 and $318,000,
respectively, for the use of this location. (Note H)

Note O - Subsequent Event

On February 9, 2000,  at a Special  Meeting of  Stockholders,  the  stockholders
approved an amendment to the Company's Restated  Certificate of Incorporation to
increase the number of the authorized  common shares,  from 15 million shares to
50 million  shares,  and an  amendment  to the  Company's  Stock  Option Plan to
increase by 500,000  shares the number of  authorized  shares that may be issued
pursuant to the Stock Option Plan.

Note P - Quarterly Results (unaudited)

The following is a summary of unaudited  quarterly results of operations for the
years ended December 31, 1999 and 1998.
<TABLE>

                                                  1999
                                   (in thousands, except per share data)
                            Mar. 31       Jun. 30        Sept. 30      Dec. 31
                            -------       -------        --------      -------
<S>                         <C>           <C>            <C>          <C>
Sales                       $8,689        $10,020        $12,890      $12,895
Gross profit                 5,497          6,670          8,460        8,693
Income from operations       1,294          2,510          3,311        3,032(1)
Net income                  $  945        $ 1,498        $ 2,270      $ 1,513(1)

Basic earnings per share    $ 0.07        $  0.11        $  0.17      $  0.11(1)
                            ======        =======        =======      =======
Diluted earnings per share  $ 0.07        $  0.11        $  0.16      $  0.11(1)
                            ======        =======        =======      =======

(1) Includes one-time  acquisition  expenses of approximately  $1.7 million,  or
$.12 per share.

                                                 1998
                                  (in thousands, except per share data)
                            Mar. 31       Jun. 30        Sept. 30      Dec. 31
                            -------       -------        --------      -------
<S>                         <C>           <C>            <C>          <C>

Sales                       $8,576        $6,489         $8,412       $10,641
Gross profit                 5,388         3,846          5,050         6,205
Income from operations       2,246           695          1,590         3,364
Net income                  $1,592        $  942         $1,434       $ 2,079

Basic earnings per share    $ 0.12        $ 0.07         $ 0.11       $  0.16
                            ======        ======         ======       =======

Diluted earnings per share  $ 0.12        $ 0.07         $ 0.11       $  0.15
                            ======        ======         ======       =======
</TABLE>


                                       33
<PAGE>

ITEM 9 - Changes in and Disagreements with Accountants on Accounting and
         Financial Disclosure

Not Applicable

PART III

The information  required by Part III and each of the following items is omitted
from this Report and presented in the Company's definitive proxy statement to be
filed,  pursuant to Regulation  14A not later than 120 days after the end of the
fiscal year covered by this Report,  in  connection  with the  Company's  Annual
Meeting of Stockholders to be held on May 31, 2000, which  information  included
therein is incorporated herein by reference.

ITEM 10 - Directors and Executive Officers of the Registrant

The section  entitled  "Election of Directors"  appearing in the Company's proxy
statement  for the Annual  Meeting of  Stockholders  to be held on May 31, 2000,
sets forth certain  information with respect to the directors of the Company and
is incorporated herein by reference.

ITEM 11 - Executive Compensation

The section entitled "Executive  Compensation"  appearing in the Company's proxy
statement  for the Annual  Meeting of  Stockholders  to be held on May 31, 2000,
sets forth certain information with respect to the compensation of management of
the Company and is incorporated herein by reference.

ITEM 12 - Security Ownership of Certain Beneficial Owners and Management

The  section  entitled  "Security  Ownership  of Certain  Beneficial  Owners and
Management" appearing in the Company's proxy statement for the Annual Meeting of
Stockholders  to be held on May 31, 2000,  set forth  certain  information  with
respect to the  ownership  of the  Company's  Common  Stock and is  incorporated
herein by reference.

ITEM 13 - Certain Relationships and Related Transactions

The section  entitled  "Certain  Transactions"  appearing in the Company's proxy
statement  for the Annual  Meeting of  Stockholders  to be held on May 31, 2000,
sets forth certain  information with respect to certain  business  relationships
and  transactions  between the Company and its  directors  and  officers  and is
incorporated herein by reference.



                                       34
<PAGE>

PART IV

ITEM 14 - Exhibits, Financial Statement Schedules, Reports on Form 8-K

(1)      Financial Statements
         The financial  statements  filed as part of this report are included in
the response to Item 8 of Part III of this 10-K report.

(2)      Financial Statement Schedules
         There  were no  financial  statement  schedules  required  to be  filed
because  they are not  applicable  or the required  information  is shown in the
Consolidated Financial Statements or notes thereto.

(3)      Exhibits
Exhibit        Ref.
Number         Number        Description
-------        ------        -----------
3.1            (1)           Restated Certificate of Incorporation
3.2            (*)           Certificate of Amendment
3.2            (1)           Amended By-laws
4.1            (1)           Form of Common Stock Certificate
4.2            (1)           Amended and Restated Stock Option Plan
4.3            (*)           June 1998 Amendment to the Stock Option Plan
4.4            (*)           February 2000 Amendment to the Stock Option Plan
10             (1)           Material Contracts
10.1           (3)           Revolving Credit Agreement dated as of December 30,
                                    1998 between the Registrant and The Chase
                                    Manhattan Bank, N.A.
10.2           (3)           Revolving Credit Note in the amount of $5,000,000
                                    dated December 30, 1998 given by the
                                    Registrant to The Chase Manhattan Bank, N.A.
10.3           (1)           Security Agreements granted by the Registrant to
                                    The Chase Manhattan Bank, N.A. dated as of
                                    April 13, 1985, April 13, 1993 and as of
                                    June 17, 1993, and with respect to
                                    Performance Computer Corporation only, the
                                    Security Agreement dated as of June 17, 1993
                                    granted to The Chase Manhattan Bank, N.A.
                                    by Performance Computer Corporation and
                                    certain other Affiliates of the Registrant
                                    (which other Affiliates have been released)
                                    and all amendments and modifications thereto
10.4           (1)           Letter of Intent from the City of Rochester to the
                                    Registrant dated May 4, 1993
10.5           (1)           Irrevocable Standby Letter of Credit from The Chase
                                    Manhattan Bank, N.A. dated June 4, 1993
10.6           (1)           Promissory Note in the amount of $80,000 dated June
                                    8, 1993 given by the Registrant to the City
                                    of Rochester
10.7           (1)           Letter of Credit and Reimbursement Agreement
                                    between C & J Enterprises and Chase Lincoln
                                    First Bank, N.A. dated September 1, 1990
10.8           (1)           Corporation Guaranty Agreement granted by the
                                    Registrant, PTI Acquisition Corporation to
                                    Chase Lincoln First Bank, N.A. dated as of
                                    September 1, 1990
10.9           (1)           Guaranty Agreement dated August 31, 1995 between
                                    the Registrant and the City of Rochester
10.10          (1)           Sublease Agreement between the Registrant and C & J
                                    Enterprises dated as of September 1, 1990
10.16          (1)           License Agreement between the Registrant and Spider
                                    Systems Limited dated March 18, 1992
10.28          (1)           Adoption Agreement between the Registrant and
                                    Principal Mutual Life Insurance Company
                                    dated September 20, 1993
10.29          (1)           The Principal Financial Group Prototype Basic
                                    Savings Plan dated May 7, 1990
10.30          (1)           Form of Stock Option Agreement
10.31          (1)           Form of Warrant Agreement
10.32          (4)           Share Acquisition Agreement between Registrant
                                    and MicroLegend Telecom Systems, Inc. as of
                                    December 2, 1999
10.32          (4)           Amendment to Share Acquisition Agreement between
                                    Registrant and MicroLegend Telecom Systems,
                                    Inc. as of December 10, 1999
21             (1)           Subsidiaries
--------------------------------------------------------------------------------
(1)     Incorporated by reference to the Registrant's Registration Statement on
          Form S-1 filed November 22, 1995.
(2)     Incorporated by reference to the Registrant Statement on Form S-8 filed
          July 30, 1997.
(3)     Incorporated by reference to the Registrant Statement on Form 10-K filed
          March 30,1999.
(4)     Incorporated by reference to the Registrant Statement on Form S-3 filed
          January 28, 2000.
(*)     Filed with this Form 10-K.

                                       35
<PAGE>

(4)      Reports on Form 8-K

         A Report on Form 8-K,  dated  December 21,  1999,  was filed during the
three-month  period ended  December 31,  1999.  Item 5 Other item;  reported the
acquisition of MicroLegend  Telecom Systems,  Inc., by the acquisition of all of
the outstanding shares of capital stock of MicroLegend.


                                   SIGNATURES

        Pursuant to the  requirements  of Section 13 or 15(d) of the  Securities
Act of 1934,  the  Registrant  has duly  caused  this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

                                       PERFORMANCE TECHNOLOGIES, INCORPORATED

Date:  March 28, 2000                               By:/s/ DONALD L. TURRELL
                                                    ------------------------
                                                    Donald L. Turrell
                                                    President and
                                                    Chief Executive Officer

                                                    By:/S/ DORRANCE W. LAMB
                                                    ------------------------
                                                    Dorrance W. Lamb
                                                    Chief Financial Officer and
                                                    Vice President of Finance

        Pursuant  to  the  requirements  of the  Securities  Act  of  1934,  the
following  persons on behalf of the  registrant and in the capacities and on the
dates indicated have signed this report.

       Signature                        Title                             Date


/s/CHARLES E. MAGINNESS       Chairman of the Board               March 28, 2000
-----------------------
Charles E. Maginness


/S/DONALD L. TURRELL        President, Chief Executive            March 28, 2000
-----------------------
Donald L. Turrell             Officer and Director


/s/DORRANCE W. LAMB       Chief Financial Officer, and            March 28, 2000
-----------------------
Dorrance W. Lamb            Vice President of Finance


/s/BERNARD KOZEL                Director                          March 28, 2000
-----------------------
Bernard Kozel


/s/JOHN E. MOONEY               Director                          March 28, 2000
-----------------------
John E. Mooney


/s/JOHN M. SLUSSER              Director                          March 28, 2000
-----------------------
John M. Slusser


/S/PAUL L. SMITH                Director                          March 28, 2000
-----------------------
Paul L. Smith