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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 (Fee Required)
                         For the Fiscal Year Ended December 31, 1996
                                              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. [X]

     The aggregate  market value of the voting stock held by  non-affiliates  of
the  registrant as of the close of business on March 14, 1997 was  approximately
$41,567,000.

     The number of shares outstanding of the registrant's Common Stock, $.01 par
value, was approximately 4,807,000 as of March 14, 1997.

                             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 June 10, 1997,  which will be filed with the  Securities and Exchange
Commission not later than 120 days after December 31, 1996.
--------------------------------------------------------------------------------
                                    -Cover Page of 34 Pages-



<PAGE>


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

                                                                           Page
PART I

Item 1         Business                                                       1
Item 2         Properties                                                    10
Item 3         Legal Proceedings                                             11
Item 4         Submission of Matters to a Vote of Security Holders           11


PART II

Item 5        Market for the Registrant's Common Equity and
                 Related Stockholder Matters                                 11
Item 6        Selected Financial Data                                        11
Item 7        Management's Discussion and Analysis of Financial
                 Condition and Results of Operations                         12

Item 8        Financial Statements and Supplementary Data                    16
Item 9        Changes in and Disagreements with Accountants on
                 Accounting and Financial Disclosure                         32


PART III

Item 10       Directors and Executive Officers of the Registrant             33
Item 11       Executive Compensation                                         33
Item 12       Security Ownership of Certain Beneficial Owners
                 and Management                                              33
Item 13       Certain Relationships and Related Transactions                 33


PART IV

Item 14       Exhibits, Financial Statement Schedules, Reports on Form 8-K   34

<PAGE>


PART I

ITEM 1 - Business

Performance Technologies,  Incorporated designs, manufactures and markets a wide
variety of fault-tolerant, high performance communications,  networking and data
storage  interface  systems  products.  The  Company's  products are designed to
enhance the performance of customers' computer network systems and include local
and wide area network interface adapters,  communications  servers, mass storage
interface  products and sophisticated  software  communications  solutions.  The
Company's  products  are  targeted  toward high  performance,  mission  critical
networking solutions for the telecommunications, financial services, defense and
public safety industries.  Applications  include network interfaces for cellular
telephone communications,  data storage products found in bank ATMs, fiber optic
data communications products used aboard navy vessels and communications servers
used in air traffic control centers.

Since its inception in 1981, the Company has  consistently  produced  innovative
networking  solutions  for a wide  variety of computer  architectures  and has a
proven  record of being able to adapt its  products  to a  continually  changing
marketplace.  The Company has focused its efforts on providing high performance,
unique application  solutions where hardware and software  reliability are a key
concern to the end user. This strategy has enabled the Company to  significantly
increase  both sales and income from  continuing  operations  over the last five
years.

All  references  to  the  "Company"  herein  include  Performance  Technologies,
Incorporated,  the Company's  wholly-owned foreign sales subsidiary,  PTI Virgin
Islands  Company,  Ltd.  and  the  Company's  wholly-owned   subsidiary,   UconX
Corporation (UconX).

Industry Overview

The need to collect,  store,  analyze and  distribute  information  in a secure,
timely  and  efficient  manner  has  become  an  integral  part of  operating  a
successful  organization.  Developments in computer  technology have resulted in
less reliance on  centralized  mainframes  and greater  reliance on  distributed
computing  which  led  to  the  computer   software   architecture   concept  of
"client/server"  computing  systems.  Client/server  computing systems typically
provide  for a large  number of desktop  computers  interconnected  with one, or
often more than one, server. The server provides central resources to all remote
computer users and provides common services such as printing, communications and
data backup and  information  gateways  to other local or distant  client/server
systems. The fundamental premise of this architecture relies heavily on computer
networking for both LAN  interconnections for  desktop-to-server  communications
and WAN interconnections for server-to-server communications.

As a result of the growing  installed base of client/server  computing  systems,
the  market  opportunity  for  client/server   networking  products  is  rapidly
expanding.  According to a recent industry study,  there were  approximately  33
million  Ethernet  connections  installed  worldwide in 1993,  and the number of
those  connections is expected to grow to over 84 million by 1998.  This growth,
combined with other market trends, is expected to cause the computer  networking
equipment industry to continue to experience substantial growth.

Strategy

The  Company's  strategy is to enhance the  performance  of  customers'  network
systems by  providing a wide variety of fault  tolerant,  high  performance  and
easily  managed   networking   solutions   targeted   toward  mission   critical
applications. Major elements of the Company's operational strategy include:

Focus on High Performance Mission Critical  Solutions.  The Company continues to
focus its development  efforts on addressing specific needs for high performance
networking.  The  Company's  products  have  provided  unique  mission  critical
solutions where  reliability  and  performance  are the primary  concerns of the
user.   Applications   include   network   interfaces  for  cellular   telephone
communications,  FDDI adapter products used aboard navy vessels,  communications
servers  used in air traffic  control and data  storage  products  found in bank
ATMs. 


                                       -1-
<PAGE>


Exploit Technological  Competencies.  Since its inception, the Company has
pioneered many innovations in networking technology including the VME64 industry
standard, proprietary ASICs and the early use of SCSIbus standard for local area
networking. These technological competencies have allowed the Company to develop
products  that  improve  network  performance  without  rendering  an end user's
network equipment  obsolete.  Management  intends to continue to leverage off of
these  competencies  to position the Company as a  technological  leader in high
performance LAN and WAN hardware and software products.

Continue to Develop Advanced  Networking  Products.  The Company  recognizes the
need to  continually  upgrade the  performance  of its existing  products and to
develop new  products  which  address the changing  requirements  of LAN and WAN
users. Over the past 12 months,  the Company has introduced a variety of WAN and
LAN products designed for the PCIbus.  Several of these products have been early
and unique entrants into the growth oriented PCIbus arena for supporting complex
communications  protocols and networks. These new products have been responsible
for a variety of potentially significant OEM and partnering  relationships.  The
Company is also  developing  switching  products for Ethernet  LANs  directed at
specific applications requiring high availability.

Expand International  Markets. The networking and computer markets served by the
Company are international in scope. Global demand for network products,  such as
those  manufactured  by the Company,  is driven by the increasing  dependence of
business on the successful implementation of networking  infrastructures.  While
the  Company  actively  markets  its  products  in Europe  and the Asia  Pacific
countries,  currently  international sales only account for approximately 11% of
sales.  During 1996 the Company  expanded  its direct  sales  presence  into the
European  Economic  Community  with the  opening  of a sales  office in  Munich,
Germany. The Company intends to continue expanding its international  efforts in
the Asia Pacific countries with more direct presence planned for the second half
of 1997.

Leverage Software Expertise.  The Company has successfully employed its software
expertise in targeted  industries  and  applications,  including  financial data
information  services,  air traffic radar installations and defense applications
and deep space telemetry. The Company plans to continue to leverage its existing
networking and mass storage interface software expertise in distributed  network
management and control,  integration of legacy networking  protocols and virtual
LAN implementation.

Capitalize  on Internal  Manufacturing  Expertise.  Unlike many of its  industry
competitors,   the  Company  does  not  rely  upon  third  party   manufacturing
subcontractors  for assembly,  test and quality control for the manufacturing of
its products.  Instead,  the Company operates a  state-of-the-art  manufacturing
facility that gives the Company the  flexibility to meet customer  requirements,
produce  high  quality  equipment  and make  timely  deliveries.  The  Company's
manufacturing   facility   operates   under  an   integrated   MRP  system  that
significantly  reduces  lead  time and  inventory  investments  and  facilitates
effective demand forecast.  This in-house manufacturing  capability provides the
Company  with the  means to launch  quickly  new  products  without  the  delays
normally associated with the use of manufacturing subcontractors.  This facility
has  continued  to  undergo  expansion  to  increase  capacity,  supporting  the
Company's  growth and to allow  manufacture of the latest  electronic  packaging
such as "Ball Grid" components. It is expected that additional capital expansion
in surface  mount  component  capacity  will occur over the next 12-18 months to
assure continued high quality  assembly with adequate  capacity to meet expected
delivery requirements for the Company's expanding customer base.

Products

The  Company's  products  include  a  wide  variety  of  fault  tolerant,   high
performance  solutions  for  WAN  communications,   LAN  connectivity  and  mass
storage/retrieval applications. The Company historically has addressed the needs
of the  client/server  computing  environment  with a  family  of  hardware  and
software  products which operate on a number of open standards and allow ease of
use with a  variety  of  popular  high  performance  computer  platforms.  These
platforms  include  systems built on the VMEbus  standard,  systems built on the
SBus  standard and systems  that include the new PCIbus  standard now found on a
broad range of computer platforms.  The Company's products are grouped into five
categories:  WAN Interface  Adapter  Products,  LAN Interface  Adapter Products,
Network  Systems  Products,  Mass Storage  Interface  Products and  Inter-system
Connectivity Products.


                                      -2-
<PAGE>

WAN Interface  Adapter  Products.  The Company's WAN interface  adapter products
include "add-in" modules providing  connectivity between the SBus, VMEbus or PCI
computer platforms and the wide area communications  network.  The Company's WAN
interface  adapter  products are found in a wide variety of  applications  which
include network interfaces for cellular telephone transmitter sites, billing and
control information for long distance telephone  communications,  and control of
remote police,  ambulance and municipal radio  transmitter  locations.  Selected
end-users  include  Lucent  Technologies,   Digital  Equipment  Corporation  and
QualComm. Products include interface adapters for use in VMEbus systems and high
speed interface adapters for the Sun Microsystems' SBus market. During 1996, the
Company released three WAN interface adapters for the PCIbus  architecture which
management  believes are some of the first  products  available to PCI users for
high  speed WAN  communications.  All of the  Company's  WAN  interface  adapter
products are designed for  applications  that require high  performance and high
speed  communications   capability.   Certain  of  the  Company's  products  are
"intelligent,"   containing   their  own   microprocessors   and  memory.   This
architecture allows these interface adapters to off-load many of the lower-level
communications  tasks that would  typically be  performed by the host  platform,
greatly  improving  overall  system  performance.  The  family of WAN  interface
adapter products is supported by extensive  communications software developed by
both the Company and a variety of third party  partners.  WAN sales  represented
42% of total sales for 1996 as compared to 36% for 1995.

LAN Interface  Adapter  Products.  The Company's LAN interface  adapter products
consist primarily of products often referred to as Network Interface Controllers
(NICs) for a variety of LANs and computer  platforms.  These products  currently
operate  on  the  PCIbus,   SBus  and  VMEbus  computer  platforms  and  include
connections for a popular range of Ethernet and FDDI standards and a unique FDDI
concentrator product that operates on the VMEbus. Applications for the Company's
Ethernet  and FDDI  network  adapter  products  include a  convenient  interface
between  computer  platforms  and  LANs  used  in  commercial,   educational  or
industrial organizations and a shipboard FDDI LAN used by the United States Navy
to integrate  tactical  workstations  on board Navy  vessels.  All of these NICs
permit easy integration of either a workstation  (SBus),  PCI or VMEbus computer
system to an FDDI or Ethernet  LAN.  The FDDI  adapters  support  the  Company's
alternate  path  FDDI  topology,   ensuring  the  highest  available  levels  of
resiliency and data integrity for fault tolerant and mission  critical  markets.
The SBus FDDI network  interface  controller  occupies  only a single SBus slot,
freeing the  remaining  expansion  bays for other uses.  The Company is actively
expanding  the  support  of its  newest  PCI  based  FDDI  adapters  to  include
operations with computer  platforms  supporting Sun  Microsystems'  SolarisJ and
Microsoft's  Windows NTJ. LAN sales  represented  21% of total sales for 1996 as
compared to 18% in 1995.

Network Systems  Products.  The Company's  network systems  products  consist of
systems level  equipment  used in the  construction  and  deployment of computer
networks.  These products represented 11% of total sales for 1996 as compared to
10% in 1995 and include:

Communications  Servers.  Communications  servers are  multi-purpose  LAN-to-WAN
bridging systems supported by software from UconX. 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.  For  larger
installations  or  special   requirements,   the  Company  offers  a  series  of
communications  servers  built on the VMEbus  standard  which offer up to 96 WAN
connections and multiple  Ethernet LAN  connections.  Using UconX software,  the
communications  servers  can be  configured  to  provide a variety  of  protocol
packages  and  supporting   protocols  including   bisynchronous,   asynchronous
communications  financial  market feeds and radar receivers.  The  communication
server  products from the Company can be found in data  collection  applications
including  NASA's  deep space  network and in air  traffic  control  centers for
retrieving radar data from remote radar antenna sites.

Front-end Communications  Subsystems.  The Company's "front-end"  communications
subsystems product supports the concurrent use of up to eight SBus "add-in" disk
storage  controllers or communication  interface modules.  This product has been
co-developed  by  the  Company  and a  large  OEM  customer,  and is  used  as a
communications  nexus for high powered  workstations,  allowing  them to link up
efficiently  with a new line of  supercomputers.  The system,  with its extended
SBus module  capability,  enables the OEM user to greatly increase the number of
workstations serviced by each front end processor,  lowering costs and improving
system reliability.

                                      -3-
<PAGE>

Ethernet Switch.  The Company is executing a market  development  effort through
acquired  Ethernet  switching  technology  which  offers a variety of  technical
features  including store and forward,  protocol  filtering and WAN internetwork
connectivity  for  Ethernet  LANs.  This  is  the  forerunner  to  a  family  of
company-designed  second generation 100 Mbit/Gigabit Ethernet Switching products
targeted  at  high  availability  applications  which  the  Company  expects  to
introduce within the next 12 months.

Mass Storage Interface  Products.  The Company's mass storage interface products
consist of adapters that connect  various mass storage  products  using the SCSI
and newer  UltraSCSI  standard to computers  based on VMEbus and SBus platforms.
The Company's  existing SCSI  interface  products are often used to add external
disk storage to workstations.  More complex applications include Redundant Array
of Inexpensive Disks (RAID) interfaces which are found in mission critical, high
reliability and high  availability  applications  such as police/fire  dispatch,
bank  automated  teller  applications  and hospital  patient data base  systems.
Coupled with the Company's  RAID  software,  the interface  product  enables Sun
workstation  users to connect RAID products sold by major OEM suppliers.  Future
products are expected to expand the Company's  already  strong  presence in this
market by adopting the new Fibre  Channel  protocol  standards and expanding the
UltraSCSI  capability to the PCIbus standard.  Mass storage products represented
16% of total sales for 1996 as compared to 18% in 1995.

Inter-system  Connectivity  Products.  The Company's  inter-system  connectivity
products permit dissimilar  computer  standards to be connected.  These products
are typically  provided to OEMs and systems  integrators  that are involved with
custom  applications  such as  connecting a Sun  workstation  to printing  press
control  electronics for a new color printing press.  Selected end-users include
Indigo, an Israeli printing equipment  company,  Data Cube, an imaging subsystem
supplier,  and Credence  Corporation,  a manufacturer of equipment that produces
electronic  integrated  circuits.  By allowing a customer to connect  dissimilar
computer standards,  the Company's products preserve that customer's  investment
in existing installed  equipment.  These products represented 10% of total sales
in 1996 as compared to 18% in 1995.  The Company is not  investing in this group
of products and further decline in these revenues is expected in 1997.

Sales, Marketing and Distribution

The Company currently markets its products world-wide to a broad spectrum of end
user customers through various channels  including OEMs, VARs,  distributors and
systems  integrators.  Currently,  nearly  90% of the  Company's  sales are made
domestically while the remainder represents  international sales.  Approximately
85% 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.

In North America,  the Company  operates seven direct sales offices,  located in
northern California,  Rochester,  New York, Old Saybrook,  Connecticut,  Dallas,
Texas, Washington,  D.C., Boston,  Massachusetts and San Diego, California.  The
Company  also  maintains a European  presence  through a sales office in Munich,
Germany.  Currently,  eleven  technically  trained  sales and support  personnel
conduct  the  Company's  selling  efforts  out of these  offices.  In  addition,
independent  sales  representatives   covering  selected  geographic  areas  and
distributors  handling selected  products  supplement the Company's direct sales
team on a worldwide  basis.  The Company  believes  that,  due to the  technical
nature  of its  products,  it is  essential  to  employ  sales  people  who  are
knowledgeable  in  the  network  and  communications  fields  and  are  able  to
adequately  respond  to  inquiries  that arise  concerning  the  capability  and
performance levels of the Company's products.

Many of the Company's products are provided to OEMs and systems  integrators and
are sold through a combination of selling  efforts by the Company's  sales force
and the efforts of a small number of independent  sales  representatives.  These
independent sales  representatives  operate under the direct  supervision of the
Company's  sales force and carry out sales of  specified  products  primarily in
selected North American geographic areas. The independent sales  representatives
are  compensated  by  commissions  paid on product  orders.  The OEMs or systems
integrators  serviced by the Company's sales  organization and independent sales
representatives  generally  require a high level of  technical  support  and are
usually  involved  with  applications  that require  Company  products  that are
ultimately  included  as a  subsystem  or  component  in  an  OEM's  or  systems
integrator's final product.

                                      -4-
<PAGE>


The Company also sells products to distributors that are end user oriented, such
as network systems  products,  data storage  interface  products and certain LAN
interface products. Distributors purchase the Company's products and resell them
to their VARs or end-users.  Distributors  who sell the  Company's  products are
currently  managed by the Company's  direct sales force. The Company carries out
several   marketing   strategies  to  support  these   distributors,   including
advertising  in  national  and  international  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.  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 OEM's customers and potential customers.

With  all of its  products,  the  Company  executes  various  ongoing  marketing
strategies  designed  to  attract  new  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 group,  participation in
national and regional  trade shows and selected trade press  advertisements  and
technical articles.

Sales  of  software-based  products  developed  by  UconX  are  supported  by  a
UconX-directed  sales force operating from offices in San Diego,  California and
Boston,   Massachusetts.   International  sales  are  handled  through  selected
distributors in Western Europe and the Pacific Rim.

The Company  continues  to believes  that the  international  market  represents
significant  opportunities for the Company's  products as sales outside the U.S.
represented  only 11% of the  Company's net sales in 1996 as compared to 14% and
12% for 1995 and 1994,  respectively.  In the  past,  the  Company  has sold its
products  within  Europe and the Asia  Pacific  countries  through  distributors
managed by sales  individuals who reside at corporate  offices in North America.
Management  believes that it can develop  expanded  sales channels and marketing
alliances  with  respect to both new and  existing  international  markets.  The
Company's   products  are  currently  sold  by  20  international   distributors
throughout  the major  industrialized  countries  in Europe and the Asia Pacific
area. Recently the Company has established a sales office in Munich,  Germany to
better support the Western  European  markets.  The Company also expects to take
similar  actions to more  progressively  support sales in the Pacific Rim in the
near  future.  International  sales are  subject to import and export  controls,
transportation  delays and  interruptions,  foreign currency exchange rates, and
foreign  governmental  regulations.  All payments  for sales  outside the United
States are made in U.S. dollars.

Customers

The  Company  has over 300 active  customers  worldwide,  including  major OEMs,
systems integrators, and educational/research  organizations,  many of which are
Fortune 500 companies.

The Company has two general  types of  customers.  The first  category  includes
customers that are  technically  oriented and assemble a product or system for a
specific end use, using components and subassemblies supplied by vendors such as
the Company. These products or systems are typically sold on either a repetitive
basis or on a lower volume,  purpose-built  basis.  End use equipment or systems
sold by OEMs on a  repetitive  basis  using  the  Company's  products  include a
sophisticated color printing press sold to "quick print" shops, a check scanning
console provided to banks to convert canceled check  information into electronic
images and mass data storage equipment provided by RAID systems manufacturers to
commercial  users such as  police/fire  departments,  hospitals  and  government
organizations.   Examples  of  lower  volume  purpose-built  end  use  equipment
incorporating  the Company's  products  include FDDI networks used by the United
States Navy for  shipboard  use, deep space  network data  collection  for space
research and data  collection/network  systems for air traffic control and radar
installations.  The second category includes customers that are less technically
proficient.   These   customer   require   products  that  are  expected  to  be
self-installing   and  require  limited  knowledge  of  the  products'  internal


                                      -5-
<PAGE>

operation.  These  products  are often  referred to as "plug n' play" or "shrink
wrapped", implying a readiness to simply install the end application without the
need to have extensive technical knowledge. The Company's products that fit into
this  category  are the SBus and PCIbus  mass  storage  interface,  the SBus and
PCIbus LAN products (Ethernet and FDDI NICs) and selected WAN interface products
operating on the SBus and PCIbus standards.  In 1996,  Lockheed Martin accounted
for 12% of sales.

Backlog

At March 9, 1997, the backlog of scheduled orders was $6.1 million,  compared to
$5.0 million at March 31, 1996.  Although  orders are subject to cancellation in
the normal course of business,  historically  the Company has filled most of its
firm orders. Management believes that the primary reason for the increase in the
Company's  backlog  of  orders  is  the  increasing  demand  for  the  Company's
networking, interface and systems products.

Seasonality

The Company's business is generally not seasonal in nature.

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.

Competition

The market for computer  communications,  networking and mass storage  interface
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 WAN interface product
market,  the Company's  products  compete with  products from SBE  Incorporated,
Adax, Incorporated and Digi International,  Incorporated. In the emerging PCIbus
arena, the Company's competition is less well-defined,  although the PCI product
market is forecast to be highly  competitive in many product  areas.  In the LAN
interface  product market,  the Company competes with Network  Peripherals Inc.,
RNS a Division of Osicom Technologies,  Incorporated and Interphase Corporation.
In the mass storage  interface  product market,  the Company  competes with such
companies   as   Interphase   Corporation,   MacroLink   Incorporated   and  Sun
Microsystems, Inc.

Many of the Company's  competitors have greater technical and capital resources,
more marketing  experience,  larger research and  development  staffs and better
production  facilities  than the Company.  In recent  years the  internetworking
product  market has become  increasingly  concentrated  as a result of increased
consolidation in the industry.  Cisco Systems Inc., the industry routing leader,
has acquired companies that have historically  competed with the Company.  These
consolidations are likely to permit Cisco and other of 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.  The Company expects that  competition  will increase  substantially as a
result of these and other industry  consolidations,  as well as the emergence of
new  competitors and new  technologies.  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.

Research and Development

The Company's research and development expenses,  plus costs attributable to the
development  of  software,  for  1994,  1995 and 1996  were  approximately  $1.4
million,  $2.0  million  and $3.0  million,  respectively.  This  represents  an
increase of 50% from 1995 to 1996. These expenses consist  primarily of employee
costs and material  consumed in developing  and  designing  new  products.  To a
lesser  degree,   there  have  been  limited   expenses  devoted  to  technology
acquisition, software license/tools and contract product development.


                                      -6-
<PAGE>

The Company  has, as a result of prior  research and  development  expenditures,
developed  significant core  competencies  applicable to high speed  fiber-optic
local  area  networking,  wide  area  networking,  switching  and  mass  storage
interface solutions. Research and development funding is anticipated to continue
to increase  significantly  in 1997.  This  funding  will be directed at further
leveraging these competencies and carrying out additional product development in
the  areas  of  communications  and  network   switching.   These  research  and
development  programs  are expected to include  expansion  of both  hardware and
software related to WAN and LAN network adapter products,  continued enhancement
of the current LAN/FDDI offerings, next generation Ethernet switching, expansion
of mass storage interface  products to encompass Fiber Channel  technologies and
expanded  communication  server  products  provided  by UconX.  In  addition  to
specific  product related  expenditures,  the Company is investing in increasing
its internal capability to design and implement ASICs. This will be an important
cornerstone for continued future  enhancements of WAN and LAN network  adapters,
advanced mass storage interfaces and high performance switching architectures to
support the emerging Gigabit Ethernet LAN technology.

Proprietary Technology

The Company's  success  depends upon the Company's  proprietary  technology.  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 which is
embedded in silicon chips,  making it extremely  difficult to  misappropriate or
reverse engineer. Such methods may not afford complete protection,  however, and
there  can be no  assurance  that  the  confidentiality  agreements  will not be
breached,  that such agreements will be enforceable,  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.

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  matter  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  affect on the
Company's results of operations regardless of the outcome of the litigation.

Suppliers

Certain  components  used in the  Company's  products,  such as specific  single
source  microprocessors,  custom ASICs,  FDDI  interface  components  and highly
integrated PCIbus and VMEbus interface components,  are only currently available
to the Company from limited sources.  Although to date the Company has generally
been able to obtain adequate supplies of these  components,  the Company obtains
these components on a purchase order basis and does not generally have long-term
contracts with any of these suppliers.  The Company's standard purchase order is
limited in nature.  In addition,  shortages of raw  materials  could  negatively
affect the Company's  ability to meet its production  obligations  and result in
increased prices to the Company for affected parts.  The Company's  inability in
the  future  to  obtain  sufficient  limited-source  components,  or to  develop
alternative  sources,  could  result  in  delays  in  product  introductions  or
shipments, and increased component prices could negatively affect gross margins,
either of which could have a material adverse effect on the Company's results of
operations.  The  Company  would  also be  negatively  affected  if it does  not
maintain adequate capital resources to fund component purchases.

                                      -7-
<PAGE>

Manufacturing

The Company  maintains a  state-of-the  art product  assembly and  manufacturing
facility at its Rochester,  New York facility.  This facility  operates under an
integrated  MRP  system  that  significantly  reduces  lead  time and  inventory
investments and facilitates  effective demand forecast.  The Company is actively
involved in  certification of its  manufacturing  facilities to ISO 9000 quality
standards.  By  maintaining  an in-house  manufacturing  capability,  management
believes that the Company has, to a certain  extent,  insulated  itself from the
risks inherent in dealing with independent subcontractors.  The Company does not
have to compete with those who may be using subcontractors, nor is it subject to
the 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 oversee  directly 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 March 9, 1997,  the Company had 132  full-time  employees,  eleven of whom
were  employed  by the  Company's  UconX  subsidiary.  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                   38
               Marketing and Sales                        19
               Manufacturing                              56
               General and Administrative                 19

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.

                                         
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
computer 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
revenues will depend upon its 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 revenues and operating results.

                                      -8-
<PAGE>

Competition. The computer communications,  networking and mass storage interface
business is  extremely  competitive  and the Company  faces  competition  from a
number of established and emerging computer  communications and  internetworking
device 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 spend for promotion, advertising, research
and product  development  than the Company.  Several of these  competitors  have
recently  introduced or announced their  intentions to introduce new competitive
products.  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  revenues and operating  results.  Several of the Company's
competitors  have recently been acquired by major  networking  companies.  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  revenues 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 revenues and operating results.

Dependence on Sun Microsystems,  Inc.  Products.  Many of the Company's products
are designed and manufactured to be compatible with workstations manufactured by
Sun  Microsystems,  Inc. The  Company's  business  opportunities  and results of
operations are dependent,  in part, on continued growth and market acceptance of
systems  manufactured and marketed by Sun Microsystems,  Inc. In the event these
systems are no longer commercially acceptable, or in the event Sun Microsystems,
Inc.  were to curtail its  manufacturing  and marketing of those  systems,  this
would have a material  adverse  effect on the  Company's  revenues and operating
results.

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
Company's  revenue in each quarter result from orders shipped in the final month
of that quarter,  revenue levels are extremely  difficult to predict. If revenue
levels are below expectations,  revenues 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.

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  revenues
and operating results.

                                      -9-
<PAGE>

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  revenues  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 and has not
filed any patent applications for its products. If patent applications are filed
by the Company,  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 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  revenues 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 revenues and operating results.

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  not
otherwise subject to employment agreements or non-competition covenants. Changes
in personnel could adversely affect the Company's operating results.

ITEM 2 - Properties

The  Company's  principal  executive  offices,   research  and  development  and
manufacturing  facilities are located in Rochester,  New York in a 30,000 square
foot building that was  constructed  specifically  for the Company in 1990. This
building  is  located in a high  technology  business  park.  The lease for this
facility  expires in the year 2001. The Company has an option to renew the lease
for two  successive  five-year  terms.  The Company also leases sales offices at
four  locations.  The terms of these  leases  are on an  annual  basis for three
locations and month to month for the  remaining  location.  The Company's  UconX
subsidiary leases  approximately 6,800 square feet of office space in San Diego,
California  pursuant to a lease which  expires  November  30,  1999.  Management
believes that its  facilities  will be sufficient  for at least 1997 after which
additional space may be required.

                                      -10-
<PAGE>

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, 1996.


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 under the
trading  symbol  "PTIX".  The  following  table  sets  forth,  for  the  periods
indicated, the high and the low closing prices for the Common Stock, as reported
on the NASDAQ  National Market since January 24, 1996, the effective date of the
Company's  Registration  Statement on Form S-1 for the Company's  initial public
offering of its Common Stock. These prices represent quotations among securities
dealers without adjustments for retail markups, markdowns or commissions and may
not represent actual transactions.
<TABLE>
<CAPTION>

1996                                              High             Low
------------------------------------              ----             ---
<S>                                               <C>            <C>

First Quarter (from January 24, 1996)             $12.75         $ 8.00
Second Quarter                                     17.75          11.75
Third Quarter                                      14.50          12.125
Fourth Quarter                                    $12.25         $ 9.656

</TABLE>


As of March 14, 1997,  there were 144  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>
<CAPTION>


For the Years Ended December 31:           1996       1995       1994       1993      1992
------------------------------------------------------------------------------------------
<S>                                     <C>        <C>        <C>        <C>        <C>

Sales                                   $24,843    $17,891    $12,562    $10,805    $8,185
Income from continuing operations         3,734      2,393      1,618      1,218       754
Loss from discontinued operations                      (19)    (1,133)      (455)     (293)
Income per common share from continuing
   operations                              $.76       $.73       $.50       $.38      $.24
Weighted average number of common shares
     outstanding                          4,907      3,284      3,262      3,217     3,196

At December 31:                            1996       1995       1994       1993      1992
------------------------------------------------------------------------------------------
Working capital                         $20,965     $6,215     $4,369     $4,689    $2,825
Total assets                             26,089     10,523      9,312      9,246     6,142
Long-term debt, less current portion    $    30     $   57     $  622     $1,504    $  175

</TABLE>


                                      -11-
<PAGE>


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


The following  discussion and analysis of the Company's  financial condition and
results of operations during the periods included in the accompanying  financial
statements focuses on the Company's  continuing  operations and does not include
any   discussion  or  analysis  with  respect  to  the  Company's   discontinued
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

The Company  achieved record sales and operating  income in 1996. For the second
consecutive  year,  revenues  increased  by  approximately  40% and income  from
continuing  operations  increased by approximately  50%. At the end of 1996, the
Company had  approximately  $16 million in cash and  marketable  securities,  no
significant debt and generated income from operations excluding depreciation and
amortization  (EBITDA) of $5.9 million.  Return on equity for 1996 was 24.7% and
return on assets was 20.4%.  On January  24,  1996,  the Company  completed  the
initial  public  offering of its Common Stock which  resulted in net proceeds to
the Company of approximately $11.4 million.

The  Company's  revenues are  generated  from  products  designed to enhance the
performance of network systems based on varied computer architectures  including
VMEbus,  SBus and PCIbus.  The Company's  products operate on various  operating
systems  including UNIX,  Windows NTJ and most recently Linux. The Company has a
proven  record of adapting its products to a continually  changing  marketplace.
During 1996,  the Company began  shipping  several new products for the Wide and
Local Area  Networks  and the mass  storage  markets,  continued  its efforts to
develop new  advanced  networking  switching  products,  expanded  its sales and
marketing  efforts to broaden  market  penetration  and increased the unit sales
volumes of existing products.

During  1996,  the  Company  entered  into  a  number  of  strategic  partnering
relationships including:  SysKonnect, Inc. and Sun Microelectronics,  a division
of Sun Microsystems,  Inc. The relationship  with SysKonnect  combines their PCI
FDDI technology with the Company's  expertise in developing network software for
Solaris x.86 and other UNIX environments. In October, the Company introduced its
first PCI based,  FDDI adapter for FDDI networks.  This was the Company's  first
Local Area Network  communications  product introduced for the PCIbus market and
complemented its two Wide Area Network  communications  adapter products for the
PCIbus market already being shipped to customers.

While the desktop  PCIbus  market has already taken off, it now appears that the
workstation  server  market is poised to  expand  rapidly  as major  workstation
manufacturers  prepare  to  announce  PCI based  workstations  and  servers.  In
November,  Sun  Microelectronics  selected  the  Company  as a  supplier  of WAN
communications  solutions  for Sun's new  SPARCengineJ  Ultra AXJ mother  board.
These products support the industry standard PCI hardware  architecture recently
adopted by Sun Microsystems,  Inc.  Management  believes that as a result of the
growth in the PCI marketplace there will be significant market opportunities for
the Company in the PCIbus server market  utilizing  both Sun Solaris and Windows
NT   platforms.   The  Company   expects  in  1997  to  introduce   several  new
communications and mass storage interface products into this expanding market.

                                      -12-
<PAGE>

The Company has  increased  sales  primarily by  developing  new products and by
increasing the unit sales volumes of existing products. International sales were
$2.6  million in 1996,  compared to $2.5  million for 1995.  In April 1996,  the
Company opened a direct sales office in Munich, Germany to sell its WAN, LAN and
mass storage interface  systems products.  During the third quarter of 1996, the
Company's PCI and SBus  communications,  networking  and mass storage  interface
products received the CE Mark and were approved for sale throughout the European
Community.  The CE Mark  can be  placed  only on  products  that  meet  rigorous
electromagnetic  compatibility  testing  standards  and  is  required  for  many
electronic products sold in Europe.

Historically, approximately 65% to 75% of the Company's sales have been to OEMs.
During 1996,  several new and significant  OEM  relationships  were  established
and/or  expanded.  Emphasis is being  placed on  developing  a larger  worldwide
distribution  network of VARs,  distributors  and  systems  integrators  for the
Company's  SBus, PCI and network  switching  products.  At the present time, the
Company has approximately 35 distributors throughout the world for its products.
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:
<TABLE>
<CAPTION>


                                                            Year Ended December 31,
                                                          1996        1995         1994
                                                        ------       ------       -----
<S>                                                      <C>          <C>         <C>

Sales                                                    100.0%       100.0%      100.0%
Cost of goods sold                                        43.7         44.4        49.1
                                                        ------       ------       -----
Gross profit                                              56.3         55.6        50.9
                                                        ------       ------       -----

Operating expenses:
   Selling and marketing                                  12.9         11.8         9.9
   Research and development                               11.9         10.9        10.9
   General and administrative                             11.0         14.6        10.4
                                                        ------       ------       -----
         Total operating expenses                         35.8         37.3        31.2
                                                        ------       ------       -----
Income from operations                                    20.5         18.3        19.7

Other income (expense), net                                3.0          1.1        (0.4)
                                                        ------       ------       -----
Income before taxes and minority interest                 23.5         19.4        19.3

Provision for income taxes                                 8.4          5.8         6.3
Minority interest                                         (0.1)        (0.2)       (0.1)
                                                        ------       ------       -----
   Income from continuing operations                      15.0%        13.4%       12.9%
                                                        ======       ======       =====

</TABLE>


Year Ended December 31, 1996, Compared with the Year Ended December 31, 1995

Sales.  Sales  for 1996  increased  by  $6,952,000  (39%) to  $24,843,000,  from
$17,891,000 for 1995. The Company's  products are grouped into five  categories:
WAN Interface Adapter products, LAN Interface Adapter products,  Network Systems
products,   Mass  Storage  Interface  products  and  Inter-system   Connectivity
products.  The increase in sales is primarily attributable to the growing demand
for the Company's WAN and LAN Adapter  products.  The Company began shipping new
PCI based WAN and LAN adapter  products in 1996 and revenues  nearly  reached $1
million for these  products.  WAN and LAN adapter product sales each grew by 62%
in 1996 and represented  42% and 21%,  respectively of total sales for the year.
Network Systems  products grew 57% in 1996 and were 11% of total sales for 1996.
Revenues from Mass Storage  interface  products  increased to $3,869,000 in 1996
and  grew  by 20% for  the  year.  Inter-system  Connectivity  product  revenues
decreased  from  18% of  sales  in 1995,  to 10% in  1996.  The  Company  is not
investing in this group of products and a further  decline in these  revenues is
expected in 1997.

                                      -13-
<PAGE>

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 for 1996  increased by  $4,051,000  to  $13,994,000,  from
$9,943,000  for 1995 due to increased  sales  volumes.  Gross margin  percentage
improved to 56.3% of sales for 1996,  from 55.6% in 1995. The improved margin is
attributable  to  favorable  product mix along with  manufacturing  efficiencies
associated with higher sales volumes.

Total Operating Expenses.  Total operating expenses increased to $8,907,000,  or
35.8% of sales  for 1996,  from  $6,670,000,  or 37.3% of sales  for  1995.  The
Company  made  significant  investments  in  sales,   marketing,   research  and
development during 1996 while reducing its general and  administrative  expenses
as a percentage of sales.

Selling and marketing expenses increased by 52% to $3,210,000, or 12.9% of sales
for 1996, from  $2,106,000,  or 11.8% of sales for 1995. The Company added sales
people in North  America and in Europe and  commissions  increased due to higher
sales levels. The Company was also added staff to the marketing department in an
effort to promote the Company's products more extensively.  The Company spent an
additional  $600,000 in advertising and trade show expenses in 1996 to introduce
several new products and to improve its presence in the marketplace.  Management
expects to hire  additional  sales and marketing  people in 1997 and to increase
its  marketing  expenditures  for  advertising,  trade shows and promotion in an
effort to expand its business in both the domestic and international markets.

Research and development  expenses  increased by 51% to $2,960,000,  or 11.9% of
sales for 1996, compared to $1,955,000, or 10.9% of sales for 1995. Research and
development  expenses consist primarily of employee salaries and benefits costs,
cost of materials  consumed in  developing  and designing new products and, to a
lesser extent,  contract  development.  Certain engineering  expenses associated
with the  development of software are capitalized and amortized to cost of goods
sold.  The increase in research and  development  expenses in 1996 was primarily
attributable  to  hiring   additional   hardware  and  software   engineers  and
compensation  related expenses.  The Company needs to continually  invest in new
product development to stay abreast of technological changes in its markets. The
Company  expects to commit  greater  resources,  as a  percentage  of sales,  to
research and development in the future including  hiring several  engineers over
the next twelve months to accelerate new product development.

General and administrative  expenses increased by 5% to $2,737,000,  or 11.0% of
sales for 1996, compared to $2,609,000, or 14.6% of sales for 1995. The decrease
as a percentage  of sales,  is primarily  attributable  to  maintaining  a tight
control on administrative expenses while sales increased by nearly 40%.

Other income (expense), net. Other income consists primarily of interest income.
During  1996,  the Company  earned  interest  income on the net  proceeds of its
initial  public  offering of Common Stock.  The funds are primarily  invested in
money market  funds,  high quality short term  commercial  paper and US Treasury
securities maturing in 8 to 12 months.

Income Taxes. The provision for income taxes for 1996 is based upon the combined
federal and state  effective tax rate of 35.6%,  compared to 29.8% in 1995.  The
primary  reasons  for the  increase  in the  combined  tax rate  are the  higher
utilization of carryforward research and development tax credits in 1995 and the
foreign sales exemption.

Year Ended December 31, 1995, Compared with the Year Ended December 31, 1994

Sales.  Sales for 1995  increased by  $5,329,000  (42.4%) to  $17,891,000,  from
$12,562,000  for 1994.  The demand for the  Company's  products in 1995 improved
over 1994 for the following reasons: introduction of new WAN products, including
both hardware and software  releases;  introduction of significant  enhancements
for the Company's LAN/FDDI  products;  and an increase in the volume of sales of
mass storage  interface  products  related to RAID  applications.  International
sales amounted to $2,538,000  for the year ended December 31, 1995,  compared to
$1,554,000 in 1994.

                                      -14-
<PAGE>


Gross Profit.  Gross profit consists of sales, less cost of goods sold including
material costs,  manufacturing expenses and amortization of software development
costs.  Gross profit for 1995 increased by $3,555,000 (56%) to $9,943,000,  from
$6,388,000  for 1994.  Gross  margin  percentage  improved to 55.6% of sales for
1995,  from 50.9% for 1994. The improved  margin is  attributable to a number of
factors,  including a reorganization of the Company's  manufacturing  operations
which  enhanced  overall  efficiency  and  resulted  in  substantially   reduced
overtime,  a change in the mix of  products  shipped  to include  higher  margin
products,  such as WAN  products,  and greater  discounts  obtained from several
major component suppliers related to higher purchasing volumes.

Total Operating Expenses.  Total operating expenses increased to $6,670,000,  or
37.3% of sales for 1995,  from  $3,916,000,  or 31.2% of sales for 1994.  Higher
staffing levels and compensation  expenses were the primary  contributors to the
increase in operating expenses.

Selling and marketing  expenses  increased to $2,106,000,  or 11.8% of sales for
1995, from  $1,242,000,  or 9.9% of sales for 1994. This increase  resulted from
significantly  greater commission  expenses associated with higher sales levels,
staff  additions  in the  marketing  function  including  the  hiring  of a Vice
President-Marketing in March 1995, and an increase in the allowance for doubtful
accounts to reflect the potential  uncollectibility  of a  significant  accounts
receivable balance.

Research and development  expenses were $1,955,000,  or 10.9% of sales for 1995,
compared to  $1,366,000,  or 10.9% of sales for 1994.  Research and  development
expenses  consist  primarily of employee  salaries and benefits  costs,  cost of
materials  consumed in  developing  and  designing new products and, to a lesser
extent,  contract development and equipment rental. Certain engineering expenses
associated  with the  development of software are  capitalized  and amortized to
cost of goods sold.

General and administrative  expenses increased to $2,609,000,  or 14.6% of sales
for 1995,  compared to  $1,308,000,  or 10.4% of sales for 1994. The increase is
primarily  attributable to compensation  expense related to warrants,  corporate
bonuses and  increases  in head count,  as well as legal,  accounting  and other
expenses associated with the growth of the business.

Income Taxes. The provision for income taxes for 1995 is based upon the combined
federal and state  effective tax rate of 29.8%,  compared to 32.7% in 1994.  The
primary reasons for the decrease in the combined tax rate are the utilization of
research and development tax credits and the foreign sales exemption.

Liquidity and Capital Resources

At December 31, 1996, the Company's  primary  source of liquidity  included cash
and cash equivalents of $10,027,000,  marketable securities with a maturity less
than one year of  $6,102,000  and available  borrowings  of  $3,000,000  under a
revolving  credit facility with a bank. No amounts were  outstanding  under this
credit  facility as of December  31,  1996.  The Company had working  capital of
$20,965,000 at December 31, 1996, compared to $6,215,000 at December 31, 1995.

Cash generated by operating activities was $3,642,000, $3,297,000 and $1,091,000
in 1996,  1995 and 1994,  respectively.  The  increase  in cash  generated  from
operating  activities in 1996 is attributable  to greater net income offset,  in
part,  by a net increase in operating  assets and  liabilities,  due to a higher
volume of business.

Cash used in investing activities was $7,469,000, $619,000 and $889,000 in 1996,
1995 and 1994,  respectively.  During 1996,  investing  activities  included the
purchase of marketable securities of $6,102,000, net capital equipment purchases
of $719,000  and the purchase of the  remaining  shares of the  Company's  UconX
subsidiary  for  $268,000  which  resulted  in  UconX  becoming  a  wholly-owned
subsidiary of the Company.  Capital  equipment  purchases  consist  primarily of
manufacturing  equipment,  office  equipment and computer and related  equipment
used in engineering.  Such capital equipment purchases have increased during the
past  three  years  reflecting  the growth of the  business  and  investment  in
maintaining and upgrading the manufacturing  operation. In addition, the Company
capitalizes certain software development costs. Amounts capitalized and included
within investing  activities were $380,000,  $193,000 and $364,000 in 1996, 1995
and 1994, respectively.

                                      -15-
<PAGE>


Cash provided by financing  activities of $11,388,000  for 1996 was  principally
the result of the  Company's  initial  public  offering  of its Common  Stock in
January  1996.  During  1995  and  1994  financing   activities  were  primarily
borrowings and repayment of borrowings on the Company's line of credit.

Assuming there is no significant  change in the Company's  business,  management
believes  that its current cash and  marketable  securities  together  with cash
generated  from  operations  and available  borrowings  under the Company's loan
agreement will be sufficient to meet the Company's anticipated needs,  including
working capital, for at least the next twelve months.





ITEM 8 - Financial Statements and Supplementary Data

Index to Financial Statements:                                             Page

   Reports of Independent Accountants                                       17
   Consolidated  Balance  Sheets  at  December  31,  1996 and 1995          19
   Consolidated  Statements of Income for the Three
     Years Ended December 31, 1996                                          20
   Consolidated Statements of Changes in Stockholders'
     Equity for the Three Years Ended December 31, 1996                     21
   Consolidated Statements of Cash Flows for the Three Years Ended
      December 31, 1996                                                     22
   Notes to Consolidated Financial Statements                               24

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.


                                      -16-
<PAGE>



Report of Independent Accountants

February 14, 1997

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, 1996
and 1995, and the results of their operations and their cash flows for the years
then ended, in conformity with generally accepted accounting  principles.  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
generally accepted auditing standards which require that we plan and perform the
audits 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/Price Waterhouse LLP
-----------------------




                                      -17-
<PAGE>


Independent Auditor's Report

Board of Directors and Stockholders
Performance Technologies, Incorporated and Subsidiaries
Rochester, New York

We have audited the accompanying  consolidated  statements of income, changes in
stockholders' equity, and cash flows of Performance  Technologies,  Incorporated
and  Subsidiaries  for  the  year  ended  December  31,  1994.  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 audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards  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.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In  our  opinion,   the   consolidated   financial   statements  of  Performance
Technologies, Incorporated and Subsidiaries referred to above present fairly, in
all material respects,  the results of their operations and their cash flows for
the year  ended  December  31,  1994,  in  conformity  with  generally  accepted
accounting principles.

/s/Rotenberg & Company, LLP
---------------------------

Rochester, New York
   March 3, 1995




                                      -18-
<PAGE>


<TABLE>
<CAPTION>

                   PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
                                 CONSOLIDATED BALANCE SHEETS

                                            ASSETS
                                                                        December 31,
                                                                      1996         1995
                                                                     ------       ------
<S>                                                                <C>          <C>

  Current assets:
   Cash and cash equivalents                                       $10,027,000  $ 2,466,000
   Marketable securities                                             6,102,000
   Accounts receivable, net (Notes B, G)                             3,234,000    2,210,000
   Inventories, net (Notes C, G)                                     4,032,000    3,412,000
   Prepaid income taxes                                                             334,000
   Prepaid expenses and other                                          284,000      294,000
   Deferred taxes (Note J)                                             419,000      238,000
                                                                   -----------  -----------
         Total current assets                                       24,098,000    8,954,000

Equipment and improvements, net (Notes D, G)                         1,267,000    1,078,000
Software development, net (Note K)                                     549,000      418,000
Other assets (Note E)                                                  175,000       73,000
                                                                   -----------  -----------
         Total assets                                              $26,089,000  $10,523,000
                                                                   ===========  ===========

                             LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Current portion of long term debt (Note G)                      $    26,000  $    73,000
   Accounts payable                                                    953,000    1,427,000
   Income taxes payable                                                 23,000
   Accrued expenses (Note F)                                         2,131,000    1,239,000
                                                                   -----------  -----------
         Total current liabilities                                   3,133,000    2,739,000

Long term debt, less current portion (Note G)                           30,000       57,000
Deferred taxes (Note J)                                                219,000      157,000
                                                                   -----------  -----------
         Total liabilities                                           3,382,000    2,953,000
                                                                   -----------  -----------

Commitments (Note H)

Minority interest                                                                    83,000

Stockholders' equity (Notes I, N)
   Preferred stock - $.01 par value: 1,000,000 shares
     authorized;  none issued at December  31, 1996 and 1995
   Common stock - $.01 par value; 15,000,000 shares authorized;
     4,899,418 and 3,263,598 shares issued at December 31,
     1996 and 1995, respectively                                        49,000       33,000
   Additional paid-in capital                                       12,885,000    1,414,000
   Retained earnings                                                 9,930,000    6,196,000
   Treasury stock-at cost, 98,117 and 98,080 shares held
     at December 31, 1996 and 1995                                    (157,000)    (156,000)
                                                                   -----------  -----------
         Total stockholders' equity                                 22,707,000    7,487,000
                                                                   -----------  -----------
         Total liabilities and stockholders' equity                $26,089,000  $10,523,000
                                                                   ===========  ===========


<FN>

The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
                                      -19-
<PAGE>


<TABLE>
<CAPTION>

                   PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
                              CONSOLIDATED STATEMENTS OF INCOME



                                                                Year Ended December 31,
                                                         1996          1995         1994
                                                         ----          ----         ----
<S>                                                  <C>           <C>           <C>

Sales                                                $ 24,843,000  $ 17,891,000  $ 12,562,000
Cost of goods sold                                     10,849,000     7,948,000     6,174,000
                                                     ------------  ------------  ------------
Gross profit                                           13,994,000     9,943,000     6,388,000
                                                     ------------  ------------  ------------

Operating expenses:
   Selling and marketing                                3,210,000     2,106,000     1,242,000
   Research and development                             2,960,000     1,955,000     1,366,000
   General and administrative                           2,737,000     2,609,000     1,308,000
                                                     ------------  ------------  ------------
         Total operating expenses                       8,907,000     6,670,000     3,916,000
                                                     ------------  ------------  ------------
Income from operations                                  5,087,000     3,273,000     2,472,000

Other income (expense), net                               750,000       203,000      (48,000)
                                                     ------------  ------------  ------------
Income before taxes and minority interest               5,837,000     3,476,000     2,424,000

Provision for income taxes (Note J)                     2,079,000     1,037,000       794,000
                                                     ------------  ------------  ------------
Income before minority interest                         3,758,000     2,439,000     1,630,000

Minority interest                                         (24,000)      (46,000)      (12,000)
Income from continuing operations                       3,734,000     2,393,000     1,618,000

Loss from discontinued operations, net of
   tax benefits (Notes J, N)                                            (19,000)   (1,133,000)
                                                     ------------  ------------  ------------
Net income                                           $  3,734,000  $  2,374,000   $   485,000
                                                     ============  ============  ============



Earnings per share:
   Income from continuing operations                 $       .76   $       .73   $       .50
                                                     ============  ============  ============

   Loss from discontinued operations                                     ( .01)        ( .35)
                                                     ============  ============  ============

   Net income                                        $       .76   $       .72   $       .15
                                                     ============  ============  ============

Weighted average common and common equivalent
   shares (Note A)                                      4,907,288     3,283,531     3,261,928
                                                     ============  ============  ============







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


                                      -20-
<PAGE>



<TABLE>
<CAPTION>


                   PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
                  CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY



                                                       Additional
                                   Common Stock        Paid-In       Treasury        Retained
                                Shares     Amount      Capital         Stock         Earnings        Total
<S>                             <C>        <C>         <C>           <C>             <C>            <C>

Balance - January 1, 1994       3,102,002  $31,000     $1,024,000    $(138,000)      $3,907,000     $4,824,000
1994 Net income                                                                         485,000        485,000
Exercise of options/warrants       54,686    1,000         99,000                                      100,000
                                ---------  -------     ----------    ---------       ----------     ----------

Balance - December 31, 1994     3,156,688   32,000      1,123,000     (138,000)       4,392,000      5,409,000

1995 Net income                                                                       2,374,000      2,374,000
Exercise of options/warrants      106,910    1,000        165,000                                      166,000
Issuance of warrants                                       62,000                                       62,000
Tax benefit - warrant and
   option plans                                            64,000                                       64,000
Purchase of treasury stock -
   6,084 shares                                                        (18,000)                        (18,000)
Distribution to stockholders -
   spin off (Note N)                                                                   (570,000)      (570,000)
                                ---------  -------     ----------    ---------       ----------     ----------
Balance - December 31, 1995     3,263,598   33,000      1,414,000     (156,000)       6,196,000      7,487,000

1996 Net income                                                                       3,734,000      3,734,000
Exercise of options/warrrants      35,820                  74,000                                       74,000
Tax benefit - warrant and
   option plans                                            25,000                                       25,000
Purchase of treasury stock -
   37 shares                                                            (1,000)                         (1,000)
Initial Public Offering
   stock proceeds (Note I)      1,600,000   16,000     11,372,000                                   11,388,000
                                ---------  -------     ----------    ---------       ----------     ----------

Balance - December 31, 1996     4,899,418  $49,000    $12,885,000    $(157,000)      $9,930,000    $22,707,000
                                =========  =======    ===========    =========       ==========    ===========



<FN>

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

</FN>
</TABLE>


                                      -21-
<PAGE>



<TABLE>
<CAPTION>

                   PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
                            CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                    December 31,
                                                          1996         1995         1994
                                                        ---------    ---------    --------
<S>                                                   <C>          <C>          <C>
Cash flows from operating activities
   Net income                                         $ 3,734,000  $ 2,374,000  $  485,000
   Non-cash adjustments:
      Depreciation and amortization                       831,000      675,000     388,000
      Reserve for inventory obsolescence                  609,000      293,000     180,000
      Deferred income taxes                              (119,000)     (73,000)     34,000
      Other                                              (113,000)     236,000      48,000
   Changes in operating assets and liabilities:
      Accounts receivable                                (895,000)    (803,000)    536,000
      Inventories                                      (1,229,000)    (783,000)   (798,000)
      Prepaid expenses and other                           25,000     (239,000)    (14,000)
      Accounts payable                                   (474,000)     385,000    (199,000)
      Accrued expenses                                    892,000      834,000    (142,000)
      Income taxes payable                                381,000      (97,000)    733,000
      Discontinued operations - non-cash charges and
         working capital charges                                       495,000    (160,000)
                                                     ------------  -----------  ----------

         Net cash provided by operating activities      3,642,000    3,297,000   1,091,000
                                                     ------------  -----------  ----------

Cash flows from investing activities
   Cash purchases of equipment and improvements, net     (719,000)    (297,000)   (158,000)
   Capitalized software development                      (380,000)    (193,000)   (364,000)
   Purchase of remaining shares in subsidiary            (268,000)
   Purchase of marketable securities                   (6,102,000)
   Investing activities of discontinued operations                    (129,000)   (367,000)
                                                     ------------  -----------  ----------

         Net cash used by investing activities         (7,469,000)    (619,000)   (889,000)
                                                     ------------  -----------  ----------

Cash flows from financing activities
   Payments on capital lease obligations                  (62,000)     (63,000)    (61,000)
   Borrowings from line of credit                                      535,000   2,169,000
   Repayment of line of credit and notes payable          (12,000)  (1,446,000) (2,545,000)
   Exercise of stock options and warrants                  74,000      142,000      72,000
   Net proceeds from issuance of common stock          11,388,000
   Financing activities of discontinued operations                                 435,000

                                                     ------------  -----------  ----------
Net cash provided (used) by financing activities       11,388,000     (832,000)     70,000
                                                     ------------  -----------  ----------
         Net increase in cash                           7,561,000    1,846,000     272,000

Cash and cash equivalents at beginning of year          2,466,000      620,000     348,000
                                                     ------------  -----------  ----------

Cash and cash equivalents at end of year             $ 10,027,000  $ 2,466,000  $  620,000
                                                     ============  ===========  ==========




<FN>


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


                                      -22-
<PAGE>



<TABLE>
<CAPTION>



                   PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
                            CONSOLIDATED STATEMENTS OF CASH FLOWS
                                         (Continued)



SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

                                                                   Year ended December 31,
                                                        1996         1995         1994
                                                      ---------    ---------    --------
<S>                                                   <C>          <C>          <C>

Interest paid                                         $    13,000  $    24,000  $  70,000
Income taxes paid                                     $ 1,853,000  $ 1,371,000  $  53,000



SCHEDULE OF NON-CASH INVESTING AND FINANCING TRANSACTIONS


Spin off to stockholders
   Accounts receivable                                             $    13,000
   Inventory                                                           642,000
   Prepaid expenses                                                     29,000
   Deferred tax assets                                                  47,000
   Equipment and improvements, net of accumulated depreciation         331,000
   Software capitalization, net of amortization                        472,000
   Accounts payable                                                   (139,000)
   Accrued expenses                                                   (117,000)
   Income taxes payable                                                 (5,000)
   Capital lease obligations, short term                                (1,000)
   Deferred tax liabilities                                           (202,000)
   Loan payable                                                       (500,000)
                                                                  ------------
      Net distribution                                            $    570,000
                                                                  ============


<FN>

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


                                      -23-
<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 was formed in 1981 under the
laws of the State of Delaware and maintains its corporate offices at 315 Science
Parkway,  Rochester, New York. The Company and its subsidiaries design, develop,
manufacture  and market high  performance  communications,  networking  and data
storage  interface  systems  products.  The  Company's  products are designed to
enhance the performance of customers' computer network systems and include local
and wide area network interface adapters, communication servers and mass storage
interface   products.   The  Company  also   provides   sophisticated   software
communications  solutions.  Applications for the Company's products are targeted
toward high  performance,  mission  critical  networking  solutions and include:
network interfaces for cellular telephone communications,  FDDI adapter products
used aboard navy  vessels,  communications  servers used in air traffic  control
centers and data storage products found in bank automated teller machines.

Segment Data,  Geographic  Information  and Significant  Customers:  The Company
operates in one industry  segment.  Export sales to customers outside the United
States  represent  10.8%,  14.2%, and 12.4% of the Company's sales for the years
ended December 31, 1996, 1995 and 1994,  respectively.  For 1996, 1995 and 1994,
four customers  accounted for approximately 30%, 21% and 30%,  respectively,  of
the Company's sales, with no single customer  representing  greater than 12%, 6%
and 15%, respectively, of the Company's sales.

Principles of Consolidation:  The consolidated  financial statements include the
accounts of the Company and its  wholly-owned  subsidiaries,  PTI Virgin Islands
Company,   Ltd.,  and  UconX  Corporation  (Note  E).  Manutech  Corporation  of
Rochester,  Videk  Corporation,  the Performance  Telecom  business unit and the
InformationView  business  unit have been shown in the  Statements of Income and
Statements  of Cash  Flows for the years  ended  December  31,  1995 and 1994 as
discontinued  operations  (Note N). All significant  inter-company  transactions
have been eliminated.

Use of Estimates:  The  preparation of 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 revenues 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,  investments  and  accounts  receivable.  Investments  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.

Inventories:  Inventories  are  valued at the lower of cost or market  using the
first-in, first-out method.

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,  1996,  as the maturity of these
instruments  are all short term.  Due to  differences  in the interest  rates on
certain  of the long  term  debt  and  capital  lease  obligations  compared  to
prevailing  rates,  the fair  value of these  instruments  does vary from  their
carrying amounts, however, such differences are immaterial.

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



                                      -24-
<PAGE>



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

Revenue  Recognition:  Revenue from hardware  sales is  recognized  upon product
shipment.  Revenue from consulting and other  professional  service contracts is
recognized when earned on the basis of hours incurred at contract rates for time
and material agreements.  Revenue relating to licenses of the Company's software
products is recognized when a binding  agreement is entered into to purchase and
after delivery of the product to the customer.  Revenue associated with customer
maintenance  agreements on software licenses is recognized on a monthly basis as
earned.  Costs  associated  with providing  maintenance  service are recorded as
incurred.

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.  At December 31, 1996,  cost
approximates fair market value.

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

     Machinery and equipment           3-10 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 recorded in
the Statements of Income.

Intangible  Assets:  Intangible assets consist of the excess purchase price over
fair value of net assets  acquired and are being  amortized  on a  straight-line
basis  over  five  years.  These  assets  are  included  in other  assets in the
consolidated  financial  statements.  The Company re-evaluates goodwill whenever
significant  events or changes  occur  which might  impair  recovery of recorded
costs (Note E).

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

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.

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  carry-forwards.  Deferred  income tax expense  (benefit)  represents the
change in net deferred tax asset and liability balances.

Earnings Per Share:  Earnings per share is computed  using the weighted  average
number of common and common  equivalent  shares  outstanding  during the period.
Common equivalent shares consist of stock options and stock warrants as computed
using the treasury stock method. Common equivalent shares from stock options and
warrants are excluded  from the  computation  if their effect is  anti-dilutive,
except that, pursuant to the Securities and Exchange Commission Staff Accounting
Bulletin,  common and common  equivalent shares issued between November 21, 1994
and the closing of the Company's  initial  public  offering on January 24, 1996,
have been included in the computation using the treasury stock method as if they
were outstanding for the years ending December 31, 1995 and 1994.

                                      -25-
<PAGE>

Note B - Accounts Receivable

Accounts receivable consisted of the following at December 31, 1996 and 1995:
<TABLE>
<CAPTION>

                                                                           December 31,
                                                                        1996           1995
                                                                       ------         ------
<S>                                                               <C>            <C>

Accounts receivable                                               $  3 ,405,000  $   2,507,000
Less:  allowance for doubtful accounts                                 (171,000)      (297,000)
                                                                  -------------  -------------
      Net                                                         $   3,234,000  $   2,210,000
                                                                  =============  =============
</TABLE>


Note C - Inventories

Inventories consisted of the following at December 31, 1996 and 1995:
<TABLE>
<CAPTION>

                                                                            December 31,
                                                                        1996           1995
                                                                       ------         ------
<S>                                                               <C>            <C>

Purchased parts and components                                    $   1,601,000  $   1,467,000
Work in process                                                       2,641,000      1,691,000
Finished goods                                                          292,000        383,000
                                                                  -------------  -------------
                                                                      4,534,000      3,541,000
Less:  reserve for inventory obsolescence                              (502,000)      (129,000)
                                                                  -------------- -------------
      Net                                                         $   4,032,000  $   3,412,000
                                                                  =============  =============
</TABLE>

Note D - Equipment and Improvements

Equipment and  improvements  consisted of the following at December 31, 1996 and
1995:
<TABLE>
<CAPTION>

                                                                           December 31,
                                                                        1996           1995
                                                                       ------         ------
<S>                                                               <C>            <C>
Engineering equipment and software                                $   1,247,000  $1,336,000
Manufacturing equipment                                               1,295,000     651,000
Furniture and equipment                                                 702,000     560,000
Leasehold improvements                                                  123,000      94,000
                                                                  -------------  ----------
                                                                      3,367,000   2,641,000
Less:  accumulated depreciation and amortization                     (2,100,000) (1,563,000)
                                                                  -------------  -----------
       Net                                                        $   1,267,000  $ 1,078,000
                                                                  =============  ===========
</TABLE>

Total depreciation and amortization  expense for equipment and improvements from
continuing  operations  for  1996,  1995  and 1994 was  $538,000,  $318,000  and
$210,000, respectively.

Fixed assets include  $271,000 and $298,000 of equipment and software held under
capital lease  agreements at December 31, 1996 and 1995,  respectively.  Related
accumulated  amortization  at  December  31,  1996  and 1995  was  $238,000  and
$209,000, respectively.  Related amortization expense from continuing operations
was $29,000, $60,000 and $21,000 for 1996, 1995 and 1994, respectively.

Note E -  Other Assets

During 1996, the Company paid $268,000 to acquire the remaining  shares of UconX
Corporation resulting in UconX becoming a wholly-owned subsidiary. In connection
with  this   transaction,   additional   goodwill  of  $188,000  was   recorded.
Amortization  expense  from  continuing  operations  for  goodwill  was $45,000,
$34,000  and  $34,000  for the years ended  December  31,  1996,  1995 and 1994,
respectively.


                                      -26-
<PAGE>


Note F - Accrued Expenses

Accrued expenses consisted of the following at December 31, 1996 and 1995:
<TABLE>
<CAPTION>

                                                                           December 31,
                                                                        1996           1995
                                                                       ------         ------
<S>                                                               <C>            <C>
Accrued compensation                                              $   1,431,000  $   918,000
Accrued payroll and other taxes                                         266,000      103,000
Other accrued expenses                                                  434,000      218,000
                                                                  -------------  -----------
      Total                                                       $   2,131,000  $ 1,239,000
                                                                  =============  ===========
</TABLE>

Note G - Long Term Debt and Credit Agreement

During 1996, the Company  signed a new two year revolving  credit loan agreement
with a bank  increasing  the  available  borrowing  capacity to $3 million.  The
Company's  subsidiary,  UconX  Corporation,  is the guarantor of the  agreement.
Borrowings  bear interest  ranging between 150 basis points above the Libor rate
to the bank's prime rate and are  collateralized  by trade accounts  receivable,
inventory,  equipment,  contract  rights  and  intangibles.  The  new  agreement
requires the Company to meet certain financial and non-financial  covenants. The
Company was in compliance  with such covenants at December 31, 1996.  There were
no balances outstanding under this agreement at December 31, 1996 and 1995.

In June  1993,  the  Company  borrowed  $80,000  from the City of  Rochester  to
purchase equipment.  The seven year loan bears interest at 2%. The loan is fully
collateralized  by an irrevocable  letter of credit.  This agreement  contains a
covenant  requiring the Company to maintain  substantially all of its operations
located within the boundaries of the municipality.

The Company has  guaranteed  $500,000 for  Performance  Telecom  Corporation,  a
former  subsidiary  spun-off in 1995 (Note N). At December 31,  1996,  PTC had a
$450,000 loan balance outstanding and during January 1997 an additional $250,000
was paid reducing the balance under this guarantee to $200,000.

A summary of the long term debt  outstanding at December 31, 1996 and 1995 is as
follows:
<TABLE>
<CAPTION>

                                                                           December 31,
                                                                        1996           1995
                                                                       ------         ------
<S>                                                               <C>            <C>

Loans payable                                                     $    41,000    $     53,000
Capital lease obligations                                              15,000          77,000
                                                                  -----------    ------------
                                                                       56,000         130,000
Less:  current portion                                                (26,000)        (73,000)
                                                                  -----------    ------------
Long term portion                                                 $    30,000    $     57,000
                                                                  ===========    ============
</TABLE>


As of  December  31,  1996,  the  aggregate  maturities  of  loans  payable  and
obligations under capital leases are as follows:
<TABLE>
<CAPTION>

                                                                      Year ended
                                                                   December 31,      Amount
                                                                   -------------     ------
<S>                                                                    <C>          <C>
                                                                       1997         $26,000
                                                                       1998          12,000
                                                                       1999          12,000
                                                                       2000           6,000
                                                                                    -------
                                                                                    $56,000
                                                                                    =======
</TABLE>


                                      -27-
<PAGE>



Note H - Commitments

The Company leases  facilities and equipment under operating  leases.  Under the
terms of the facility  lease 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   co-guaranteed
approximately  $1,250,000 of the mortgage  obtained to finance the building.  In
recognition  of this  guarantee,  the Company has the right of first  refusal to
purchase the facility at a discounted price, should the owners elect to sell.

Future minimum lease  payments for all operating  leases having a remaining term
in excess of one year at December 31, 1996 are as follows:
<TABLE>
<CAPTION>

                                                                      Operating
                                                                      Leases
                                                                    ------------
<S>                                                                 <C>
         1997                                                        $  404,000
         1998                                                           396,000
         1999                                                           383,000
         2000                                                           311,000
         2001                                                           129,000
                                                                     -----------
         Total minimum lease payments                                $1,623,000
                                                                     ===========
</TABLE>


Rental expense from  continuing  operations  amounted to $500,000,  $563,000 and
$311,000 for 1996,  1995 and 1994,  respectively.  Rental income from continuing
operations  amounted  to  $9,000,  $134,000  and $0 for  1996,  1995  and  1994,
respectively.

Note I - Stockholders'  Equity

In connection  with the initial public  offering of the Company's  common stock,
the Company's Board of Directors authorized on November 14, 1995 to increase the
authorized  number  of shares of common  stock to be issued  from  6,000,000  to
15,000,000  shares and for the issuance of 1,000,000  shares of preferred stock,
$0.01 par  value.  On  November  22,  1995,  the  Company  filed a  Registration
Statement on Form S-1 with the Securities and Exchange Commission to register up
to 2,000,000 shares of its common stock for sale to the public. Of these shares,
400,000 were sold by selling shareholders. On January 24, 1996, the Registration
of these securities became effective and the Company completed a public offering
of 1.6  million  shares  of its  common  stock at $8 per  share.  Aggregate  net
proceeds from the sale of shares approximated $11.4 million.

In 1986,  the Company  established  an Incentive  Stock Option Plan  pursuant to
which  700,000  shares of common stock have been reserved for grant by the Board
of Directors. Options may be granted to any officer, director 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.


                                      -28-
<PAGE>


The following table summarizes stock option activity under this plan:
<TABLE>
<CAPTION>


                                                  Number of Shares             Price Ranges
<S>                                                    <C>                     <C>

Outstanding at January 1, 1994                          226,150
Granted                                                  38,964                $2.28-$3.01
Exercised                                               (50,666)               $1.75-$2.50
Expired                                                 (32,314)               $1.75-$2.50
                                                       --------                

Outstanding at December 31, 1994                        182,134
Granted                                                  16,000                $2.74-$3.01
Exercised                                               (58,410)               $1.83-$3.00
Expired                                                  (6,400)               $2.28-$2.50
                                                       --------                

Outstanding at December 31, 1995                        133,324                $1.83-$3.01
Granted                                                 232,000                $10.00-$14.75
Exercised                                               (32,340)               $1.83-$2.74
Expired                                                    (855)               $2.28-$2.74
                                                       --------                

Outstanding at December 31, 1996                        332,129                $1.83-$14.75
                                                        =======                
</TABLE>


At December  31,  1996,  102,061  options  were vested and 164,575  options were
available for future grant under the stock option plan.

On March 31, 1995, 55,888 options issued to employees who terminated  employment
with  the  Company  and  became   employees   of  PTC  were  amended  to  become
non-qualified  options on that date.  There was no change in the exercise price,
vesting provisions or expiration date for these options.

At December 31, 1994,  39,500 common stock warrants were  outstanding and during
1994, no warrants were issued,  6,000 warrants were exercised and 3,000 warrants
expired. During 1995, all previously issued warrants were exercised.

During 1995, 50,000 warrants were issued to two of the Company's officers, 2,000
warrants  were issued to an outside  director and 500 warrants  were issued to a
consultant.  The warrants are  exercisable for five years from the date of grant
and have an  exercise  price of $2.74 per share.  The  warrants  were  valued at
$62,000  and the  related  charge  to  continuing  operations  was  recorded  to
operations in 1995. During 1996, 2,000 of such warrants were exercised.

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.
The effect of this  pronouncement  on 1995,  prior to the public offering of the
Company's  common  stock,  is not  significant.  Had  compensation  cost for the
Company's stock option plan been determined based on the fair value at the grant
date for awards in 1996  consistent  with the  provisions  of SFAS No. 123,  the
Company's  net income and  earnings per share would have been reduced to the pro
forma amounts of $3,198,000 and $.65, respectively.

The assumption regarding the stock options issued to executives in 1996 was that
33% of such  options  vested in 1996.  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 1996:  dividend
yield of 0%; expected  volatility of 65%;  risk-free  interest rate of 6.2%; and
expected lives of five years.


                                      -29-
<PAGE>


Note J - Income Taxes

The provisions for income taxes from  continuing  operations for 1996,  1995 and
1994 were as follows:
<TABLE>
<CAPTION>


                                                                  Year ended December 31,
Current income taxes                                          1996        1995        1994
                                                          ---------     --------    ---------
<S>                                                    <C>            <C>           <C>

   Federal                                             $ 1,852,000    $  916,000    $ 490,000
   State                                                   346,000       194,000      270,000
                                                       -----------    ---------     ---------
                                                         2,198,000     1,110,000      760,000
Deferred provision (benefit)                              (119,000)      (73,000)      34,000
                                                       -----------    ---------     ---------
   Total provision                                     $ 2,079,000    $1,037,000    $ 794,000
                                                       ===========    ==========    =========
</TABLE>


The provisions  (benefits) for income taxes from  continuing  operations  differ
from those computed using the federal tax rate of 34% due to the following:
<TABLE>
<CAPTION>


                                                                  Year ended December 31,
                                                              1996        1995        1994
                                                             ------     --------    ---------
<S>                                                          <C>          <C>          <C>


Federal income tax at statutory rate                         34.0%        34.0%        34.0%
Utilization of research and development tax credits          (2.7)        (4.8)        (0.7)
State tax provision, net of federal benefit                   3.9          3.6          7.6
Other                                                         0.4         (3.0)        (8.1)
                                                             ----         ----         ----
   Total provision for income taxes                          35.6%        29.8%        32.8%
                                                             ====         ====         ====

</TABLE>

The Company's  net deferred  income tax balance as of December 31, 1996 and 1995
consists of the following:
<TABLE>
<CAPTION>

                                                                          December 31,
Deferred tax liabilities                                                   1996     1995
------------------------                                                  ------   ------
<S>                                                                 <C>           <C>

Capitalized software development cost, net                          $  219,000    $  167,000
Other                                                                                (10,000)
                                                                    ----------    ----------
   Total deferred tax liabilities                                   $  219,000    $  157,000
                                                                    ----------    ----------

Deferred tax assets
Accrued vacation, payroll and other accrued expenses                  (121,000)      (67,000)
Inventory obsolescence reserve and other inventory related items      (171,000)      (52,000)
Bad debt reserve                                                       (68,000)     (119,000)
Research tax credits                                                   (35,000)
Other                                                                  (24,000)
                                                                    ----------
   Total deferred tax assets                                          (419,000)     (238,000)
                                                                    ----------    ----------
      Net deferred tax asset                                        $ (200,000)   $  (81,000)
                                                                    ==========    ==========
</TABLE>


The carryforward research credits begin to expire in 2006.

Note K - Research and Software Development Costs

The Corporation incurred research and software development costs relating to the
development of new products for continuing operations during 1996, 1995 and 1994
as follows:
<TABLE>
<CAPTION>

                                                                    Year Ended December 31,
                                                              1996           1995          1994
                                                            -------         ------       -------
<S>                                                         <C>           <C>           <C>
Gross expenditures for engineering
   and software development                                 $3,460,000    $2,177,000    $1,757,000
Less:  amounts capitalized                                    (500,000)     (222,000)     (391,000)
                                                            ----------    ----------    ----------
   Net charged to operating expenses                        $2,960,000    $1,955,000    $1,366,000
                                                            ==========    ==========    ==========
</TABLE>


Amortization of software development costs for continuing operations included in
cost of goods sold was $369,000,  $323,000 and $144,000 for 1996, 1995 and 1994,
respectively.


                                      -30-
<PAGE>

Software  Development  costs consisted of the following at December 31, 1996 and
1995:
<TABLE>
<CAPTION>


                                                                           December 31,
                                                                       1996           1995
                                                                      ------         ------
<S>                                                               <C>             <C>

Capitalized software development costs                            $ 1,398,000     $ 898,000
Less:  accumulated amortization                                      (849,000)     (480,000)
                                                                  -----------     ---------
   Net                                                            $   549,000     $ 418,000
                                                                  ============    ==========
</TABLE>


Note L - Employee Benefit Plans

The Company's  Retirement  Savings Plan  qualifies  under Section  401(k) of the
Internal  Revenue  Code.  Generally,   all  eligible  full  time  employees  may
contribute  up to 20% of their  compensation  subject to the IRS  limitation  of
$9,500 per year toward their retirement on a tax deferred basis. The Company has
made matching  contributions up to three-quarters of the amounts  contributed by
participating employees, but no more than 3% of the participant's  compensation.
The  Plan's  assets  are   administered  by  the  Principal   Financial   Group.
Contributions  for  continuing  operations  amounted  to  $126,000,  $67,000 and
$11,000 for 1996, 1995 and 1994, respectively.

Note M - Transactions with Related Parties

The  Company  leases  its  primary  facility  from an entity  controlled  by two
directors of the Company,  one of whom is an officer.  During  1996,  1995,  and
1994,  the Company paid rent of $307,000,  $297,000 and $290,000,  respectively,
for the use of this location. (Note H)

Note N - Discontinued Operations

In March 1995,  the Company sold the assets of the Manutech  business unit for a
net purchase price of $168,000.  Effective March 31, 1995, the Company completed
a spin-off  transaction  (the  "Spin-Off")  whereby  the  Company's  Performance
Telecom business unit, the  InformationView  business unit, and its wholly owned
subsidiary,  Videk  Corporation,  were combined  into a new entity,  Performance
Telecom  Corporation,  the  stock  of which  was  distributed  to the  Company's
stockholders.  To  accomplish  the Spin-Off,  the  Company's  Board of Directors
declared a distribution  to each of the Company's  stockholders  of one share of
Performance  Telecom stock for each share of the Company's Common Stock owned by
its  stockholders.  The  Spin-Off  was  structured  to  qualify  as  a  tax-free
transaction  under the Internal  Revenue  Code.  This  transaction  represents a
distribution to stockholders and, therefore,  there is no gain or loss reflected
in the Company's Statement of Income.

The  disposal of Manutech  and the  operations  distributed  in the Spin-Off are
reflected as  discontinued  operations in the Company's  consolidated  financial
statements.

A summary of discontinued operations for 1995 and 1994 is as follows:
<TABLE>
<CAPTION>

                                                                    Year ended December 31,
                                                                       1995           1994
                                                                      ------         ------
<S>                                                               <C>           <C>

Sales                                                             $ 1,634,000   $ 6,055,000
                                                                  ===========   ===========

Loss before income taxes                                          $  (189,000)  $(1,725,000)
Income tax benefit                                                    170,000       630,000
                                                                  -----------   -----------
Loss from discontinued operations                                     (19,000)   (1,095,000)
Loss on sale of Manutech including operating losses during the
   phase out period, net of tax benefit of $12,000                                  (38,000)
                                                                  -----------   -----------
                                                                  $   (19,000)  $(1,133,000)
                                                                  ===========   ===========
</TABLE>


                                      -31-
<PAGE>



Note O - Quarterly Results (unaudited)

The following is a summary of unaudited  quarterly results of operations for the
years ended December 31, 1996 and 1995.
<TABLE>
<CAPTION>


                                                                 December 31, 1996
                                                 Mar. 31    Jun.30        Sept.30    Dec.31
                                                --------   -------       --------   -------
<S>                                             <C>         <C>          <C>         <C>

Sales                                           $5,537      $6,463       $6,412      $6,431
Gross profit                                     3,174       3,721        3,506       3,593
Income from operations                           1,313       1,298        1,254       1,222
Income before taxes and minority interest        1,444       1,473        1,456       1,463
Net income                                      $  897      $  910       $  912      $1,015

Earnings per share                              $ 0.20      $ 0.18       $ 0.18      $ 0.21
                                                ======      ======       ======      ======

                                                                 December 31, 1995
                                                Mar. 31    Jun.30        Sept.30    Dec.31
                                                --------   -------       --------   -------
Sales                                           $3,931      $4,144       $4,997      $4,819
Gross profit                                     2,228       2,219        2,644       2,852
Income from operations                             712         719        1,005         837
Income before taxes and minority interest          764         753          976         983
Net income                                      $  440      $  517       $  677      $  740

Earnings per share                              $ 0.13      $ 0.16       $ 0.20      $ 0.23
                                                ======      ======       ======      ======
</TABLE>




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

Not Applicable



                                      -32-
<PAGE>


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 June 10, 1997, 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 June 10, 1997,
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 June 10, 1997,
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 June 10, 1997,  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 June 10, 1997,
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.




                                      -33-
<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 10K 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
-------     ------      -----------
1.1         (1)         Form of Underwriting Agreement
2.1         (1)         Agreement and Plan of Reorganization and Corporate
                             Separation between the Registrant and Performance
                             Telecom Corporation dated March 15, 1995
3.1         (1)         Restated Certificate of Incorporation
3.2         (1)         Amended By-Laws
4.1         (1)         Form of Common Stock Certificate
4.2         (1)         Amended and Restated Stock Option Plan
5.1         (1)         Opinion of Harter, Secrest & Emery
10          (1)         Material Contracts
10.1        (2)         Revolving  Credit  Agreement  dated as of October 31,
                             1996 between the Registrant and The Chase Manhattan
                                   Bank, N.A.
10.2        (2)         Revolving  Credit Note in the amount of  $3,000,000
                             dated  October 31, 1996 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
10.11       (1)         Master  Equipment  Lease  between  the  Registrant  and
                             Fleet Credit Corporation dated as of March 30, 1992
10.12       (1)         Master  Equipment  Lease between the  Registrant  and
                             M & M Associates dated February 1, 1993
10.13       (1)         Master  Equipment  Lease between the  Registrant  and
                             M & M Associates dated November 1, 1993


                                      -34-
<PAGE>


Exhibit     Ref.
Number      Number      Description
-------     ------      -----------
10.14       (1)         Agreement between the Registrant and Loral Test &
                             Information  Systems dated November 2, 1995
10.15       (1)         License Agreement between the Registrant and Willemijn
                             Houdstermaatschappij BV dated as of January 1, 1994
10.16       (1)         License  Agreement  between the Registrant and Spider
                             Systems  Limited dated March 18, 1992
10.17       (1)         Technology Transfer Agreement between the Registrant and
                             Newbridge Networks Corporation dated July 5, 1995
10.18       (1)         Real Property Lease for UconX Corporation, as Lessee
10.19       (1)         Line of Credit and  Security  Agreement  between  the
                             Registrant and UconX Corporation dated as of
                             September 1, 1992
10.20       (1)         Amendment to Line of Credit Agreement and Security
                             Agreement  between the Registrant and UconX
                             Corporation dated as of July 1, 1993
10.21       (1)         Second Amendment to Line of Credit and Security
                             Agreement between the Registrant and UconX
                             Corporation dated as of September 2, 1994
10.22       (1)         Employee Confidentiality, Non-Disclosure,
                             Non-Competition and Assignment Agreement between
                             the Registrant, UconX Corporation and Thomas R.
                             Stockey dated August 14, 1992
10.23       (1)         Employee   Confidentiality,    Non-Disclosure,
                             Non-Competition and Assignment Agreement between
                             the Registrant,UconX Corporation and Robert S.
                             Lindstrom dated August 14, 1992
10.24       (1)         Employee   Confidentiality,    Non-Disclosure,
                             Non-Competition and Assignment Agreement between
                             the Registrant, UconX Corporation and Jean M.
                             Lindstrom dated August 14, 1992
10.25       (1)         Employee   Confidentiality,    Non-Disclosure,
                             Non-Competition and Assignment Agreement between
                             UconX Corporation and Kevin Quick dated August 16,
                                      1992
10.26       (1)         Employee   Confidentiality,    Non-Disclosure,
                             Non-Competition   and Assignment Agreement between
                             UconX Corporation and Tim Barba dated August 14,
                             1992
10.27       (1)         Shareholders'  Agreement among the  Registrant,
                             Shareholders of UconX Corporation and UconX
                             Corporation dated as of September 1, 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
11          (1)         Statement re computation of per share earnings
16          (1)         Letter re change in certifying public accountant
21          (1)         Subsidiaries
24.1        (1)         Corporate Power of Attorney
24.2        (1)         Officer and Director Power of Attorney
--------------------------------------------------------------------------------
(1) Incorporated by reference to the Registrant's Registration Statement of Form
S-1 filed on November 22, 1995.
(2)  Incorporated  by reference  to the  Registrant's  Quarterly  Report on Form
10-Q/A for the  Quarterly  Period Ended  September  30, 1996 filed  November 14,
1996.

(4)     Reports on Form 8-K
        None


                                      -35-
<PAGE>

                                 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


                                                   By:/s/CHARLES E. MAGINNESS
                                                      Charles E. Maginness
                                                    Chief Executive Officer

                                                      /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, this report has been
signed  by  the  following  persons  on  behalf  of  the  registrant  and in the
capacities and on the dates indicated.


        Signature                   Title                        Date


/s/CHARLES E. MAGINNESS      Chairman of the Board, Chief      March 28, 1997
----------------------       Executive Officer and Director 
Charles E. Maginness         


S/DONALD L. TURRELL          President and Director            March 28, 1997
----------------------
Donald L. Turrell


/s/DORRANCE W. LAMB          Chief Financial Officer, and      March 28, 1997
-----------------------      Vice President of Finance
Dorrance W. Lamb


/s/JOHN M. SLUSSER           Director                          March 28, 1997
----------------------
John M. Slusser


/s/BERNARD KOZEL             Director                          March 28, 1997
----------------------
Bernard Kozel


/s/JOHN E. MOONEY            Director                          March 28, 1997
----------------------
John E. Mooney


/S/PAUL L. SMITH             Director                          March 28, 1997
----------------------
Paul L. Smith


                                      -36-
<PAGE>