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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549
                               ------------------

                                   FORM 10-K/A
(Mark One)
        [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
            EXCHANGE ACT OF 1934 (No Fee Required)
                   For the Fiscal Year Ended December 31, 2001
                                       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               (I.R.S. Employer Identification No.)
 of incorporation of organization)


        315 Science Parkway, Rochester, New York           14620
        (Address of principal executive offices)         (Zip Code)
       Registrant's telephone number, including area code: (585) 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  February  28,  2002  was
approximately $85,000,000.

     The number of shares outstanding of the registrant's Common Stock, $.01 par
value, was approximately 12,239,000 as of February 28, 2002.

                       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 4, 2002,  which will be filed with the  Securities  and Exchange
Commission not later than 120 days after December 31, 2001.

================================================================================
<PAGE>



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


PART I                                                                    Page
--------
ITEM 1     Business                                                          1
ITEM 2     Properties                                                       14
ITEM 3     Legal Proceedings                                                15
ITEM 4     Submission of Matters to a Vote of Security Holders              15


PART II
--------
ITEM 5     Market for the Registrant's Common Equity and                    15
              Related Stockholder Matters
ITEM 6     Selected Financial Data                                          16
ITEM 7     Management's Discussion and Analysis of Financial                17
              Condition and Results of Operations
ITEM 7A    Quantitative and Qualitative Disclosures About Market Risk       25
ITEM 8     Financial Statements and Supplementary Data                      25
ITEM 9     Changes in and Disagreements with Accountants on                 39
              Accounting and Financial Disclosure


PART III
--------
ITEM 10    Directors and Executive Officers of the Registrant               39
ITEM 11    Executive Compensation                                           39
ITEM 12    Security Ownership of Certain Beneficial Owners                  40
              and Management
ITEM 13    Certain Relationships and Related Transactions                   40


PART IV
--------
ITEM 14    Exhibits, Financial Statement Schedules, Reports on Form 8-K     41


<PAGE>

PART I


ITEM 1 - Business

Overview

Performance  Technologies,   Incorporated  (the  "Company")  is  a  supplier  of
innovative  hardware and software  products for a broad range of  communications
infrastructure,  including traditional data communications and wireline/wireless
telecommunication systems. The Company's forward looking development efforts are
directed at future growth  opportunities  that utilize the evolving IP (Internet
Protocol)  standards  for  communications  and  networking  equipment.  IP-based
communications  and systems  products  are the  foundation  for  next-generation
telecommunications  systems and services, as well as embedded systems for video,
data communications and mass storage  applications.  The Company focuses on high
availability  network  infrastructure  solutions  that  include  network  access
products, embedded Ethernet switching products and integrated Signaling System 7
systems.  Customers who use the  Company's  products and  technologies  include:
telecommunications   equipment  manufacturers  (TEMs),   communications  service
providers/operators,   international   mobile/cellular  wireless  operators  and
embedded systems platform suppliers/integrators.

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

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,  cancellations or delays of customer orders
including  those  associated  with  "design  wins,"  changes  in the  product or
customer mix of sales,  delays in new product  development,  customer  delays in
qualification of products and delays in customer acceptance of new products.

Important Year 2001 Milestones

The  market  environment  was  very  different  at the  end  of  2001  from  the
environment  at the  beginning  of the year.  In late 2000 and early  2001,  the
telecommunications   industry  was  experiencing  unprecedented  expansion  with
substantial  effort  underway  to  overhaul  and update  both the  wireline  and
wireless  network  infrastructure.  Much of this  expansion was forecasted to be
built on the convergence of more traditional telecommunications systems with the
technology  known as IP (Internet  Protocol) that was used as the building block
in setting up the  worldwide  Internet.  There was also  emphasis on  widespread
replacement of the current wireline  communications  system with "Voice-over-IP"
(VoIP) networks. In deploying an IP network for communications,  the promise was
reduced  costs and a wider array of new features and services  that could not be
implemented on the current public switched telephone networks (PSTN).

In  the  wireless  communications  area,  many  of  the  second-generation  (2G)
mobile/cellular  systems  being  operated  around  the world  were  experiencing
impressive  subscriber growth.  However, 2G systems could not adequately support
data  communications and the many services that could be built on a data-capable
wireless  system.  In early 2001,  there was a concerted  effort by carriers and
equipment   suppliers   to   upgrade   the   wireless   networks   to   extended
second-generation  systems and ultimately,  in short order, to third  generation
(referred to as 2.5G and 3G, respectively)  systems. The 2.5G and 3G systems are
heavily dependent upon the use of "IP Communications" technology in the core.
                                        1
<PAGE>

During  the  course of the year,  the  market  and  subsequent  funding  for the
expansion  of  communications  networks  declined  dramatically.   Many  of  the
alternative wireline  communication  suppliers,  known as Competitive Local Area
Exchange Carriers (CLECs),  experienced financial  difficulties  contributing to
the overall  slowdown in the wireline  segment.  Based on the many  services and
potential  cost  savings of IP  technology  in networks  for both  wireline  and
wireless  infrastructure,  it seems  reasonable to conclude this  build-out will
resume, at some point, despite the downturn in deployment rates that occurred in
2001.

As a result of the  changing  market  environment  that  occurred  during  2001,
management  continued its engineering  development  programs associated with the
Company's  long  range  strategy  but  emphasis  was also  placed on  delivering
solutions  that  could  be  deployed  in   current-generation   networks  or  in
next-generation networks if a rapid payback of investment could be demonstrated.

Despite a chaotic 2001 market environment, the Company made substantial progress
in a variety of areas including:

Introduction of the SEGwayTM Network Products:  As traffic  increases,  existing
communications systems are expanding,  causing expansion of the SS7 network. The
SEGway  Network  product family is an innovative use of IP networks for carrying
signaling  traffic.  There  are  two  products  in  the  SEGway  Network  family
including: 1) The SEGway Edge, and (2) the SEGway Link Concentrator.  The SEGway
Edge enables  wireless and wireline  operators to offload  long-haul SS7 traffic
onto lower-cost IP networks. The Company announced this product in February 2001
and customers began  deployment of SEGway Edge units on a worldwide basis in the
spring of 2001.  The SEGway  Link  Concentrator  is a  companion  product to the
SEGway Edge and reduces the need to add links to Signal  Transfer  Points (STPs)
by concentrating SS7 traffic onto fewer,  highly utilized links. The SEGway Link
Concentrator  is expected to become  available in the second  quarter 2002.  The
SEGway  Link  Concentrator  was  recognized  as  the  Product  of  the  Year  by
Communications Solutions magazine in December 2001.

Appropriate  for current  economic  conditions,  the  Company's  SEGway  Network
products give carriers the ability to reduce operating  costs,  enhance services
and expand  their  current  networks by  utilizing  lower cost IP  networks  for
signaling.  To capitalize on the carrier market,  sales and marketing  personnel
are now dedicated to carrier sales.

GSM  Roaming  Platform:  GSM is the most widely used  cellular  mobile  wireless
protocol  in the  world.  One of the  untapped  revenue  opportunities  for many
wireless telephone service providers, that does not require large infrastructure
investments, is enlarging their roaming footprints beyond international borders.
After several successful  deployments of the Performance  Technologies'  Roaming
Platform  technology  during 2000-2001,  the Company  introduced the GSM Roaming
Platform as a standard offering in January 2002. This platform enables large GSM
wireless  carriers to offer  roaming  services to small or emerging GSM carriers
who may  otherwise  not be able to offer  extensive  roaming  coverage  to their
subscribers.  While the market for these platforms is not large, there is little
competition.

Both the SEGway  Network  products  and the GSM Roaming  Platforms  are products
produced by the Company's SS7 Signaling  group that was acquired in late 1999 as
MicroLegend  Telecom  Systems Inc.  (MicroLegend).  The  combination of the core
competencies  of  Performance  Technologies  and the in-depth SS7  capability of
MicroLegend  has elevated the Company to a prominent  position in the  signaling
part of the telecommunications marketplace.

PICMG  2.16  Specification  Ratification:  Management  believes  one of the most
important and far reaching  accomplishments  by the Company  during 2001 was the
development   and   leadership   in  the   ratification   of  the  PICMGTM  2.16
specification. PICMG 2.16 fully defines a revolutionary new approach to embedded
system design.  This new  architecture  for building  embedded  systems,  called
Compact Packet Switching  Backplane (cPSB),  dramatically  improves  scalability
while building on much of the technology  that has been developed for local area
networks (LANs) and found in enterprise applications.
                                        2
<PAGE>

At the  beginning  of 2002,  only three months  after  ratification  of the 2.16
specification,  there  were  more  than  30  products  available  or  soon to be
available that interoperate with this new embedded system architecture. The rate
of adoption of this new  architecture  has been  unprecedented  in the industry.
Management believes that the Company's intimate role in developing this standard
and then shepherding it through the ratification  process, has given the Company
a  "first-to-market"  advantage for its products that are already in conformance
to this new standard.

In anticipation  of the adoption of PICMG 2.16, the Company  introduced a family
of products,  under the trade name  IPnexusTM,  in the latter part of 2000.  The
cornerstone of the Company's IPnexus family is a full range of high availability
embedded  IP  Ethernet   switching   products  that  are  an  integral  part  of
implementing the 2.16 architecture.  While a number of competitive products have
been  announced in this area,  the Company  believes it has the  broadest,  most
flexible and cost effective  solutions  currently on the market.  The Company is
maintaining  its  market  leadership  position  with  the  announcement  of  two
gigabit-class IPnexus switches that will be available in the first half of 2002.
In addition to the embedded IP Ethernet Switching products, the Company has also
continued  to  enhance  the  IPnexus  product  family  throughout  2001  with an
expanding set of T1/E1/J1 and T3/DS3  Network Access  products,  which are PICMG
2.16 compatible.

Industry Overview

2001 was an extremely difficult year for the  telecommunications  industry.  The
year began with continuing strong demand for next-generation  infrastructure for
both  wireline  and  wireless  applications.  As  the  year  progressed,  demand
slackened  due to the slowing  economy  and excess  capacity  developed  in some
communications  sectors.  By  year-end,  it was evident that a number of factors
within the  telecommunications  market were  clearly  different  from those that
existed at the beginning of the year.

In   the    telecommunications    arena,   many   of   the   large   traditional
Telecommunications  Equipment  Manufacturers  (TEMs),  such  as  Lucent,  Nortel
Networks  and  Motorola  experienced  significant  losses  and  had  substantial
reductions-in-force during 2001. Coupled with "time-to-market" pressures and the
growing complexity of communications networks, there appears to be a fundamental
shift  in  their  business  models  away  from  developing  proprietary  network
equipment toward open architecture equipment.  New product programs appear to be
relying  on  the  use  of  equipment   platforms  and  software  assembled  from
third-party vendors, such as Performance Technologies, who provide open standard
products.  These vendors enable faster  "time-to-market" for their new platforms
and internal staffs to focus on proprietary applications.  So what traditionally
has been the realm of proprietary products and systems,  completely designed and
built "in-house" by major TEMs, is now migrating to an  "out-sourced"  model for
platforms and major elements of technology  used in many of the  next-generation
equipment applications.  This is an important shift in "sourcing" philosophy and
a clear opportunity for the Company, which supplies a variety of standards-based
infrastructure  products.  Management believes that despite the reduction in new
product  programs  by the TEMs,  the  pressure  to use  technologies  and system
elements provided by third-party  suppliers is now greater than at the beginning
of 2001.

The Company's products are sold into two parts of the telecommunications market:
1) The current generation of equipment in wireline (PSTN) and  wireless/cellular
networks; and 2) The newer/next-generation  networks utilizing IP communications
technology. Most of the growth realized in current generation networks is in the
wireless/cellular  area rather than the PSTN,  which  typically  involves  older
equipment architectures and is less apt to be an "open standard system design."

The second part of the communications market involves  infrastructure  equipment
for the newer/next-generation network utilizing IP communications technology and
is a target  for  many of the  Company's  contemporary  products.  An  important
concept in  next-generation  communications  systems is the  ability to converge
voice,  data and eventually video  information onto one network with a worldwide
reach.
                                        3
<PAGE>

An essential element of the convergence paradigm, especially in the voice-driven
applications  arena, is the SS7 network  signaling  protocol.  Signaling plays a
vital role in the implementation of many enhanced, value-added services, such as
local  number  portability,   800/900  toll-free  services,   wireless  roaming,
telephone calling cards, call waiting,  caller ID and greater cellular coverage.
SS7 is now  the  most  pervasive  signaling  architecture  used  by the  leading
telephone  operators and wireless carriers  worldwide.  Although  convergence of
traditional  voice networks and IP-based data networks will cause  unprecedented
change, one thing remains certain,  circuit-switched  equipment in the PSTN will
still need to communicate effectively with the packet-switched equipment in data
networks  worldwide.  This  can  only  be  achieved  through  the use of the SS7
signaling  protocol.  The  Company's  efforts  in 2001 were  heavily  focused on
providing a variety of key  technologies  and system elements for the continuing
evolution  of the current  public  telephone  network  into the  next-generation
network.

Industry analyst Venture  Development  Corporation (VDC) estimated the worldwide
market for SS7 products (both  equipment and services) at $9.4 billion for 2000,
with flat or  declining  growth in 2002,  beginning to show signs of recovery in
2003 and  accelerating  out  through  2005.  The  Company's  SEGway and  Roaming
platforms fit this  segment.  VDC predicts  steady  growth  through 2005 for the
"enabling SS7 products" (SS7 Software Stacks and Network Interface  hardware for
Embedded System  Applications) with a market size of $1.85 billion in 2000. In a
signaling market research report,  the SS7 software market was estimated at $2.0
billion in 2001 with the  non-proprietary,  open standards  products  comprising
approximately 25%, or $500 million of this market place. The Company's Signaling
Gateways,  Channel7 and SS7 Signaling Blade products  address this open standard
market segment.

While the overall demand for communications  systems slowed  dramatically during
2001 and is forecast to be  approximately  flat through 2003, the market is very
large. According to industry analyst,  Gartner Dataquest,  2001 telecom spending
was estimated at $210 billion,  growing to $224 billion in 2003.  The segment of
spending  that will be directed at  implementation  of new  infrastructure  that
utilizes  IP  Communication  technologies  will be the  smaller  segment  of the
equipment  investment,  but with a larger (and  accelerating)  growth potential.
This is the market  segment  that is a major  target for the  Company's  Network
Access, SS7/IP and Embedded Ethernet Switching products.

Another  important  potential  growth  segment  of  telecommunications   systems
involves  the  extension of the current  wireless  products to be able to handle
high speed  Internet  connectivity  as well as traditional  voice service.  Most
wireless systems in operation today are  second-generation  (2G) technology.  In
2002,  it  is  expected  that  the  rollout  of   technology,   referred  to  as
two-and-a-half  (2.5G),  will continue.  2.5G will increase the bandwidth of the
current 2G systems to allow  substantial  improvement in data services.  2.5G is
the forerunner to the next full generation of wireless networks,  referred to as
3G wireless.  Deployment of 3G technologies,  which has started,  is expected to
continue  primarily  in Asia and some  European  regions.  This will be the base
technology for an expanding list of value-added  services that will be delivered
to a new family of wireless  handheld and portable  personal digital  assistants
(PDAs)  supporting  wireless  voice,  data and  ultimately  video.  While the 3G
infrastructure  investment has been revised downward to reflect the reduction in
overall economic  activity and delays in deployment,  the carriers are facing an
increasing challenge in capacity within the existing 2G radio spectrum and there
is a need for  additional  services  to drive  continued  growth  in  subscriber
numbers. 3G is a potential solution to both issues.
                                        4
<PAGE>

Embedded system architectures built on Ethernet are manifesting  themselves in a
variety  of  formats.  However,  one of the  formats  with the  highest  rate of
adoption is the Compact Packet Switching Backplane (cPSB) standard.  It is ideal
for communications  platforms used in both wireline and wireless  infrastructure
systems but finds  applications  that are well beyond the boundaries of telecom.
The Company was  instrumental in designing and  standardizing  this new embedded
system  architecture,  built  on  the  CompactPCI  standard,  that  incorporates
Ethernet  switching into the basic functions of the embedded  platform (known as
PICMG 2.16).  While the market for this new paradigm is young,  adoption of this
standard is occurring at an unseen rate for previous  technology  change in this
area.  Industry  analysts  believe the market for this new  embedded  system had
reached a $50 million  revenue  rate at the end of 2001 (only three months after
ratification  of the standard) and will likely reach a $500 million revenue rate
by the end of 2002.  The  Company's  Ethernet  switching  products  address this
embedded system market.

Also aligned with the embedded  systems market are the Company's  network access
products.  These  products  address a general  segment that an industry  analyst
estimated to be $3.9 billion in 2001 and growing to $5.3 billion in 2003.

Certainly, changes in the general state of the economy can alter the outlook and
timing of  deployments  for a variety of  products  related  to  next-generation
networks and embedded  systems.  A dramatic  slowing of economic  growth  marked
2001,  especially in the later part of the year.  However, a variety of industry
sources  are  predicting  improved  growth  after 2002 to  fulfill  the need for
networking  equipment and the communications  industry expansion during the next
five years. A new breed of service providers has begun  construction and initial
operation of their infrastructures to create the next-generation public network,
where the Internet will also be used to carry real-time voice and video traffic.
Although IP  communications  technology  outside of the  Internet and Local Area
Networks is at an early stage of deployment,  market  analysts  estimate a large
demand for products  that exploit this  technology,  given its potential to save
money and  expand the  service  revenue  generation  of the  network  operators.
Management believes that the Company's SS7 Signaling Gateway,  embedded Ethernet
Switching and Network Access products,  designed around the Company's innovative
IPnexus  architecture,  will play a significant  role as the new  generations of
communications and embedded systems are built.

Strategy

Despite the turbulent business  conditions during 2001,  management believes the
Company's  products are well  positioned to capitalize on the growth of wireless
networks,  the Internet and the network  convergence of voice, data and emerging
broadband communications.  A central theme to improved bandwidth and services is
the use of IP communications technology in the deployment of these capabilities.
While these markets have slowed dramatically,  the consensus of industry pundits
appears to be that this growth will resume as we progress toward 2003.

Key components of the Company's business strategy include:

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

(1)       Wireless Communications - The continued growth in wireless
          communications and the opportunity to supply new, Internet-related
          wireless services are requiring wireless carriers to improve their
          infrastructure to 2.5G and ultimately to 3G architectures. The Company
          will continue to focus on developing high performance, high
          reliability SS7 Signaling, Network Access and IP Switching products to
          be sold to TEMs building equipment platforms for this market. The
          SEGway Network Products and GSM Roaming Platform are two new product
          lines introduced during 2001 for this market. (See Important Year 2001
          Milestones).

(2)       Embedded Systems - Management believes the TEM's reliance on
          standards-based embedded systems will continue to grow because of
          "time-to-market" pressures and downsizing. The Company has built a
          broad line of embedded Ethernet switching, network access and SS7
          Gateway products that are fully functional with the new PICMG 2.16
          industry specification. It is management's intent to aggressively
          pursue "design win" opportunities for these products during 2002,
          capitalizing on the Company's "first-to-market" advantage that
          resulted from the pioneering efforts in developing this standard.
          Management believes these "design wins" can translate into important
          growth as demand increases for embedded systems in a variety of
          markets.
                                        5
<PAGE>

Exploit  Technological   Competencies.   In  the  development  of  creative  and
innovative  products,  the Company will continue to build on its core  knowledge
and expertise in  communications  technologies,  particularly  in voice and data
networking, and signaling control. Despite the economic slowdown, management has
continued  to invest  heavily in new product  development.  It is the  Company's
intention to continue  performance  enhancements to its existing products and to
develop new products that address the changing needs of its customers.

Management  believes  that the  Company's  vision  and active  participation  in
developing industry standards for next-generation IP telecommunications networks
and embedded  systems  platforms  will be  important  factors in  maintaining  a
competitive edge in the Company's markets.

Leverage  Software  Expertise.  The  Company has  continued  to develop its core
communications   software   expertise  in   signaling,   data   networking   and
communications.   In  addition,   the  Company  has  invested  substantially  in
developing  "high-availability" and "hardened" software  implementations used in
embedded switching products and wide area telecommunications  applications aimed
at  carrier-grade  products.  Management  believes an  important  element of the
Company's future product  strategy is to increase the  intellectual  property in
its software products. Management also believes that the software content of its
products has a very positive influence on its gross margins.

Expand  International  Markets.  The communications and embedded systems markets
are global in scope.  Outside of North America, the Company markets its products
primarily  in  Western  Europe  and  the  Asia  Pacific  region.  As part of its
international  growth plan,  the Company has been  investing in the expansion of
its marketing,  sales and support operations in these specific geographic areas.
The  Company  operates a sales and  support  office in the United  Kingdom  that
provides coverage to Western European,  African and Middle Eastern markets. This
office was expanded during 2001 to better service these regions of the world. In
the Asia Pacific region,  the Company relies on agents to establish both OEM and
distribution  channels.   During  2000,  the  Company  also  assigned  a  senior
management level  salesperson,  based in the Company's West Coast facility,  the
full-time  duties  associated  with  developing  business in the Pac Rim. Direct
shipments to international customers amounted to 27% of revenue in 2001.

Acquisitions and  Partnerships.  The Company  continues its ongoing  acquisition
effort.  Targets  that  would  provide  additional  technology  elements  in the
embedded communication or signaling areas; expansion of the Company's ability to
integrate its products into application oriented  subsystems;  and organizations
that would expand  sales/distribution  channels are continually  being evaluated
for  acquisition.  With  changes in  enterprise  valuations  over the past 12-18
months and the Company's  strong  balance sheet,  management  believes there are
potential  acquisition  opportunities  that can accelerate  growth that were not
available  in the  past.  Seeking  opportunities  to grow  the  Company  through
appropriate inorganic additions is an important strategy element for 2002-2003.

Products

Performance  Technologies develops and markets high performance  communications,
networking    and   signaling    products   to   the   leading    suppliers   of
telecommunications,  embedded  systems  and network  equipment.  The Company has
pioneered many recent  innovations in networking and signaling  technologies and
continues  to  be a  leader  in  defining  standards  for  both  next-generation
telecommunications signaling systems and embedded system architectures that have
a broad  application  base.  New products  introduced by the Company during 2001
aggressively  implemented these standards.  Management will continue to focus on
the  development  and  delivery  of new  IP-based  products  in  three  distinct
communications   markets:   Signaling,   embedded  IP  Ethernet   Switching  and
Communications   Network   Access  built  on  both  "open"  systems  and  "open"
communications standards.

Signaling Products.  The Company's signaling products fall into three categories
including:  Signaling  Gateways,  the SEGway Network  products and SS7 Signaling
Blade.
                                        6
<PAGE>

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

Signaling products include: SS7/IP Signaling Gateways, which bridge SS7 networks
and IP data networks;  SS7 Routing Systems, which extend traditional MTP message
routing with enhanced  capabilities such as n-digit global title translation and
routing based on message parameters; and SS7 Protocol Conversion, which provides
interoperability between ANSI SS7, ITU-T C7 and numerous national variants.

During 2001, the Company continued development and deployment of a new family of
signaling  products  aimed  at SS7  system  expansion  using  IP  communications
technology.  This new  product  family  being  marketed  under the trade name of
SEGway Network  products  includes an "Edge"  product and a "Link  Concentrator"
product.  The SEGway Edge provides SS7 link  replacement and is designed to save
telecom  carriers the leasing or  provisioning  costs  associated with dedicated
long-haul SS7 links. The SEGway Link Concentrator (SLC) provides  high-level SS7
functionality to act like an IP STP, providing message consolidation and routing
capability that reduces the number of SS7 links required to terminate traffic in
SS7 networks.  In addition the SLC provides the option to route  messages to any
entity location within an SS7 network.

Management  believes the SEGway Network  products offer carriers an ideal option
to expand existing Public Switched  Telephone  Network or wireless systems using
an incremental  approach to IP network technology.  The Company's SEGway Network
solutions are appropriate for current economic conditions, as this SS7 expansion
solution  provides  carriers  the  ability  to  reduce  operating  costs in many
applications when compared to traditional SS7 expansion link.

Conforming to its philosophy for providing high  availability  products designed
to "open"  standards  for  embedded  systems,  the  Company  introduced  several
Embedded Signaling BladeTM versions of its Signaling products during 2001, which
can be integrated into  CompactPCI  (cPCI) system  platforms.  These "Blade" SS7
products will be expanded in 2002 to be fully  compliant  with the 2.16 embedded
systems standard.

The entire range of the Company's  SS7/IP  Signaling  products use an internally
developed,  network-proven,  object-oriented  SS7  protocol  stack that has been
uniquely configured to allow the use of the same software  intellectual property
across all SS7/IP product lines.

Customers  for the  signaling  gateway  products  include  Alcatel  SA,  Clarent
Corporation,  Comfone AG,  Ericsson  Telecommunications,  iBasis Inc.,  Motorola
Corporation,  Nortel Networks,  Swisscom AG, Teleglobe and TSI Telecommunictions
Services.

Embedded IP Ethernet Switching Products. The Company has background in designing
products  for high  availability  Ethernet  switching  applications.  While this
background  was  originally  targeted at enterprise  network  applications,  the
Company  focused  these  resources  during  2000 on  developing  an IP  Ethernet
switching product for embedded systems. As an important adjunct to this product,
the Company  designed a specification  that was based on technologies  that have
been  developed  for  Local  Area  Networks  but can be  applied  with  numerous
advantages in reliability,  performance,  ease of integration and time-to-market
for embedded  systems.  The  foundation  of this system  architecture,  that has
become a ratified  standard known as PICMG 2.16, is an Ethernet  switch.  During
2001 and continuing  into 2002, the Company is  aggressively  developing a broad
range of embedded Ethernet switching products. As of early 2002, the Company was
shipping four Ethernet switching products with various features and capabilities
and has  announced two new gigabit  Ethernet  switches for delivery in the first
half of the year.
                                        7
<PAGE>

Management is aggressively pursuing IP Ethernet switching opportunities with its
family of PICMG 2.16  switches  with  equipment  manufacturers  and  integrators
working with these  manufacturers.  The Company's family of embedded switches is
built on a common  software  platform  allowing  the  Company to provide a broad
range of features across the complete product offering.  These embedded Ethernet
switches and the attendant PICMG 2.16 architecture are ideal for  communications
platform  applications,  but there are many other industries where this embedded
design will offer superior cost and performance capabilities. Entering 2002, the
Company is shipping switching products into embedded systems designs for a broad
range of applications.  While the Company has realized  numerous design wins for
these  products,  there is no indication  that any of the design wins have moved
into a production volume. As a result,  management believes there is noteworthy,
unrealized growth potential as design wins move to the production phase.

Despite the general  slow-down in economic  activity in the latter half of 2001,
additional  competition is beginning to address this virgin  market.  Management
has continued  aggressive  development  and marketing of its embedded  switching
products with the objective of being the preeminent  embedded switch provider in
this marketplace. The Performance Technologies embedded IP Ethernet switches are
sold under the trade name of IPnexus for PICMG 2.16 compliance.

Announced  customers  for the  embedded IP  Ethernet  switch  products  include:
APW/Electronic Solutions, Clarent Corporation, Cognitronics Corporation, General
Dynamics,  Kaparel,  Lucent Technologies,  Nortel Networks,  Siemens AG and Soma
Networks.

Communications  Network Access Products.  The Company's  overall  Communications
Network  Access  strategy  is to develop  and  provide  products  to the leading
communications  and  telecommunications  suppliers  that  enable  voice and data
communications.   These  products  are  comprised  of  hardware,   software  and
subsystems  that  support a variety of "open"  system  platforms  and  operating
systems.   These  open  systems  include   CompactPCI   (cPCI),   PCI,  and  PMC
architectures.   Product  applications  cover  many  uses  including  high-speed
Internet connections for server products, T1/E1 products used for SS7 and T3/DS3
for trunk interfaces. To support these applications,  the Company's products are
"intelligent,"  with  embedded  microprocessors  and memory.  During  2001,  the
Company continued to enhance a family of contemporary access products introduced
in late 2000 utilizing the Company's  IPnexus  architecture that is based on the
PICMG 2.16 architecture recently ratified.

The Company offers  software  systems support for its products across a spectrum
of popular  operating  systems  including UNIX, Sun  Microsystems'  Solaris(TM),
Microsoft's  Windows NT(TM),  Wind River's  VxWorks and Linux.  The Company also
offers an extensive  suite of advanced  communications  software  consisting  of
Frame Relay, SS7, X.25, HDLC, ProtoKit (a comprehensive  development environment
allowing customers to integrate its specific protocols),  as well as ComLink and
ChanneLink which are  telecommunications-oriented  software packages designed by
the Company for operation in Sun's Solaris environment.

During 2001,  the Company  introduced a  comprehensive  communications  software
suite that is based on the Linux operating system. This new suite of software is
aimed at reducing  customer  integration  efforts and  time-to-market.  This new
suite is marketed under the trade name  NexusWare(TM) and supports the Company's
suite of communications software and the PICMG 2.16 specification.

The Company also markets a specialized  Internet Protocol (IP)/Wide Area Network
(WAN)   communications   server,   the  MPS800.   The  MPS800  provides  one  IP
Communication  port and eight  high-speed  WAN serial  ports making it ideal for
intelligent  WAN  bridging,  T1/E1  multiplexing  and remote  WAN  connectivity.
Virtually all computers  and  workstations  equipped with IP Ethernet on the LAN
can access information from these communication  servers. The Company's complete
suite of communications protocol products is available on the MPS800,  including
SS7, Frame Relay,  X.25, HDLC, Radar Receiver,  Synchronous Bit Stream Interface
and Asynchronous Data Transfer.  Using this unique software,  the communications
server can be configured for a variety of applications.
                                        8
<PAGE>

During 2001, the Company's  MPS800  achieved  substantial  usage in a variety of
applications  including air traffic  control  centers for retrieving  radar data
from remote radar antenna sites and in the U.S.  Weather Service  infrastructure
for retrieving weather satellite and radar images.

Customers   for   the   Company's    network   access   products   include   ADC
Telecommunications,  Inc., Alcatel SA, Compaq Corporation,  Lucent Technologies,
Inc.,  Motorola  Corporation,   NAVCanada,   Nortel  Networks,   Raytheon,   Sun
Microsystems, Inc., and the U.S. Weather Service.

Sales, Marketing and Distribution

The Company  markets its products  worldwide to a spectrum of customers  through
its  direct  sales  force and  various  channels  including  Original  Equipment
Manufacturers  (OEMs),  Value Added Resellers  (VARs),  distributors and systems
integrators.  Approximately 80% of the Company's North American business is sold
through the Company's direct sales force to OEMs and systems  integrators.  Much
of the remainder is sold to carriers (network operators) by the Company's direct
sales force.

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

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

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

International  sales  represented  27%, 30% and 16% of the Company's  revenue in
2001, 2000 and 1999,  respectively.  Management  believes that the international
markets continue to represent important  opportunities for its products.  During
2000 and 2001,  Performance  Technologies  increased its focus on these markets.
European operations were expanded and a senior management level sales person had
primary  responsibility  for sales in the Pac Rim. In 2002, our efforts in these
areas will be refocused consistent with our revised product focus. The Company's
products are  currently  sold by  approximately  30  international  distributors
throughout   the  more   industrialized   countries   in  Europe  and  in  Asia.
International  sales are subject to import and export  controls,  transportation
delays  and   interruptions,   foreign  currency  exchange  rates,  and  foreign
governmental  regulations.  Payments  for  shipments  from the United  States to
outside the United  States are generally  made in U.S.  dollars and payments for
shipments from Canada to Canada are generally made in Canadian dollars.

Customers

The  Company  has  over  50  active   customers   worldwide   primarily  in  the
telecommunications  and embedded  systems  markets.  Many of the Company's major
customers are Fortune 500  companies in the United States or of similar  stature
in Europe and Asia.  In 2001,  the largest  single  customer  represented  9% of
revenue and the largest four customers represented 30% of the Company's revenue.
                                        9
<PAGE>

The  Company's  products are  generally  integrated  into products for wireline,
wireless  and  next-generation  IP network  infrastructure.  These  products are
targeted at  customers in the  following  sectors:  telecommunication  equipment
manufacturers, telecommunications service providers and operators, international
wireless carriers and platform  manufacturers.  Once the Company's products have
been selected for integration into the customer's  product,  the customer has to
complete their product development,  which can take twelve to eighteen months or
longer to reach the production phase.

Backlog

At February 10, 2002, the scheduled backlog of orders was $3.2 million, compared
to $6.9 million at February 23, 2001.  A  substantial  portion of the  Company's
revenue in each  quarter  results from orders  placed  within the quarter and is
often  shipped  in the  final  month  of the  quarter.  Orders  are  subject  to
cancellation  in the  normal  course of  business;  however,  historically,  the
Company has filled  most of its firm  orders.  (See  Management's  Discussion  &
Analysis included elsewhere in this report).

Seasonality

The Company's  business is not generally  subject to large seasonal swings,  but
the revenue typically declines  sequentially from the calendar fourth quarter to
the  first   quarter  of  the  year.   Much  of  the   Company's   business   is
project-related,   driven  by  customer   demand,   which  can  cause  quarterly
fluctuations in revenue.

Environmental Matters

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

Competition

The market for communications and networking  products is intensely  competitive
and characterized by rapid  technological  innovations  resulting in new product
introductions and frequent  advances in  price/performance  ratios.  Competitive
factors in this industry  include product  performance,  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 signaling  market,  the Company  competes with  Ulticom,  Inc.,  Tekelec,
Natural  Microsystems,  Trillium  Digital  Systems,  Inc. (a subsidiary of Intel
Corp.) and several  larger  companies  that have  proprietary  SS7 technology or
products.  The  signaling  market  continues  to grow and it is likely that more
competitors  will enter this market as the telecom  market  activity  associated
with next-generation infrastructure restarts, as predicted by analysts.

The embedded IP Ethernet  switching market was a new market in 2000. The current
competitors include smaller private companies such as Zynx, Ramix and Continuous
Computing and more recently larger public companies such as Radisys Corp. and an
embedded  systems  division  of Intel  Corp.  The size of this  market  is small
compared to the enterprise Ethernet switch market.  However, larger companies in
the enterprise market may have interest in this segment if they believe that the
embedded market can become of significant size. In some cases, embedded Ethernet
switches may use merchant parts and components  produced by the larger companies
and this will represent an opportunity to increase volumes of these components.

In the network access market,  the Company's products compete with products from
Adax Incorporated,  Audiocodes Ltd., Artisan Components, Interphase Corporation,
Natural Microsystems, Radisys Corporation, and SBS Technology.
                                       10
<PAGE>

Research and Development

The Company's research and development expenses were approximately $7.9 million,
$8.9  million and $7.9  million  for 2001,  2000 and 1999,  respectively.  These
expenses consist primarily of employee costs and material consumed in developing
and  designing  new  products.  To a lesser  degree,  amounts are  expended  for
software license/tools and contract product development.  Given stable improving
economic   conditions,   the  Company  expects  to  maintain  its  research  and
development expenditure percentages in 2002.

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

Proprietary Technology

The  Company's  success  depends upon  retaining  and  maximizing  the Company's
proprietary  technologies.  To date,  the  Company has relied  principally  upon
trademark,   copyright  and  trade  secret  laws  to  protect  its   proprietary
technology.  The  Company  generally  enters  into  confidentiality  or  license
agreements  that  contain  confidentiality   provisions,   with  its  customers,
distributors and potential  customers and limits access to, and distribution of,
the source code to its software and other  proprietary  information.  All of the
Company's  employees are subject to the Company's  employment  policy  regarding
confidentiality. The Company's software products 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.  Such methods
may not  afford  complete  protection  and  there can be no  assurance  that the
confidentiality agreements will not be breached, or that such agreements will be
enforceable,  or that the Company will have adequate remedies for any breach, or
that the  Company's  trade  secrets  will not  otherwise  become  known  to,  or
independently  developed,  by competitors.  The Company has a patent application
pending. There can be no assurance that any patents will be granted, or that, if
granted,  such patents would provide the Company with meaningful protection from
competition.

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

Suppliers

In the fast paced  technology  environment,  manufacturers  frequently  obsolete
electronic  components.  Furthermore,  more  situations  are  arising  where the
Company is utilizing  sole or limited  source  components on its  products.  The
Company has generally been able to obtain adequate supplies of components or has
redesigned  specific  products when adequate  components are not available.  The
Company obtains components on a purchase order basis and does not generally have
long-term contracts with any of its suppliers.

Manufacturing

The Company maintains a  state-of-the-art  manufacturing  facility in Rochester,
New York.  There is currently no excess space in this  facility.  In April 2002,
                                       11

<PAGE>

the Company will  relocate to a new facility in the  Rochester  area with larger
manufacturing space.  Manufacturing operates under an integrated MRP system that
significantly reduces lead-time and inventory investment, and facilitates demand
forecast.  The Company's  manufacturing  facility and quality management systems
are ISO 9002 certified.  The Company's products have a high software content and
are generally produced in low volumes. By maintaining an in-house  manufacturing
capability,  management  believes  that the Company  has,  to a certain  extent,
insulated itself from the risks inherent with subcontracted manufacturing. These
risks  include the  sub-contractors  inability  to meet  flexible  manufacturing
requirements,  inventory  control and cost  containment.  In addition,  in-house
manufacturing  enables  the  Company to  maintain a high  quality  level for its
products and  timeliness  for  deliveries.  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

During January 2002, the Company  reduced its annualized  operating  expenses by
approximately $1.6 million in order to improve its cost structure.  Most of this
reduction  was the result of a lay-off  of  approximately  10% of the  Company's
staff.  As of January 31, 2002,  the Company had 168 full-time  employees,  five
part  time and  contract  employees  and five  Engineering  Cooperative  student
employees.  Management  believes its relations  with its employees are good. The
Company's employees are not subject to collective bargaining agreements.

The Company's fulltime employees work in the following areas:

             Research and Development                             82
             Marketing and Sales                                  27
             Manufacturing                                        45
             General and Administrative                           14

Through  mid-2001,  competition  for  engineering  personnel  in  the  Company's
marketplace was intense.  Up to that point in time, the use of significant stock
option and cash bonuses was prevalent in our market. Since mid-2001, engineering
personnel  seem to be more  readily  available.  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  industry   standards   change.   Additionally,   the  overall
communications  and  networking  industry  is  volatile  as the  effects  of new
technologies,  new standards,  new products and short life cycles  contribute to
changes in the  industry  and the  performance  of  industry  participants.  The
Company's  future  revenue will depend upon the Company's  ability to anticipate
technological  change and to develop and introduce  enhanced products of its own
on a  timely  basis  that  comply  with  new  industry  standards.  New  product
introductions, or the delays thereof, 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
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 its products or their  component  parts, or
the failure to achieve market  acceptance for its products would have a material
adverse effect on the Company's revenue and operating results.

Competition. The communications,  signaling and networking business is extremely
competitive and the Company faces  competition  from a number of established and
emerging start-up companies.  Many of the Company's  principal  competitors have
established  brand name recognition and market positions and have  substantially
greater experience and financial resources to deploy on promotion, advertising,
                                       12
<PAGE>


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

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

Design Wins. A design win is when a customer or  prospective  customer  notifies
the  Company  that its product has been  selected  to be  integrated  with their
product. Ordinarily, there are a number of steps between the design win and when
customers initiate production shipments. Design wins reach production volumes at
varying rates.  Historically,  this gestation  period prior to volume orders has
been twelve to eighteen months or more after the design win occurs. A variety of
risks such as schedule delays, cancellations of programs and changes in customer
markets can adversely  affect a design win from reaching the  production  phase.
The customer's failure to bring their product to the production phase would have
an adverse effect on the Company's revenue and operating results.

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

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

Dependence  on  Internal  Manufacturing.  In order to avoid  relying  on outside
contract  manufacturers,  the Company manufactures almost all of its products at
its  Rochester,  New York  facility.  The  Company  does  not  have  alternative
                                       13
<PAGE>

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  would not be able to deliver  products on a timely  basis,  which would
have a material adverse effect on the Company's  revenue and operating  results.
Although  the  Company  currently  has  business  interruption   insurance,   no
assurances can be given that such insurance will adequately  cover the Company's
lost business as a result of such an interruption.

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

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

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

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. Through
mid-2001, competition for engineering personnel in the Company's marketplace was
intense.  Since  mid-2001,   engineering  personnel  seem  to  be  more  readily
available.  Although  the  Company's  employees  are  subject  to the  Company's
employment  policy  regarding   confidentiality  and  ownership  of  inventions,
employees are generally not subject to employment  agreements or non-competition
covenants.  Changes in personnel could adversely affect the Company's  operating
results.


ITEM 2 - Properties

The corporate headquarters are currently located in 30,000 square feet of office
and manufacturing space in Rochester,  New York. Corporate  headquarters include
the  executive  offices,  along  with  the  sales,  marketing,  engineering  and
manufacturing  operations  for the  communications  and switching  groups of the
Company.  There is currently no excess office space in this  facility.  In April
2002, the Company will relocate its Rochester  operations to a new 57,000 square
foot  facility  in  the  Rochester  area.  This  new  facility  is  designed  to
                                       14
<PAGE>

accommodate  the Company's  immediate  business  requirements  while providing a
variety of expansion  options.  The Company has also  purchased land adjacent to
this new  facility  for future  expansion.  The Company  also  leases  sales and
engineering  office  space  in  San  Diego,  California  and  sales  offices  in
Connecticut  and the United  Kingdom.  The  Company's  core  signaling  group is
located in 14,000 square feet of office space in a building  located in downtown
Ottawa,  Canada. The office leases in this building expire in April 2002 and May
2003.  The Company is in the process of  finalizing  the lease  agreement on the
portion of the office that expires in April 2002.  The signaling  group also has
an engineering operation in office space in Raleigh,  North Carolina. The office
lease in this building expires in February 2005.

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.  With the
exception of the following  items,  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.

During the second  quarter  2000,  the Company  announced  that the then current
customer  order  backlog  was  not  sufficient  to  meet  revenue  and  earnings
expectations  for the  second  quarter  and given the  Company's  difficulty  in
predicting the timing of when customers would begin production shipments for the
Company's new design wins, management adjusted revenue and earnings expectations
for the second  quarter and the year.  On and after May 24, 2000,  several class
action  lawsuits were filed against the  corporation,  as well as several of its
officers and  directors,  alleging  violations of federal  securities  laws. The
lawsuits were filed in United States District Court for the Western  District of
New York.  The Lead Counsel was approved by the Court and an Amended  Complaint,
dated March 19, 2001,  was filed with the Court.  On May 18,  2001,  the Company
filed a motion to dismiss the  consolidated  complaint.  On June 25,  2001,  the
Plaintiffs  filed a memorandum of law in  opposition to the Company's  motion to
dismiss.  On July 20, 2001,  the Company  filed a  memorandum  of law in further
support  of the  Company's  motion  to  dismiss  the  Plaintiffs'  class  action
complaint.

Performance  Technologies believes these claims to be without merit, has mounted
a vigorous defense against these  allegations and no costs have been accrued for
this possible loss contingency.

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, 2001.

PART II

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

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

                  2001                            High              Low
         First Quarter                           $15.75           $10.06
         Second Quarter                           16.49            10.00
         Third Quarter                            17.40             8.22
         Fourth Quarter                          $13.55            $8.00

                  2000                            High              Low
         First Quarter                           $44.62           $16.12
         Second Quarter                           40.00             8.19
         Third Quarter                            15.50             8.50
         Fourth Quarter                          $17.31           $13.25
                                       15
<PAGE>

As of February 28, 2002,  there were 184 stockholders of record of the Company's
common stock.

To date,  the Company has not paid cash dividends on its common stock and has no
intention to do so for the foreseeable future.

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

For the Years Ended December 31:       2001     2000     1999     1998     1997
Sales                                $36,517  $38,963  $44,494  $34,118  $32,435
Income from operations                 5,186    7,050    6,226    6,047    5,271
Basic earnings per share:
   Income from operations (1)        $   .42  $   .54  $   .47  $   .46  $   .41
   Weighted average common shares     12,282   13,106   13,165   13,077   13,012
Diluted earnings per share:
    Income from operations (1)       $   .41  $   .51  $   .45  $   .45  $   .39
    Weighted average common and common
        equivalent shares             12,708   13,769   13,789   13,517   13,449

Pro forma income from operations:
    (Excluding $1.7 million charge for
     acquisition expenses in 1999)   $ 5,186  $ 7,050  $ 7,970  $ 6,047  $ 5,271
Pro forma basic earnings per share:
    (Excluding $1.7 million charge for
     acquisition expenses in 1999)(1)$   .42  $   .54  $   .61  $   .46  $   .41
Pro forma diluted earnings per share:
    (Excluding $1.7 million charge for
     acquisition expenses in 1999)(1)$   .41  $   .51  $   .58  $   .45  $   .39


At December 31:                        2001     2000     1999     1998     1997
Working capital                      $34,728  $36,975  $39,009  $32,221  $26,889
Total assets                          42,954   44,758   49,142   40,122   33,544
Long-term debt, less current portion                                  6       18
Total stockholders' equity           $38,342  $39,468  $40,828  $34,180  $28,661

(1) All per share amounts have been adjusted where appropriate, for the
    three-for-two stock splits effected in September 1999 and September 1997.
                                       16
<PAGE>

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

The  Company's  annual  operating  performance  is subject to various  risks and
uncertainties.  The following  discussion should be read in conjunction with the
Consolidated Financial Statements and related notes included elsewhere herein as
well as the  section  appearing  in Item 1 of this Form 10-K  under the  heading
"Risk  Factors."  The  Company's  future  operating  results  may be affected by
various  trends  and  factors,  which are beyond the  Company's  control.  These
include, among other factors, general business and economic conditions, rapid or
unexpected  changes in  technologies,  cancellation  or delay of customer orders
including those relating to design wins,  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.  Furthermore,  as the economic
conditions  deteriorate,  customer's visibility also deteriorates causing delays
in the  placement  of  orders.  This  results  in a  substantial  portion of the
Company's  revenue in each quarter  being  derived from orders placed within the
quarter and is often shipped in the final month of the quarter.

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 Exchange Act of 1934,
as  amended,  and are  subject  to the safe  harbor  provisions  of the  Private
Securities  Litigation  Reform Act of 1995.  The Company's  actual results could
differ materially from those discussed in the forward-looking statements.

Overview

Financial Information: All historical financial information contained herein has
been restated to reflect the acquisition of MicroLegend  Telecom Systems,  Inc.,
which was  accounted  for as a pooling of  interests  during the fourth  quarter
1999.   Furthermore,   per  share  amounts  have  been  adjusted  to  reflect  a
three-for-two stock split effected in September 1999.

The  preparation of the  consolidated  financial  statements in conformity  with
generally accepted  accounting  principles requires management to make estimates
and assumptions  that affect the reported  amounts of assets and liabilities and
disclosure of  contingent  assets and  liabilities  at year-end and the reported
amounts of revenue and expenses  during the  reporting  period.  Actual  results
could  differ from those  estimates.  The  Company  believes  that the  critical
accounting policies discussed herein can involve additional  management judgment
due to the sensitivity of the methods,  assumptions  and estimates  necessary in
determining the related asset, liability, revenue and expense amounts.

FAS 144 - In August  2001,  the FASB issued SFAS No.  144,  "Accounting  for the
Impairment or Disposal of Long-Lived  Assets." SFAS No. 144 addresses  financial
accounting and reporting for the impairment or disposal of long-lived  assets to
be held and used, to be disposed of other than by sale, and to be disposed of by
sale.  The  Statement is effective for  financial  statements  issued for fiscal
years  beginning after December 15, 2001 and interim periods within those fiscal
years, and will thus be adopted by the Company, as required, on January 1, 2002.
The adoption of SFAS No. 144 is not expected to have any impact on the Company's
consolidated financial statements at the time of adoption.

Revenue for 2001 amounted to $36.5  million,  compared to $39.0 million in 2000.
Despite the poor economic  environment in 2001,  revenue from the Company's core
Signaling,  Network  Access  and  Embedded  Switching  products  (excluding  LAN
interface and other legacy  products)  remained stable at $33.5 million in 2001,
compared to $33.5 million in 2000.  Sales  outside of North America  amounted to
$9.7 million and $11.7 million in 2001 and 2000, respectively.

Net  income  in 2001  was $5.2  million,  or $.41 per  share,  compared  to $7.0
million,  or $.51 per  share in 2000,  based on 12.7  million  and 13.8  million
shares outstanding, respectively.
                                       17
<PAGE>

Cash, cash equivalents and marketable  securities amounted to $26.9 million, and
no long-term debt existed at the end of 2001. During 2001, the Company generated
$9.0 million from operating  activities,  compared to $5.9 million  generated in
2000.  During 2001 and 2000, the Company expended $6.9 million and $8.8 million,
respectively, to buy back its shares in the open market.

Industry  Overview:  As  the  telecommunications  industry  was  entering  2001,
worldwide demand for  telecommunications  services was near its peak and telecom
service providers were experiencing unparalleled competition.  At the same time,
telecommunications  equipment  manufacturers (TEMs) were aggressively  designing
next-generation  equipment platforms to enable the convergence of voice and data
onto one  network  (Voice-over-IP)  and to upgrade  wireless  networks to handle
expanded services (2.5G and 3G wireless platforms).

Twelve  months  later,   the   telecommunications   industry  is  burdened  with
overcapacity and many second and third tier telecom service providers are out of
business or are  struggling for survival.  Most of the large  telecommunications
service providers still remaining have drastically  slashed capital  expenditure
budgets  for  2002  and  plans  for  Voice-over-IP  and  2.5G  and  3G  wireless
deployments  are of  lesser  priority.  Many of the  smaller  service  providers
remaining  will forge ahead with  next-generation  network  deployments  but the
pressure on the larger carriers has subsided for the near term.

Business Strategy:  Performance Technologies,  Incorporated (the "Company") is a
supplier of  innovative  hardware  and  software  products  for a broad range of
communications  infrastructure,  including  traditional data  communications and
wireline/wireless   telecommunication  systems.  The  Company's  forward-looking
development efforts are directed at future growth opportunities that utilize the
evolving IP (Internet  Protocol)  standards for  communications  and  networking
equipment.  IP based  communications and systems products are the foundation for
next-generation  telecommunications  systems and  services,  as well as embedded
systems for video, data communications and mass storage applications.  Customers
who use the  Company's  products and  technologies  include:  telecommunications
equipment  manufacturers  (TEMs),  communications  service  providers/operators,
international  mobile/cellular  wireless operators and embedded systems platform
suppliers/integrators.  The Company's  products are based on  open-architectures
and are focused on high availability infrastructure.

At the  beginning of 2001,  the  Company's  products  were  positioned to enable
next-generation  Voice-over-IP,  2.5G  and 3G  wireless  networks.  As the  year
progressed and the telecom environment  deteriorated,  management  continued its
engineering  development  programs on its  long-range  strategy but emphasis was
also placed on delivering solutions that could be deployed in current-generation
networks or in  next-generation  networks if a rapid payback of investment could
be demonstrated.  (See Signaling  Products (SEGway and GSM Roaming Platform) and
IP Ethernet switch products).

Management believes the most important  measurement of progress in executing the
Company's  product  and  marketing  strategies  is the number of  "design  wins"
realized  with  its  customer  base.  A  "design  win"  is  when a  customer  or
prospective  customer notifies the Company that its product has been selected to
be integrated with their product. During 2001, the Company received notification
for  thirty-five new design wins for its signaling (10), IP Ethernet switch (10)
and  network  access  (15)  products,  compared to twenty new design wins during
2000.  Ordinarily,  there are a number of steps  between the design win and when
customers  initiate  production  shipments,  which can take  twelve to  eighteen
months, or more, for customers to complete this process. Not all design wins are
expected to result in production orders.

The Company's  engineering  development  programs are directed toward  expanding
three distinct product areas: signaling products, IP Ethernet switch and network
access products.

Signaling Products: The Company's strategy is to develop signaling products that
will enable  signaling  traffic  over  less-costly  IP networks.  The  Company's
signaling  product line  includes  SS7/IP  Signaling  Gateways,  SEGway  Network
products  and the new GSM  Roaming  Platform  introduced  in January  2002.  The
Company's  signaling  products use an internally  developed  network-proven  SS7
protocol stack.
                                       18
<PAGE>

SS7/IP Signaling Gateways are designed for wireless applications such as roaming
and   transmission   of  SS7  messages   delivered  over  IP  networks  and  for
Voice-over-IP (VoIP) embedded computing platforms.

The  Company   broadened  its  signaling  gateway  product  family  in  2000  by
introducing the MicroLegend(R) 4000 Series Signaling Gateway. This was the first
signaling  gateway designed to meet the stringent  reliability,  performance and
international   interoperability   demands  of  interfacing  Internet  Telephony
networks with the Public Switched  Telephone  Network (PSTN).  Gateway  products
also  provide  users with a unique  distributed  SS7 software  environment  that
enhances reliability and expandability. In July 2001, the Company introduced the
SS7/IP  Signaling  Blade(TM).  This new  product  is a full  featured,  embedded
signaling  gateway  "system  in  a  slot,"  specifically  designed  for  telecom
equipment  manufacturers seeking to integrate SS7/IP signaling capabilities into
their current and  next-generation  chassis designs.  The SS7/IP Signaling Blade
received  the  Product of the Year Award from  Internet  Telephony  magazine  in
December 2001.

SEGway  Network  Products:  The  SEGway  Edge  product is an  innovative  SS7/IP
inter-networking device that enables wireless operators to offload long-haul SS7
traffic onto  lower-cost  IP  networks.  The Company  announced  this product in
February 2001 and customers began deployment of SEGway Edge units on a worldwide
basis in the spring of 2001.

The SEGway Link  Concentrator  reduces the need to add links to Signal  Transfer
Points (STPs) by  concentrating  SS7 traffic onto fewer,  highly utilized links.
The SEGway  Link  Concentrator  is expected  to become  available  in the second
quarter 2002. The SEGway Link  Concentrator was recognized as the Product of the
Year by  Communications  Solutions  magazine in December 2001.  Appropriate  for
current  economic  conditions,  the  Company's  SEGway  Network  solutions  give
carriers  the ability to reduce  operating  costs,  enhance  services and expand
their network by utilizing lower cost IP networks for signaling.

GSM  Roaming  Platform:  GSM is the most widely used  cellular  mobile  wireless
protocol in the world.  In January 2002, the Company  introduced the GSM Roaming
Platform.  This platform  enables  large GSM wireless  carriers to offer roaming
services to small or emerging GSM  carriers,  who may  otherwise  not be able to
offer extensive roaming coverage to their subscribers.  This product is based on
the successful deployment of this technology by a variety of customers.

Customers for the  Company's  signaling  products  include  Alcatel SA,  Clarent
Corporation,  Comfone AG,  Ericsson  Telecommunications,  iBasis Inc.,  Motorola
Corporation,  Nortel Networks, Swisscom AG, Teleglobe and TSI Telecommunications
Services.

IP Ethernet  Switching  Products  and the  Compact  Packet  Switching  Backplane
Architecture:  The Company  pioneered a new  architecture  for  embedded  system
platforms  using Ethernet and recommended  adoption of this  architecture by the
industry   standards  board,  PCI  Industrial   Computer   Manufacturers   Group
(PICMG(R)),  in September 2000.  PICMG  established a committee to evaluate this
new  architecture  and designated a member of the Company's  management  team to
chair the process. This new industry standard,  called PICMG 2.16 was adopted in
September 2001. This architecture  overlays an Ethernet switching network on the
industry-standard  CompactPCI(R)  architecture for embedded system applications.
For platform  integrators,  PICMG 2.16  dramatically  improves  scalability  and
reliability enabling an entirely new approach to system  implementation.  A wide
variety of industries including defense,  medical,  industrial  automation,  and
telecommunications  are  expected  to  utilize  this new  architecture  in their
next-generation  platforms.  Thus far, more than thirty companies have announced
products  and  platforms   utilizing  this  standard,   quickly  validating  its
acceptance.

The foundation of the PICMG 2.16 architecture is an embedded IP Ethernet switch.
In August 2000, the Company  introduced the CPC4400 embedded IP Ethernet switch,
the market's first  carrier-grade,  Layer 3 Ethernet switch utilizing CompactPCI
                                       19
<PAGE>

hardware.  During 2000 and 2001, the Company developed the IPnexus(TM) family of
new IP  Ethernet  switch and  network  access  products  based on the PICMG 2.16
architecture.  Three new IPnexus  Ethernet switch models  (CPC3400,  CPC4401 and
CPC4406)  began  shipping to  customers  in  September  2001 and two new IPnexus
Gigabit  Ethernet switch models (CPC5400 and CPC6400) are scheduled for delivery
in the first half of 2002.

The  Company's  leadership on the standards  board  committee,  coupled with the
introduction  of the IPnexus  product family,  has  significantly  increased the
Company's  visibility  within the  communications  industry  and in the broader,
platform  market.  Many of the Company's  customers are already  developing  new
system level products utilizing the PICMG 2.16 architecture.

Customers   for  the   Company's   IP  Ethernet   switching   products   include
APW/Electronic Solutions, Clarent Corporation, Cognitronics Corporation, General
Dynamics,  Kaparel,  Lucent Technologies,  Nortel Networks,  Siemens AG and Soma
Networks.

Network Access Products, Communications Server Products and NexusWare(TM): There
are three distinct networks in the communications  world today:  Voice, data and
signaling.  The Company's  network access strategy includes products that enable
voice,  data and signaling  communications  with  comprehensive  solutions  that
comprise  integrated  hardware,  software and subsystem  elements operating in a
variety of open system platforms.  The Company's software generally supports the
Solaris(TM),  Windows NT(TM),  VxWorks and Linux operating  environments  and an
extensive suite of  communication  protocols  including Frame Relay,  SS7, X.25,
HDLC and Radar Receiver.  The Company's network access and communications server
products enable current generation, as well as, next-generation networks.

Many industry  analysts believe current PCI  architectures  are reaching maximum
performance capabilities.  Developers of highly available wireless, IP telephony
and  broadband  access  platforms  are  seeking   increased  system   bandwidth,
performance  and  reliability  and  new  architectures  such as the  PICMG  2.16
architecture enable those capabilities.

During 2000 and 2001, the Company developed the IPnexus family of network access
and IP  Ethernet  switch  products  based on the PICMG  2.16  architecture.  The
Company has introduced three new carrier-grade IPnexus access products including
the CPC388 octal T1/E1/J1 adapter, the CPC395 dual T3/DS3 adapter and the PCI384
telecom adapter,  an advanced  communications  subsystem that provides wide area
networking and  communications  connectivity  for developers of  next-generation
telecom and IP telephony systems applications.

Target  applications  for  these  new  access  products  include  Time  Division
Multiplex (TDM) and trunk related tasks  associated with wireline,  wireless and
IP telephony  markets.  This includes a broad range of embedded  platforms built
for base station controllers,  radio network controllers,  HLRs/VLRs, VoIP media
gateways,  signaling  gateways,  softswitches,  enhanced  service  platforms and
integrated access devices.

NexusWare(TM)  is  a  comprehensive,   Linux-based,  operating  and  development
environment  intended for system  engineers using IPnexus products that provides
integrated   communications  protocols  to  expedite  the  development  process.
Introduced in 2001,  NexusWare enables software integration at the system level,
rather than the driver-level. This greatly simplifies the design process in both
conventional  PCI-based  systems and the  emerging  PICMG 2.16  systems  thereby
accelerating system integration and ultimately time-to-market.

The  MPS800,   an  Internet   Protocol   (IP)/Wide   Area  Network  (WAN)  based
communications  server began  shipping in  production  volumes  during 2000 to a
number of customers. The MPS800 provides a cost-effective platform that is ideal
for intelligent WAN bridging,  T1/E1  multiplexing and remote WAN  connectivity.
The Company's  extensive suite of WAN protocol software products is available on
the MPS800.
                                       20
<PAGE>

Network   access   and    communications    server    customers    include   ADC
Telecommunications,  Inc., Alcatel SA, Compaq Corporation,  Lucent Technologies,
Inc.,  Motorola  Corporation,   NAV  Canada,  Nortel  Networks,   Raytheon,  Sun
Microsystems, Inc., and the U.S. National Weather Service.

On January 15,  2002,  the  Company  announced  a  reduction  of its  annualized
operating  expenses of  approximately  $1.6 million in order to improve its cost
structure relative to the economic climate and visibility.  Management continues
to focus on the  preservation  of cash and to maintain tight fiscal control over
discretionary  expenses and hiring. At the present time, management believes the
business is sized  appropriately from a financial  perspective to take advantage
of an economic recovery as it occurs.

Results of Operations

The  following  table sets forth for the years  indicated  certain  consolidated
financial  data  expressed as a percentage of sales and is included as an aid to
understanding  the Company's  results and should be read in conjunction with the
selected  financial data and Consolidated  Financial  Statements  (including the
notes thereto) appearing elsewhere in this report:
                                                 Year Ended December 31,
                                      2001            2000           1999
                                    --------        --------       --------
Sales                                100.0%          100.0%         100.0%
Cost of goods sold                    36.5            35.3           34.1
                                    --------        --------       --------
Gross profit                          63.5            64.7           65.9
                                    --------        --------       --------
Operating expenses:
   Selling and marketing              15.2            12.6           13.0
   Research and development           21.7            22.9           17.8
   General and administrative          8.1             6.4            8.4
   Acquisition charges                                                3.9
                                    --------        --------       --------
         Total operating expenses     45.0            41.9           43.1
                                    --------        --------       --------
Income from operations                18.5            22.8           22.8

Other income, net                      2.7             5.0            3.3
                                    --------        --------       --------
Income before income taxes            21.2            27.8           26.1

Provision for income taxes             7.0             9.7           12.1
                                    --------        --------       --------
   Net income                         14.2%           18.1%          14.0%
                                    ========        ========       ========
Excluding one-time acquisition expenses:
Income before income taxes
  (Excluding $1.7 million charge for
      acquisition expenses in 1999)   21.2%           27.8%          30.0%

Provision for income taxes             7.0             9.7           12.1
                                    --------        --------       --------
   Pro forma net income               14.2%           18.1%          17.9%
                                    ========        ========       ========

Year Ended December 31, 2001, compared with the Year Ended December 31, 2000

Sales.  Total revenue for 2001 was $36.5 million,  compared to $39.0 million for
2000.  For the years  indicated,  the  Company's  products are grouped into four
distinct  categories  in  one  market  segment:  Signaling  and  network  access
products, IP Switching products,  U.S.  Government/LAN  interface products,  and
Other products.  Revenue from each product category is expressed as a percentage
of sales for 2001 and 2000 are as follows:

                                             2001                    2000
                                      ------------------     -------------------

Signaling and network access products        87%                     82%
IP Switching products                         5%                      1%
U.S. Government/LAN interface products        0%                      3%
Other                                         8%                     14%
                                      ------------------     -------------------
    Total                                   100%                    100%
                                      ==================     ===================
                                       21
<PAGE>

Signaling and Network Access  Products:  Revenue from this category  amounted to
$31.8  million  and $32.1  million in 2001 and 2000,  respectively.  The Company
broadened  its  signaling  product line and  developed  several new cPCI network
access products  during 2001. The Company has invested  heavily in new Signaling
and network access products and management  expects this product  category to be
the key revenue growth driver for the Company.

IP Switching  Products:  Revenue from this category  increased over 300% to $1.7
million in 2001,  compared to $.4 million for 2000.  The first  member of the IP
switch family,  the CPC4400 was introduced in September 2000.  Three new IPnexus
Ethernet  switch  models  (CPC3400,  CPC4401  and  CPC4406)  began  shipping  to
customers in September 2001 and two new IPnexus  Gigabit  Ethernet switch models
(CPC5400  and  CPC6400)  are  scheduled  for delivery in the first half of 2002.
Revenue  for these  products is still  modest but is  expected to increase  when
customers  move into  production  of their  new  platforms  using  the  recently
ratified PICMG 2.16 embedded architecture.

U.S.  Government/LAN  Interface  Products:  Revenue  from these U.S.  Government
projects amounted to zero and $1.1 million in 2001 and 2000, respectively.  This
sub-contract ended in June 2000.

Other product revenue:  Revenue from other products amounted to $3.0 million and
$5.4 million in 2001 and 2000,  respectively.  This revenue is related to legacy
products.  Many of  these  products  are  project  oriented  and  shipments  can
fluctuate on a quarterly basis.  Management  expects revenue from these products
to continue to decline over future periods as these technologies are replaced.

Gross Profit.  Gross profit consists of sales, less cost of goods sold including
material costs,  manufacturing  expenses,  amortization of software  development
costs,  expenses  associated with  engineering  contracts and technical  support
function  expenses.  Gross margin was 63.5% and 64.7% of sales in 2001 and 2000,
respectively. Fixed expenses spread over lower sales volumes in 2001 as compared
to 2000 impacted gross margin as a percentage of sales.

Total Operating Expenses. Total operating expenses amounted to $16.4 million and
$16.3 million in 2001 and 2000,  respectively.  As a percentage of sales,  total
operating  expenses  increased  to  45.0% in 2001,  from  41.9% in 2000.  At the
beginning of 2001, the Company  increased sales and marketing  expense levels to
garner  greater  market  share.  Beginning  in the second  quarter  through  the
remainder of the year, the Company reduced  expense levels due to  deteriorating
economic conditions.

Selling and marketing expenses amounted to $5.5 million and $4.9 million in 2001
and 2000,  respectively.  Expenditures  for  advertising,  travel and trade show
participation  were increased at the beginning of 2001 and then began  declining
in the second quarter as the economy deteriorated.

Research and development  expenses  amounted to $7.9 million and $8.9 million in
2001 and 2000,  respectively.  During 2001, the Company  focused its engineering
efforts on the  development  of the IPnexus  embedded  switch and network access
products and  broadening  its signaling  product line. In addition,  the Company
capitalized  certain software  development costs.  Amounts capitalized were $1.7
million and $.8 million for 2001 and 2000, respectively.  Gross expenditures for
engineering and software development were $9.6 million and $9.7 million for 2001
and 2000, respectively.

General and administrative expenses amounted to $2.9 million and $2.5 million in
2001 and 2000,  respectively.  An  incentive  related  expense  amounting to $.2
million was recorded to reflect the  attainment  of certain  corporate  goals in
2001. The remaining year-over-year expense increase is primarily attributable to
an increase in corporate insurance costs.

Other  Income,  net.  Other income  consists  primarily of interest  income from
marketable securities and cash equivalents.  The funds are primarily invested in
high quality Municipal and U.S. Treasury securities with maturities of less than
one year.
                                       22
<PAGE>

Income  taxes.  The provision for income taxes for 2001 is based on the combined
federal,  state and foreign  effective tax rate of 33%, compared to 35% in 2000.
Based on operational  decisions implemented during 2000, the Company was able to
utilize Canadian tax incentives to lower its net effective tax rate in 2001.

Year Ended December 31, 2000, compared with the Year Ended December 31, 1999

Sales.  Total revenue for 2000 was $39.0 million,  compared to $44.5 million for
1999. For the years  indicated,  the Company's  sales are in one product segment
and are grouped into four product  categories:  SS7 and Network Access products,
U.S.  Government/LAN   interface  products,  IP  Switching  products  and  Other
products.

SS7 and Network  Access  Products:  Revenue for this group,  which  includes the
Signaling  Gateway,  Channel7(TM) and network access products,  increased 29% to
$32.1 million in 2000, compared to $24.9 million for 1999. The Company broadened
its Signaling Gateway product line, enhanced its Channel7 products and developed
several new cPCI network access products during 2000.

U.S.  Government/LAN  Interface  Products:  Revenue  from these U.S.  Government
projects  amounted  to  $1.1  million  and  $13.5  million  in  2000  and  1999,
respectively.  Beginning  in  1994,  the  Company  had  contracts  with  various
sub-contractors,  including Lockheed Martin, to provide the U.S. Government with
legacy LAN Interface  products for various Navy programs.  These contracts ended
in June 2000.

IP Switching Products:  Revenue from this new embedded IP switch product was not
meaningful for 2000. In August 2000, the Company introduced the CPC4400 embedded
IP Ethernet switch,  the market's first  carrier-grade,  Layer 3 Ethernet switch
utilizing industry-standard cPCI hardware.

Other product revenue:  Revenue from other products amounted to $5.4 million and
$6.1  million  in 2000  and  1999,  respectively.  Other  products  include  the
Company's  legacy  products.  Many of these  products  are project  oriented and
shipments can fluctuate on a quarterly basis.

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  amounted to $25.2  million and $29.3  million in 2000 and
1999,  respectively.  Gross  margin  was 65% and 66% of sales in 2000 and  1999,
respectively.

Total Operating Expenses. Total operating expenses amounted to $16.3 million and
$19.2 million in 2000 and 1999,  respectively.  As a percentage of sales,  total
operating  expenses  increased to 41.9% in 2000,  from 39.2% in 1999,  excluding
one-time acquisition charges of $1.7 million. During 2000, the Company increased
its investment in research and development to develop new signaling  gateway and
embedded IP Ethernet switch products, and reduced its general and administrative
expenses.

Selling and marketing expenses amounted to $4.9 million and $5.8 million in 2000
and 1999, respectively. As a percentage of revenue, sales and marketing expenses
were reduced slightly in 2000 in order to increase the investment in new product
development.  In late 1999, the allowance for doubtful accounts was increased by
$.5 million due to a significant  OEM customer  closing their doors for business
in January 2000.

Research and development  expenses increased to $8.9 million, or 23% of sales in
2000,  compared  to $7.9  million,  or 18% of  sales  in 1999.  The  market  for
next-generation  network products expanded considerably as wireline and wireless
IP networks  became more widely  deployed  during 2000 and the Company  invested
significantly  in the development of new products in order to be positioned as a
leading supplier in this market.
                                       23
<PAGE>

General and administrative  expense amounted to $2.5 million,  or 6% of sales in
2000, compared to $3.8 million (excluding one-time acquisition charges) or 8% of
sales in 1999.  The  majority  of this  expense  decline is  attributable  to no
management incentive bonus being earned in 2000. In 1999, acquisition charges of
$1.7 million  consisted  primarily of fees for  investment  bankers,  attorneys,
accountants and other related charges.

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

Income Taxes. The provision for income taxes for 2000 is based upon the combined
federal and state  effective tax rate of 35%,  compared to 46% in 1999. The year
2000 was PTI's first full year with Canadian  operations.  Based on  operational
decisions  implemented  during 2000,  PTI was able to take  advantage of certain
Canadian tax incentives that began benefiting the Company in 2000. For 1999, the
net   effective   tax  rate  is  much  higher  than  normal   primarily  due  to
non-deductible acquisition charges.

Liquidity and Capital Resources

At December 31, 2001, the Company's  primary  source of liquidity  included cash
and cash  equivalents of $26.9 million and available  borrowings of $5.0 million
under a bank revolving credit facility.  No amounts were outstanding  under this
credit  facility as of December  31,  2001.  The Company had working  capital of
$34.7 million and $37.0 million at December 31, 2001 and 2000, respectively.

Cash generated by operating  activities was $9.0 million,  $5.9 million and $7.7
million in 2001, 2000 and 1999, respectively.

During 2001, cash provided by investing  activities was $7.0 million.  Investing
activities included the maturity of marketable  securities of $10.0 million, and
property and capital equipment purchases of $1.3 million. Land was purchased for
$.4  million  for  future  expansion  adjacent  to the  Company's  newly  leased
facility.  Capital  equipment  purchases  of $.9 million  consist  primarily  of
manufacturing  equipment,  office  equipment and computer and related  equipment
used in  engineering.  In addition,  the Company  capitalizes  certain  software
development costs.  Amounts capitalized and included within investing activities
were  $1.7  million,  $.8  million  and $.2  million  in 2001,  2000  and  1999,
respectively.

In August 2000,  the Board of Directors  authorized  the repurchase of up to one
million shares of the Company's Common Stock and the Company repurchased 342,000
and 658,000 of its common shares in 2001 and 2000, respectively.  The total cost
of repurchasing  such shares was $4.7 million and $8.8 million in 2001 and 2000,
respectively. This program was completed in March 2001.

In March 2001, the Board of Directors authorized the repurchase of an additional
five hundred  thousand  shares of the Company's  Common Stock.  During 2001, the
Company  repurchased  a total of 206,000  shares at a total cost of $2.2 million
under this program.

Assuming there is no significant  change in the Company's  business,  management
believes that its current cash,  cash  equivalents,  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 and capital expenditure  requirements,  for at
least the next twelve  months.  However,  an  unfavorable  determination  in the
outstanding  class action litigation could have a material adverse effect on the
Company's working capital.  Furthermore,  management is continuing its strategic
acquisition  program to further  accelerate  new product and market  penetration
efforts.  This program  could have an impact on the Company's  working  capital,
liquidity or capital resources.
                                       24
<PAGE>

Notes:  Solaris  is a  trademark  of  Sun  Microsystems,  Inc.  Windows  NT is a
trademark  of  Microsoft  Corporation.  IPnexus,  Channel7,  NexusWare,  SEGway,
Signaling Blade and MicroLegend are trademarks of Performance Technologies, Inc.

ITEM 7A - Quantitative and Qualitative Disclosures About Market Risk

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

ITEM 8 - Financial Statements and Supplementary Data

Index to Financial Statements:                                             Page

   Report of Independent Accountants                                        25
   Consolidated Balance Sheets at December 31, 2001 and 2000                26
   Consolidated Statements of Income for the Years Ended
      December 31, 2001, 2000 and 1999                                      27
   Consolidated Statements of Changes in Stockholders' Equity
      for the Years Ended December 31, 2001, 2000 and 1999                  28
   Consolidated Statements of Cash Flows for the Years Ended
      December 31, 2001, 2000 and 1999                                      29
   Notes to Consolidated Financial Statements                               30

Index to Financial Statement Schedules:

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

                        Report of Independent Accountants


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, 2001
and 2000,  and the results of their  operations and their cash flows for each of
the three  years in the  period  ended  December  31,  2001 in  conformity  with
accounting principles generally accepted in the United States of America.  These
financial  statements are the  responsibility of the Company's  management;  our
responsibility  is to express an opinion on these financial  statements based on
our audits.  We conducted  our audits of these  statements  in  accordance  with
auditing  standards  generally  accepted in the United States of America,  which
require that we plan and perform the audit to obtain reasonable  assurance about
whether the financial  statements  are free of material  misstatement.  An audit
includes  examining,  on a test  basis,  evidence  supporting  the  amounts  and
disclosures in the financial  statements,  assessing the  accounting  principles
used and  significant  estimates made by management,  and evaluating the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.


/s/PricewaterhouseCoopers LLP
-----------------------------
PricewaterhouseCoopers LLP

Rochester, New York
February 5, 2002
                                       25

<PAGE>



             PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS


                                     ASSETS

                                                             December 31,
                                                        2001             2000
                                                   -----------     ------------
Current assets:
   Cash and cash equivalents                       $26,913,000     $ 17,187,000
   Marketable securities                                              9,995,000
   Accounts receivable, net                          6,905,000        7,393,000
   Inventories, net                                  3,756,000        5,788,000
   Prepaid expenses and other                          359,000          745,000
   Deferred taxes                                      608,000          679,000
                                                   -----------     ------------
       Total current assets                         38,541,000       41,787,000

Property, equipment and improvements, net            2,465,000        2,119,000
Software development costs, net                      1,948,000          852,000
                                                   -----------     ------------
       Total assets                                $42,954,000     $ 44,758,000
                                                   ===========     ============
                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Accounts payable                                $   417,000     $  1,347,000
   Income taxes payable                                350,000          219,000
   Accrued expenses                                  3,046,000        3,246,000
                                                   -----------     ------------
       Total current liabilities                     3,813,000        4,812,000

Deferred taxes                                         799,000          478,000
                                                   -----------     ------------
       Total liabilities                             4,612,000        5,290,000
                                                   -----------     ------------
Commitments and contingencies

Stockholders' equity:
   Preferred stock-$.01 par value; 1,000,000 shares
     authorized; none issued
   Common stock-$.01 par value; 50,000,000 shares
     authorized; 13,260,038 shares issued              133,000          133,000
   Additional paid-in capital                       11,305,000       12,375,000
   Retained earnings                                40,239,000       35,053,000
   Treasury stock-at cost, 1,024,547 and 598,313
     shares held at December 31, 2001 and 2000,
     respectively                                  (13,284,000)      (8,042,000)
   Accumulated other comprehensive loss                (51,000)         (51,000)
                                                   -----------     ------------
       Total stockholders' equity                   38,342,000       39,468,000
                                                   -----------     ------------
       Total liabilities and stockholders' equity  $42,954,000     $ 44,758,000
                                                   ===========     ============

   The accompanying notes are an integral part of these consolidated financial
   statements.
                                       26

<PAGE>


             PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME





                                                Year Ended December 31,
                                          2001           2000           1999
                                      -----------    -----------    -----------

Sales                                 $36,517,000    $38,963,000    $44,494,000
Cost of goods sold                     13,327,000     13,768,000     15,174,000
                                      -----------    -----------    -----------
Gross profit                           23,190,000     25,195,000     29,320,000
                                      -----------    -----------    -----------
Operating expenses:
   Selling and marketing                5,534,000      4,889,000      5,767,000
   Research and development             7,941,000      8,926,000      7,906,000
   General and administrative           2,946,000      2,497,000      3,756,000
   Acquisition charges                                                1,744,000
                                      -----------    -----------    -----------
       Total operating expenses        16,421,000     16,312,000     19,173,000
                                      -----------    -----------    -----------
Income from operations                  6,769,000      8,883,000     10,147,000

Other income, net                         971,000      1,947,000      1,478,000
                                      -----------    -----------    -----------
Income before income taxes              7,740,000     10,830,000     11,625,000

Provision for income taxes              2,554,000      3,780,000      5,399,000
                                      -----------    -----------    -----------
       Net income                     $ 5,186,000    $ 7,050,000    $ 6,226,000
                                      ===========    ===========    ===========


Basic earnings per share              $       .42    $       .54    $       .47
                                      ===========    ===========    ===========
Diluted earnings per share            $       .41    $       .51    $       .45
                                      ===========    ===========    ===========





Weighted average number of common shares
   used in basic earnings per share    12,282,400     13,105,953     13,164,903
Common equivalent shares                  425,661        663,080        623,976
                                      -----------    -----------    -----------
Weighted average number of common shares
   used in diluted earnings per share  12,708,061     13,769,033     13,788,879
                                      ===========    ===========    ===========





   The accompanying notes are an integral part of these consolidated financial
   statements.
                                       27
<PAGE>



             PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<S>           <C>                <C>         <C>          <C>         <C>       <C>


                                                                     Accumulated
                                 Additional                            Other
                Common Stock      Paid-in    Retained     Treasury Comprehensive
              Shares   Amount     Capital    Earnings      Stock   Income (Loss)  Total
            ------------------- ----------- ----------- ------------- --------- -----------

Balance -
 January 1,
 1999        9,632,144 $ 97,000 $13,228,000 $21,777,000 $   (917,000) $ (5,000) $34,180,000

1999 net income                               6,226,000                           6,226,000
Currency
 translation
 adjustment                                                             33,000       33,000
Exercise of
 options         4,500              928,000                  334,000              1,262,000
Issuance of
 options                            715,000                                         715,000
Tax benefit
 option plan                         62,000                                          62,000
Three-for-two
 stock split 3,735,056   37,000     (37,000)
Purchase of
 treasury
 stock -
 91,584 shares                                            (1,650,000)            (1,650,000)
Retirement of
 treasury
 stock        (185,174)  (2,000) (2,231,000)               2,233,000
            ---------- -------- ----------- ----------- ------------- --------- -----------
Balance -
 December 31,
 1999       13,186,526  132,000  12,665,000  28,003,000                 28,000   40,828,000

2000 net income                               7,050,000                           7,050,000
Currency
 translation
 adjustment                                                            (79,000)     (79,000)
Excise of
 options and
 warrants       73,512    1,000    (304,000)                 783,000                480,000
Tax benefit
 option plan                         14,000                                          14,000
Purchase of
 treasury
 stock - 658,200
 shares                                                   (8,825,000)            (8,825,000)
            ---------- -------- ----------- ----------- ------------- --------- -----------
Balance -
 December 31,
 2000       13,260,038  133,000  12,375,000  35,053,000   (8,042,000)  (51,000)  39,468,000

2001 net income                               5,186,000                           5,186,000
Currency
 translation
 adjustment
Exercise of options
 and warrants                    (1,089,000)               1,630,000                541,000
Tax benefit
 option plan                         19,000                                          19,000
Purchase of
 treasury
 stock - 547,334
 shares                                                   (6,872,000)            (6,872,000)
            ---------- -------- ----------- ----------- ------------- --------- -----------
Balance -
 December 31,
 2001       13,260,038 $133,000 $11,305,000 $40,239,000 $(13,284,000) $(51,000) $38,342,000
            ========== ======== =========== =========== ============= ========= ===========
</TABLE>



   The accompanying notes are an integral part of these consolidated financial
   statements.
                                       28
<PAGE>



             PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                               Year Ended December 31,
                                          2001           2000           1999
                                     ------------   ------------   -------------
Cash flows from operating activities:
   Net income                        $  5,186,000   $  7,050,000   $  6,226,000
   Non-cash adjustments:
     Depreciation and amortization      1,537,000      1,313,000      1,545,000
     Provision for bad debts              152,000        (70,000)       602,000
     Reserve for inventory obsolescence   708,000      1,027,000        779,000
     Deferred income taxes                392,000        595,000       (764,000)
     Compensation expense                                               715,000

   Changes in operating assets and liabilities:
     Accounts receivable                  336,000      2,131,000     (4,255,000)
     Inventories                        1,324,000     (2,915,000)      (228,000)
     Prepaid expenses and other           386,000        (63,000)       410,000
     Accounts payable and
       accrued expenses                (1,130,000)    (1,407,000)     1,210,000
     Income taxes payable                 150,000     (1,760,000)     1,434,000
                                     ------------   ------------   -------------
       Net cash provided by
       operating activities             9,041,000      5,901,000      7,674,000
                                     ------------   ------------   -------------
Cash flows from investing activities:
   Purchases of property, equipment
     and improvements                  (1,325,000)    (1,348,000)    (1,047,000)
   Capitalized software
     development costs                 (1,654,000)      (819,000)      (168,000)
   Purchase of marketable securities       (5,000)   (17,988,000)   (23,007,000)
   Maturities of marketable securities 10,000,000     30,000,000      1,000,000
                                     ------------   ------------   -------------
       Net cash provided (used) by
       investing activities             7,016,000      9,845,000    (23,222,000)
                                     ------------   ------------   -------------
Cash flows from financing activities:
   Repayment of debt                                      (6,000)       (12,000)
   Exercise of stock options and warrants 541,000        480,000        543,000
   Purchase of treasury stock          (6,872,000)    (8,825,000)      (932,000)
                                     ------------   ------------   -------------
       Net cash used by financing
       activities                      (6,331,000)    (8,351,000)      (401,000)
                                     ------------   ------------   -------------
       Net increase (decrease) in cash
       and cash equivalents             9,726,000      7,395,000    (15,949,000)

Cash and cash equivalents at
beginning of year                      17,187,000      9,792,000     25,741,000
                                     ------------   ------------   -------------
Cash and cash equivalents at end
of year                              $ 26,913,000   $ 17,187,000   $  9,792,000
                                     ============   ============   =============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid                        $              $              $     15,000
Income taxes paid                    $  2,033,000   $  5,005,000   $  4,319,000

Non-cash financing activity: Exercise of stock options using 800, 100 and 46,849
   shares of common stock in 2001, 2000 and 1999,
   respectively                      $     10,000   $      4,000   $    718,000


   The accompanying notes are an integral part of these consolidated financial
   statements.
                                       29
<PAGE>

             PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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

The Company: Performance Technologies,  Incorporated (the Company) was formed in
1981 under the laws of the State of Delaware and maintains its corporate offices
in Rochester, New York. The Company designs, develops,  manufactures and markets
communications and networking  products that enable the convergence of wireline,
wireless and next-generation Internet Protocol networks.

Segment Data,  Geographic  Information  and Significant  Customers:  The Company
operates in one  industry  segment.  Export  sales to  customers  outside  North
America  represent  27%,  30% and 16% of sales for the years ended  December 31,
2001,  2000 and 1999,  respectively.  For 2001,  2000 and 1999,  four  customers
accounted for approximately  30%, 32% and 43%,  respectively,  of sales, with no
single  customer  representing  greater than 9%, 12% and 23%,  respectively,  of
sales.

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

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

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

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

Fair Value of  Financial  Instruments:  The  carrying  amounts of the  Company's
financial   instruments,   including  cash  and  cash  equivalents,   marketable
securities,  accounts receivable and accounts payable approximate fair values at
December 31, 2001,  as the maturity of these  instruments  are  generally  short
term.

Cash Equivalents:  The Company considers all highly liquid investments purchased
with an original maturity of three months or less to be cash equivalents.
                                       30
<PAGE>

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

Marketable  Securities:  The Company has classified  all of its marketable  debt
securities  as held to  maturity  and has  accounted  for these  investments  at
amortized cost.  Marketable  securities  classified as held to maturity are high
credit quality securities in accordance with the Company's investment policy.

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

Revenue Recognition: The Company adopted the SEC Staff Accounting Bulletin (SAB)
No. 101, "Revenue  Recognition in Financial  Statements," for 2000. In doing so,
the Company did not incur any adjustments to revenue. Revenue is recognized upon
product  shipment.  Revenue from  arrangements  for software  systems  requiring
significant production, modification, or customization of software is recognized
over the contract period as performance  milestones are fulfilled.  Revenue from
consulting  and  other  services  is  recognized  at the time the  services  are
rendered.  Any anticipated losses on contracts are charged to operations as soon
as such losses are determined.  Revenue from software  maintenance  contracts is
recognized ratably over the contractual period, or as the service is performed.

Property,  Equipment and Improvements:  Property, equipment and improvements are
stated at cost. Depreciation of equipment and improvements is provided for using
the straight-line method over the following estimated useful lives:

     Engineering equipment and software 3-5 years
     Manufacturing equipment            3-5 years
     Furniture and equipment            3-5 years
     Leasehold improvements             the lesser of 10 years or the lease term

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

Long-Lived  Assets:  The Company regularly assesses all of its long-lived assets
for impairment when events or circumstances  indicate their carrying amounts may
not be  recoverable,  in  accordance  with  Statement  of  Financial  Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets."

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

Advertising: Advertising costs are expensed as incurred and recorded in "Selling
and marketing" in the  Consolidated  Statements of Income.  Advertising  expense
amounted  to  $249,000,   $244,000  and  $254,000  for  2001,   2000  and  1999,
respectively.

Software Development Costs: On a product-by-product  basis, software development
costs incurred subsequent to the establishment of technological  feasibility and
prior to general release of the product are capitalized and amortized commencing
after general release 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.
                                       31
<PAGE>


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

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

Earnings Per Share:  Basic earnings per share is computed by dividing net income
available by the weighted  average number of common shares  outstanding  for the
period. Diluted earnings per share calculations reflect the assumed exercise and
conversion of dilutive employee stock options and warrants applying the treasury
stock method.  Dilutive  earnings per share  calculations  exclude the effect of
approximately  864,000,  236,000  and 85,000  options  for 2001,  2000 and 1999,
respectively, since such options have an exercise price in excess of the average
market price value of the Company's common stock.

Stock-Based  Compensation:  Stock-based  compensation  costs  are  deferred  and
recognized  over the vesting  period in accordance  with  Accounting  Principles
Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," based on
the  difference,  if any,  between the quoted  market  price of the stock on the
grant date and the exercise price.  Awards to non-employees are accounted for at
fair value following SFAS 123. In early 1999, a compensation  charge of $715,000
was recorded to operating  expenses for the issuance of stock options granted to
MicroLegend  employees with an exercise price below the fair market value of its
common stock.

Note B - Business Combination

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

The following  information  presents  certain pro forma income statement data of
the separate companies for the period preceding the merger:
                                               Nine months ended
                                                 September 30,
                                                    1999
                                                 -----------
                                                 (unaudited)
Revenue:
   Performance Technologies, Inc.                $28,060,000
   MicroLegend Telecom Systems, Inc.               3,539,000
                                                 -----------
                                                 $31,599,000
                                                 ===========
Net income (loss):
   Performance Technologies, Inc.                $ 5,665,000
   MicroLegend Telecom Systems, Inc.                (952,000)
                                                 -----------
                                                 $ 4,713,000
                                                 ===========
                                       32
<PAGE>

During  the year ended  December  31,  1999,  the  Company  recorded a charge to
operating expenses of approximately $1.7 million,  or $.12 per common share, for
costs pertaining to the merger transaction.

Note C - Accounts Receivable, net

Accounts receivable consisted of the following:           At December 31,
                                                       2001             2000
                                                   -----------      -----------
Accounts receivable                                $ 7,189,000      $ 7,579,000
Less:  allowance for doubtful accounts                (284,000)        (186,000)
                                                   -----------      -----------
      Net                                          $ 6,905,000      $ 7,393,000
                                                   ===========      ===========
Note D - Inventories, net

Inventories consisted of the following:                   At December 31,
                                                       2001             2000
                                                   -----------      -----------
Purchased parts and components                     $ 1,329,000      $ 2,656,000
Work in process                                      2,778,000        3,959,000
Finished goods                                         468,000          297,000
                                                   -----------      -----------
                                                     4,575,000        6,912,000
Less:  reserve for inventory obsolescence             (819,000)      (1,124,000)
                                                   -----------      -----------
      Net                                          $ 3,756,000      $ 5,788,000
                                                   ===========      ===========
Note E - Property, Equipment and Improvements, net

Property, equipment and improvements consisted
of the following:                                         At December 31,
                                                        2001             2000
                                                   -----------      -----------
Land                                               $   407,000      $
Engineering equipment and software                   3,876,000        3,504,000
Manufacturing equipment                              1,313,000        1,345,000
Furniture and equipment                              1,364,000        1,268,000
Leasehold improvements                                 166,000          143,000
                                                   -----------      -----------
                                                     7,126,000        6,260,000
Less:  accumulated depreciation and amortization    (4,661,000)      (4,141,000)
                                                   -----------      -----------
       Net                                         $ 2,465,000      $ 2,119,000
                                                   ===========      ===========
Total depreciation and amortization expense for equipment and improvements for
2001, 2000 and 1999 was $975,000, $894,000 and $775,000, respectively.

Note F - Accrued Expenses

Accrued expenses consisted of the following:              At December 31,
                                                        2001             2000
                                                   -----------      -----------
Accrued compensation                               $ 1,294,000      $ 1,143,000
Accrued professional services                          329,000          416,000
Deferred revenue                                       917,000          793,000
Other accrued expenses                                 506,000          894,000
                                                   -----------      -----------
      Total                                        $ 3,046,000      $ 3,246,000
                                                   ===========      ===========
                                       33
<PAGE>

Note G - Credit Agreements

At December 31, 2001,  the Company had a revolving  credit loan agreement with a
bank under which it can borrow up to $5 million which expires in November  2002.
Borrowings  bear interest either at the bank's prime rate or the one-month LIBOR
rate plus applicable  basis points as outlined in the agreement.  Borrowings are
collateralized  by trade accounts  receivable,  inventory,  equipment,  contract
rights and  intangibles.  The  agreement  requires  the Company to meet  certain
financial and non-financial  covenants.  The Company was in compliance with such
covenants at December 31, 2001.  There were no balances  outstanding  under this
agreement  at  December  31,  2001 and 2000.  The annual fee on the credit  loan
agreement is immaterial.

Note H - Commitments

The Company leases  facilities and equipment under operating  leases.  The lease
agreement  for the current  facility in Rochester,  N.Y.  expires in April 2002.
During 2001, the Company  entered into a lease  agreement for its new Rochester,
N.Y. corporate headquarters and manufacturing facility that is expected to begin
in April  2002.  Under the terms of the lease that  expires in March  2012,  the
Company  agrees to pay an annual  rental of  $740,000  in the first  year,  with
predetermined  adjustments for each year thereafter.  For both lease agreements,
the  Company is also  required  to pay the pro rata  share of the real  property
taxes  and  assessments,  expenses  and  other  charges  associated  with  these
facilities.  The Company has leased facilities in its other operating  locations
in North America that expire between 2002 through 2005.

Future minimum lease  payments for all operating  leases having a remaining term
in excess of one year at December 31, 2001 are as follows:
                                                          Operating Leases
                                                          ----------------
          2002                                              $  825,000
          2003                                                 888,000
          2004                                                 865,000
          2005                                                 771,000
          2006                                                 754,000
          Thereafter                                         4,059,000
                                                            ----------
Total minimum lease payments                                $8,162,000
                                                            ==========
Rental expense  amounted to $908,000,  $830,000 and $787,000 for 2001,  2000 and
1999, respectively.

Note I - Stockholders' Equity

On February 9, 2000,  the  stockholders  approved an  amendment  to the Restated
Certificate of Incorporation to increase the number of authorized common shares,
from 15 million shares to 50 million shares.

During 1999 pursuant to a stock  repurchase  program  authorized by the Board of
Directors  in 1998,  the Company  repurchased  44,735 of its common  shares at a
total cost of $932,000  under this  program.  On December 10, 1999,  the Company
terminated  this stock  repurchase  program.  In  connection  with the  business
combination with MicroLegend Telecom Systems,  Inc., the Company retired 185,174
shares of Treasury  stock  acquired at an average  cost of $12.06 per share,  or
$2.2 million.

In August 2000,  the Board of Directors  authorized  the repurchase of up to one
million shares of the Company's common stock and the Company repurchased 341,800
and 658,200 of its common shares in 2001 and 2000, respectively.  The total cost
of  repurchasing  such shares was  $4,699,000  and  $8,825,000 in 2001 and 2000,
respectively. This program was completed in March 2001.

In March 2001, the Board of Directors authorized the repurchase of an additional
five hundred  thousand  shares of the Company's  common stock.  During 2001, the
Company  repurchased  a total of 205,534  shares at a total  cost of  $2,173,000
under this program.
                                       34
<PAGE>

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

Note J - Stock Option Plan

In 1986, the Company  established  the 1986 Incentive Stock Option Plan pursuant
to which the Board of Directors  reserved  2,700,000  shares of common stock for
grant. On February 9, 2000, the stockholders  approved an amendment to the Stock
Option Plan to increase, by 500,000 shares, the number of authorized shares that
may be issued pursuant to this Plan. On May 31, 2001, the stockholders  approved
the 2001  Incentive  Stock  Option Plan  pursuant to which  1,500,000  shares of
common  stock were  reserved  for grant.  The 2001  Incentive  Stock Option Plan
replaced  the 1986 plan which  expired on December  31,  2001.  276,000  options
available for issuance  under the 1986 plan were  cancelled upon adoption of the
2001 plan.  Options  may be granted to any  officer or employee at not less than
the fair  market  value at the date of grant  (not  less  than  110% of the fair
market  value in the case of  holders of more than 10% of the  Company's  common
stock).  Options granted under the plans generally expire five or six years from
the date of grant and generally vest over three, four or five years.

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

The following table summarizes stock option activity under these plans:

                                                  Weighted-Average     Option
                                Number of Shares   Exercise Price    Price Range

Outstanding at January 1, 1999     1,009,607         $ 5.89       $1.01 - $ 9.75
Granted                              385,375         $13.60       $8.15 - $18.75
Exercised                           (253,164)        $ 4.91       $1.22 - $ 9.75
Expired                              (26,400)        $ 8.49       $1.22 - $ 9.17
                                   ----------
Outstanding at December 31, 1999   1,115,418         $ 8.72       $1.22 - $18.75
Granted                              526,375         $15.14       $9.00 - $28.75
Exercised                            (77,249)        $ 5.38       $1.22 - $ 9.75
Expired                              (64,013)        $14.09       $5.94 - $28.75
                                   ----------
Outstanding at December 31, 2000   1,500,531         $10.91       $4.44 - $28.75
Granted                              572,950         $13.85       $8.00 - $14.50
Exercised                            (65,650)        $ 7.36       $4.44 - $10.25
Expired                             (189,001)        $15.05       $6.17 - $28.75
                                   ----------
Outstanding at December 31, 2001   1,818,830         $11.54       $4.83 - $28.75
                                   ==========
At December 31, 2001,  929,086 options were  exercisable  and 1,427,800  options
were  available  for future grant under the stock  option plan.  During 2001 and
2000,  warrants for 56,250 shares for each year,  issued at fair market value in
1995,  were exercised at an exercise  price of $1.22 per share.  At December 31,
2001, there are no warrants outstanding.
                                       35
<PAGE>

The  Company  has  adopted  the  disclosure  only  provisions  of SFAS No.  123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation cost has
been recognized for the stock option plan. Had  compensation  cost for the stock
option plan been determined based on the fair value at the grant date for option
awards  consistent with the provisions of SFAS No. 123, the Company's net income
would have been reduced to the pro forma amounts of  $3,487,000,  $4,570,000 and
$4,765,000,  respectively.  Basic  earnings per share would have been reduced to
the pro forma amounts of $.28, $.35 and $.36, respectively. Diluted earnings per
share would have been reduced to the pro forma  amounts of $.27,  $.33 and $.34,
respectively.  The assumption  regarding the annual vesting of stock options was
25% for options  granted in 2001 and 33% for  options  granted in 2000 and 1999,
respectively.  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 2001, 2000 and 1999:  Dividend
yield of 0%; expected volatility of 64%, 63% and 65%; risk-free interest rate of
4.7%, 6.2% and 5.4%; and expected lives of four years in 2001 and three years in
2000 and 1999, respectively.

Note K - Stockholder Rights Plan

On October 27, 2000,  the  Company's  Board of Directors  adopted a  Stockholder
Rights Plan. Under this plan, one Preferred Stock Purchase Right was distributed
as a dividend for each share of common stock held by the  stockholders of record
as of the close of business of November 8, 2000. Until the occurrence of certain
events,  the Rights are traded as a unit with the common stock.  Each Right will
separate and entitle  stockholders  to buy stock upon the  occurrence of certain
events  generally  related to the change of control of the Company as defined in
the Plan. The Rights become  exercisable ten days after either (1) an "Acquiring
Person"  acquires  or  commences  a tender  offer to acquire  15% or more of the
Company's  Common Stock, or (2) an "Adverse  Person" has acquired 10% or more of
the  Company's  common stock and the Board  determines  this person is likely to
cause  pressure  on the Company to enter into a  transaction  that is not in the
Company's best long-term interest. All Rights not held by an Acquiring Person or
an Adverse Person become rights to purchase from the Company one  one-thousandth
of one share of Preferred Stock at an initial  exercise price of $110 per Right.
Each Right  entitles the holder of that Right to purchase the equivalent of $220
worth of the Company's common stock for $110. If after such an event the Company
merges,  consolidates  or engages in a similar  transaction in which it does not
survive,  each  holder has a "flip over"  right to buy  discounted  stock in the
surviving entity.

The  Company may redeem the Rights for $.001  each.  The Rights Plan  expires on
November 1, 2010 or can be modified or terminated, at the option of the Board of
Directors.

Note L - Income Taxes

Pre-tax  earnings and provision for income taxes  consisted of the following for
the years ended December 31, 2001, 2000 and 1999:
                                     2001              2000             1999
Pre-tax earnings:                -----------       -----------      -----------
   United States                 $ 6,265,000       $ 9,784,000      $12,065,000
   Outside United States           1,475,000         1,046,000         (440,000)
                                 -----------       -----------      -----------
   Total pre-tax earnings        $ 7,740,000       $10,830,000      $11,625,000
                                 ===========       ===========      ===========

The provisions for income taxes were as follows:
                                     2001              2000             1999
Current income tax expense:      -----------       -----------      -----------
   Federal                       $ 1,551,000       $ 2,874,000      $ 4,603,000
   State                             198,000           288,000          765,000
   Foreign                           401,000            99,000          610,000
                                 -----------       -----------      -----------
                                   2,150,000         3,261,000        5,978,000
Deferred provision (benefit)         404,000           519,000         (579,000)
                                 -----------       -----------      -----------
   Total provision               $ 2,554,000       $ 3,780,000      $ 5,399,000
                                 ===========       ===========      ===========
                                       36
<PAGE>


Reconciliation  of the statutory U.S. federal income tax rate to effective rates
were as follows:
                                              2001           2000          1999
                                              -----          -----         -----
Federal income tax at statutory rate          34.0%          34.0%         35.0%
State tax provision, net of federal benefit    1.7            1.8           4.2
Acquisition charges                                                         6.0
Other                                         (2.7)           (.9)          1.2
                                              -----          -----         -----
   Effective tax rate                         33.0%          34.9%         46.4%
                                              =====          =====         =====

The net deferred income tax balance consists of the following:
                                                       At December 31,
Deferred tax liabilities                             2001          2000
                                                -----------    -----------
Capitalized software development cost, net      $ (682,000)    $ (321,000)
Difference in tax basis of assets                  (22,000)       (84,000)
Investment tax credit                              (95,000)       (73,000)
                                                -----------    -----------
   Total deferred tax liabilities               $ (799,000)    $ (478,000)
                                                ===========    ===========
Deferred tax assets
Accrued vacation, payroll and other accrued
   expenses                                     $  111,000     $  108,000
Inventory obsolescence reserve and other
   inventory related items                         320,000        427,000
Bad debt reserve                                    87,000         55,000
Research tax credits                                16,000         17,000
Other                                               74,000         72,000
                                                -----------    -----------
   Total deferred tax assets                       608,000        679,000
                                                -----------    -----------
     Net deferred tax (liability) asset         $ (191,000)    $  201,000
                                                ===========    ===========
As  of  December  31,  2001,  no  deferred  taxes  have  been  provided  on  the
undistributed earnings of its Canadian subsidiary,  as the Company does not plan
to initiate any action that would require the payment of income taxes. It is not
practicable  to estimate the amount of  additional  tax that might be payable on
these undistributed earnings.

Note M - Research and Software Development Costs

The Corporation incurred research and software development costs relating to the
development of new products as follows:

                                           2001          2000           1999
                                        ----------    ----------     ----------
Gross expenditures for engineering
   and software development             $9,595,000    $9,745,000     $8,074,000
Less:  amounts capitalized              (1,654,000)     (819,000)      (168,000)
                                        ----------    ----------     ----------
   Net charged to operating expenses    $7,941,000    $8,926,000     $7,906,000
                                        ==========    ==========     ==========
Software Development costs consisted of the following:
                                                   At December 31,
                                                2001             2000
                                             ----------       ----------
Capitalized software development costs       $5,202,000       $3,548,000
Less:  accumulated amortization              (3,254,000)      (2,696,000)
                                             ----------       ----------
   Net                                       $1,948,000       $  852,000
                                             ==========       ==========
Amortization  of software  development  costs included in cost of goods sold was
$558,000, $419,000 and $770,000 for 2001, 2000 and 1999, respectively.
                                       37
<PAGE>


Note N - Employee Benefit Plans

For its operations in the United States,  the Retirement  Savings Plan qualifies
under  Section  401(k) of the  Internal  Revenue  Code.  Discretionary  matching
contributions by the Company to the plan were $99,000, $133,000 and $116,000 for
2001, 2000 and 1999,  respectively.  In conjunction  with its Flexible  Benefits
plan,  the Company made  additional  discretionary  qualified  contributions  to
employee  accounts which vest  immediately  amounting to $119,000,  $139,000 and
$134,000 for 2001, 2000 and 1999, respectively.

For its operations in Canada, contributions were made to a Registered Retirement
Savings  Plan  (RRSP)  that  is   administered   by  the  Canadian   government.
Discretionary  matching  contributions  to the Plan were $186,000,  $190,000 and
$34,000 for 2001, 2000 and 1999, respectively.

Note O - Litigation

Following the Company's  announcement  on May 19, 2000 regarding its preliminary
results of operations for the second quarter, several class action lawsuits were
filed against the Corporation, as well as several of its officers and directors,
alleging  violations  of federal  securities  laws.  The lawsuits  were filed in
United States  District  Court for the Western  District of New York and request
unspecified  monetary  damages.  The Lead Counsel has been approved by the Court
and an Amended  Complaint,  dated March 19, 2001, has been filed with the Court.
On May 18,  2001,  the  Company  filed a  motion  to  dismiss  the  consolidated
complaint.  On June  25,  2001,  the  Plaintiffs  filed a  memorandum  of law in
opposition to the  Company's  motion to dismiss.  On July 20, 2001,  the Company
filed a memorandum of law in further support of the Company's  motion to dismiss
the Plaintiffs' class action complaint.

Management  believes that the claims contained in these actions  described above
are  without  merit  and the  Company  intends  to  defend  against  the  claims
vigorously.  In the opinion of management,  resolution of this litigation is not
expected  to have a material  adverse  effect on the  financial  position of the
Company.  However,  depending  on the amount and timing of such  resolution,  an
unfavorable  resolution  of this matter could  materially  affect the  Company's
future results of operations or cash flows in a particular period. No costs have
been accrued for this possible loss contingency.

The Company is subject to various other legal  proceedings and claims that arise
in the ordinary course of business. In the opinion of management,  the amount of
any ultimate  liability with respect to these actions will not materially affect
the financial position of the Company.

Note P - Transactions with Related Parties

The Company  leases its primary  facility in Rochester,  New York from an entity
controlled  by two  directors of the Company.  During 2001,  2000 and 1999,  the
Company paid rent of $347,000, $335,000 and $323,000,  respectively, for the use
of this location. (Note H)

Note Q - Subsequent Event- Restructuring Plans

On January 15, 2002, the Company  announced  plans to improve its cost structure
primarily  through  reductions  in the  Company's  staff.  This  plan  has  been
completed and resulted in a reduction in workforce of approximately  10%. During
the first  quarter of 2002,  the  Company  will record a  restructuring  charge,
primarily related to severance costs, of $163,000.
                                       38
<PAGE>


Note R - Quarterly Results (unaudited)

The following is a summary of unaudited  quarterly results of operations for the
years ended December 31, 2001 and 2000.
                                                    2001
                                                 ----------
                                   (in thousands, except per share data)
                           Mar. 31        Jun. 30          Sept. 30      Dec. 31
                           -------        -------          -------       -------
Sales                      $ 9,700        $ 9,444          $ 9,871       $ 7,502
Gross profit                 5,891          5,833            6,493         4,973
Income from operations       1,364          1,638            2,456         1,311
Net income                   1,152          1,259            1,770         1,005

Basic earnings per share   $  0.09        $  0.10          $  0.14       $  0.08
                           =======        =======          =======       =======
Diluted earnings per share $  0.09        $  0.10          $  0.14       $  0.08
                           =======        =======          =======       =======

                                                    2000
                                                 ----------
                                   (in thousands, except per share data)
                           Mar. 31        Jun. 30          Sept. 30      Dec. 31
                           -------        -------          -------       -------
Sales                      $11,594        $ 8,089          $ 9,244       $10,036
Gross profit                 7,793          5,366            6,268         5,768
Income from operations       3,467          1,242            1,961         2,213
Net income                   2,436          1,119            1,521         1,974

Basic earnings per share   $  0.18        $  0.08          $  0.12       $  0.15
                           =======        =======          =======       =======
Diluted earnings per share $  0.17        $  0.08          $  0.11       $  0.15
                           =======        =======          =======       =======

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

None.

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 4, 2002, 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 4, 2002,
sets forth  certain  information  with respect to the  directors  and  executive
officers 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 4, 2002,
sets forth certain information with respect to the compensation of management of
the Company and is incorporated herein by reference.
                                       39
<PAGE>


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 4, 2002,  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 4, 2002,
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.
                                       40

<PAGE>


PART IV

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

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

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

(3)      Exhibits
Exhibit        Ref.
Number         Number      Description
3.1            (1)         Restated Certificate of Incorporation
3.2            (5)         Certificate of Amendment
3.3            (1)         Amended By-laws
4.1            (1)         Form of Common Stock Certificate
4.2            (1)         Amended and Restated 1986 Incentive Stock Option Plan
4.4            (6)         February 2000 Amendment to Amended and Restated 1986
                              Incentive Stock Option Plan
4.5            (7)         Rights Agreement
4.6            (9)         2001 Incentive Stock Option Plan
10             (1)         Material Contracts
10.1           (3)         Revolving Credit Agreement dated as of December 30,
                              1998 between the Registrant and The Chase
                              Manhattan Bank, N.A. - as amended
10.2           (3)         Revolving Credit Note in the amount of $5,000,000
                              dated December 30, 1998 given by the Registrant to
                              The Chase Manhattan Bank, N.A.
10.3           (1)         Security Agreements granted by the Registrant to The
                              Chase Manhattan Bank, N.A. dated as of April 13,
                              1985, April 13, 1993 and as of June 17, 1993  and
                              with respect to Performance Computer Corporation
                              only, the Security Agreement dated as of June 17,
                              1993 granted to The Chase Manhattan Bank, N.A. by
                              Performance Computer Corporation and certain other
                              Affiliates of the Registrant (which other
                              Affiliates have been released) and all amendments
                              and modifications thereto
10.10          (1)(10)     Sublease Agreement between the Registrant and C & J
                              Enterprises dated as of September 1, 1990 - as
                              amended
10.16          (1)         License Agreement between the Registrant and Spider
                              Systems Limited dated March 18, 1992
10.28          (1)         Adoption Agreement between the Registrant and
                              Principal Mutual Life Insurance Company dated
                               September 20, 1993
10.29          (1)         The Principal Financial Group Prototype Basic Savings
                             Plan dated May 7, 1990
10.30          (1)         Form of Stock Option Agreement
10.31          (1)         Form of Warrant Agreement
10.32          (4)         Share Acquisition Agreement between Registrant and
                              MicroLegend Telecom Systems, Inc. as of December
                              2, 1999
10.33          (4)         Amendment to Share Acquisition Agreement between
                              Registrant and MicroLegend Telecom Systems, Inc.
                             as of December 10, 1999
10.33a         (10)        Lease Agreement dated as of May 19, 2001 between the
                              Registrant and Christa PT, LLC
10.33b         (10)        First Amendment to Lease dated as of July 19, 2001
                              between the Registrant and Christa PT, LLC
10.33c         (10)        Second Amendment to Lease dated as of July 31, 2001
                              between the Registrant and Christa PT, LLC
                                       41
<PAGE>

21             (8)           Subsidiaries
23.1           (*)           PricewaterhouseCoopers Consent
--------------------------------------------------------------------------------
(1)  Incorporated by reference to the Registrant's Registration Statement on
     Form S-1 filed November 22, 1995.
(2)  Incorporated by reference to the Registrant Statement on Form S-8 filed
     July 30, 1997.
(3)  Incorporated by reference to the Annual Report on Form 10-K filed March
     30,1999.
(4)  Incorporated by reference to the Registrant Statement on Form S-3 filed
     January 28, 2000.
(5)  Incorporated by reference to the Annual Report on Form 10-K filed on March
     30, 2000.
(6)  Incorporated by reference to the Registrant Statement on Form S-8 filed
     June 21, 2000.
(7)  Incorporated by reference to the Registrant Statement on Form 8-A filed
     November 8, 2000.
(8)  Incorporated by reference to the Annual Report on Form 10-K filed on March
     30, 2001.
(9)  Incorporated by reference to the Registration Statement on Form DEF 14A
     filed on April 27, 2001.
(10) Incorporated by reference to the Registrant Statement on Form 10-Q filed on
     August 14, 2001.

(*)  Filed with this form 10-K

(4)  Reports on Form 8-K

         None
                                       42


<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

Date:  March 27, 2002                         By:/s/ Donald L. Turrell
                                                     -----------------
                                                     Donald L. Turrell
                                                     President and
                                                     Chief Executive Officer

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


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

       Signature                   Title                               Date


/s/John M. Slusser        Chairman of the Board                   March 27, 2002
-----------------------
John M. Slusser           and Director

/s/Donald L. Turrell      President, Chief Executive              March 27, 2002
-----------------------
Donald L. Turrell         Officer and Director

/s/Dorrance W. Lamb       Chief Financial Officer, and            March 27, 2002
-----------------------
Dorrance W. Lamb          Vice President of Finance

/s/Bernard Kozel          Director                                March 27, 2002
-----------------------
Bernard Kozel

/s/Charles E. Maginness   Director                                March 27, 2002
-----------------------
Charles E. Maginness

/s/Stuart B. Meisenzahl   Director                                March 27, 2002
-----------------------
Stuart B. Meisenzahl

/s/John E. Mooney         Director                                March 27, 2002
-----------------------
John E. Mooney

/s/Paul L. Smith          Director                                March 27, 2002
-----------------------
Paul L. Smith

/s/Arlen Vanderwel        Director                                March 27, 2002
-----------------------
Arlen Vanderwel
                                       43
<PAGE>
                                                                   Exhibit 23.1

                       Consent of Independent Accountants

To the Board of Directors and Stockholders of
Performance Technologies, Inc.

We hereby consent to the incorporation by reference in the Registration
Statement on Form S-3 (No. 333-94371) and S-8 (No. 333-24477) of Performance
Technologies, Incorporated of our report dated February 5, 2002 relating to the
financial statements and financial statement schedules, which appears in this
Form 10-K.

/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP

Rochester, New York
March 27, 2002