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

                                    FORM 10-K
(Mark One)
         [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
             EXCHANGE ACT OF 1934 (No Fee Required)
                     For the Fiscal Year Ended December 31, 2004
                                       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
           of incorporation)                                 Identification No.)

205 Indigo Creek Drive, Rochester, New York                         14626
 (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. [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [  ]

The aggregate market value of the voting stock held by non-affiliates of the
registrant as of the close of business on June 30, 2004 was approximately
$106,889,000.

The number of shares outstanding of the registrant's Common Stock, $.01 par
value, was approximately 12,851,777 as of March 2, 2005.

                       Documents Incorporated by Reference
The information called for by Items 10-14 of Part III is incorporated by
reference to the definitive Proxy Statement for the Annual Meeting of
Stockholders of the Company to be held June 2, 2005, which will be filed with
the Securities and Exchange Commission not later than 120 days after December
31, 2004.
--------------------------------------------------------------------------------

<PAGE>







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


PART I                                                                     Page
------

ITEM 1     Business                                                          3
ITEM 2     Properties                                                       17
ITEM 3     Legal Proceedings                                                17
ITEM 4     Submission of Matters to a Vote of Security Holders              18


PART II
-------

ITEM 5     Market for the Registrant's Common Equity, Related Stockholder
            Matters and Issuer Purchases of Equity Securities               18
ITEM 6     Selected Financial Data                                          19
ITEM 7     Management's Discussion and Analysis of Financial
            Condition and Results of Operations                             19
ITEM 7A    Quantitative and Qualitative Disclosures About Market Risk       35
ITEM 8     Financial Statements and Supplementary Data                      35
ITEM 9     Changes in and Disagreements with Accountants on
            Accounting and Financial Disclosure                             57
ITEM 9A    Controls and Procedures                                          57
ITEM 9B    Other Information                                                58

PART III
--------

ITEM 10    Directors and Executive Officers of the Registrant               58
ITEM 11    Executive Compensation                                           58
ITEM 12    Security Ownership of Certain Beneficial Owners
            and Management and Related Stockholder Matters                  58
ITEM 13    Certain Relationships and Related Transactions                   59
ITEM 14    Principal Accountant Fees and Services                           59

PART IV
-------

ITEM 15    Exhibits and Financial Statement Schedule                        60




<PAGE>

ITEM 1 - Business

Overview

Performance Technologies, Incorporated (the "Company") is a supplier of
platforms, components, software, and service solutions for the embedded systems
marketplace that can be used in a broad range of applications and end markets.

Since its founding in 1981 as a Delaware corporation, the Company has
consistently designed innovative embedded products and component solutions that
focus on attributes such as reduced time-to-market, enhanced performance, high
availability and cost advantages for a user base that includes communications,
military and commercial applications. The Company has a history of successfully
adapting its products and services to a constantly changing, technology-driven
marketplace through the course of several business cycles that have occurred
since its founding.

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
technological changes accompanied by frequent new product introductions,
competitive pressures, dependence on key customers, the attainment of design
wins, fluctuations in quarterly and annual results, the reliance on a limited
number of third party suppliers, limitations of the Company's manufacturing
arrangements, the protection of the Company's proprietary technology, the
dependence on key personnel, changes in critical accounting estimates, potential
delays associated with the purchase and implementation of an advanced planning
and scheduling system and potential impairments related to investments. In
addition, during weak economic periods, customers' visibility deteriorates
causing delays in the placement of their orders. These factors often result in a
substantial portion of the Company's revenue being derived from orders placed
within a quarter and shipped in the final month of the same quarter.

The Company's Web site address is www.pt.com. The Company makes available free
of charge via a hypertext link on its Web site, its annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments
to those reports as soon as reasonably practicable after such material is
electronically filed with or furnished to the Securities and Exchange Commission
("SEC"). The Company will provide this information upon written request to the
attention of the Chief Financial Officer, Performance Technologies,
Incorporated, 205 Indigo Creek Drive, Rochester, New York 14626. Information is
also available through the SEC Web site at www.sec.gov or at the SEC Public
Reference Room at 450 Fifth Street, N.W. Washington, D.C. 20549 or by calling
1-800-SEC-0330.

Important Year 2004 Milestones

2004 was a year of contrasting results for the Company. Our Advanced Managed
Platform strategy showed promise with significant design wins at key customers
and with the addition of a new value-added support and services, the Company
continued to strengthen its position as a broad based, integrated platform
supplier. However, consolidation amongst companies in the telecommunications
space left several existing customer programs in an uncertain state.

The telecommunications segment of the market, which the Company serves, is
dependent on carriers spending to upgrade network infrastructure to
next-generation equipment. In the first quarter 2004, the carriers increased
spending on infrastructure upgrade, but for the remainder of 2004, carrier
spending was limited, and only directed toward niche applications such as media
gateways, rather than on general infrastructure upgrading.

During most of 2004, the uncertainty in the telecommunications sector placed
pressure on the Company's revenue and operating earnings. However, after several
quarters of uncertain conditions in our target markets, the fourth quarter
exhibited positive signs of increased customer demand for the Company's
products.

To best focus its resources in 2004, management targeted a number of programs to
strengthen and promote our platform products and business.

These initiatives included:

1)   Further expansion of our Advanced Managed Platform Product line: Critical
     to our growth is the ongoing development of our fully managed, packet-based
     platforms and spreading our message to those customers looking to take
     greater advantage of outsourcing options. The Advanced Managed Platform
     architecture offers distinct cost advantages which allow developers of
     next-generation systems to reduce design complexity while increasing
     overall system reliability and performance. From a market perspective, the
     Advanced Managed Platform line is a viable alternative to proprietary
     platforms and directly addresses equipment manufacturers' requirements for
     designing high availability into their applications using a flexible and
     scalable architecture. Since the introduction of the Advanced Managed
     Platform, the Company has realized more than 25 new design wins of varying
     sizes for its integrated platform products.

2)   Further Development of Innovative, Packet-Based IP Products: The Company
     developed and introduced an impressive portfolio of new products in 2004
     directed at IP/packet-based communication applications including:

              Gigabit Embedded Ethernet Switches: The Company's focus in 2004
              was the enhancement of its Ethernet switch software with
              carrier-grade network routing and security capabilities. Since the
              introduction of our Gigabit class products, the Company's family
              of embedded Ethernet switching products has grown by more than
              100% each year since 2002.

              Intelligent Shelf Manager: In the spring 2003, the Company
              introduced the Intelligent Shelf Manager (ISM). This product is a
              key differentiating factor of the Company's Advanced Managed
              Platforms and is an important requirement for customers because it
              enables the overall management of individual components in an
              embedded platform, including third-party supplied embedded
              products. During 2004, NexusWare(TM) ISM was introduced adding the
              power of an open source Linux application to support operation of
              the ISM function.

              Network Access Products: During 2004, the Company launched the
              first in a series of new products based on unique, intelligent,
              single or multi-processor hardware architecture. This new product
              family is intended to offer powerful packet processing solutions
              for emerging "user based" services that will become an important
              economic element in contemporary IP-based networks.

              Network Processing, Voice Processing and Compute Products: The
              Company expanded its line of network processing engines, voice
              processing products and Intel-based single board computers for
              embedded applications during 2004. These new products are designed
              to utilize the advancing capability of microprocessor and memory
              technologies.

              SEGway(TM) Signaling Products: During 2004, the Company introduced
              five new industry-leading products which enable the migration of
              signaling traffic from traditional networks to IP-based networks.

3)   Extension of the Company's Significant Suite of Software: The Company's
     software products and expertise continue to be a key differentiating factor
     for Performance Technologies' products. Many of these products are sold
     under the trade name NexusWare, which is based on the popular and rapidly
     growing Linux operating system. Performance Technologies announced major
     enhancements to its NexusWare software during 2004. This product has
     evolved to become the overarching software environment for all components
     in our Advanced Managed Platforms. Management believes that the NexusWare
     software provides distinct user advantages unmatched by competitive
     offerings and is an important enabler for our customers.

4)   Expansion of the Signaling Products Sales Efforts: Our concerted efforts in
     2004 to focus on Carriers, Service Providers and Telecom Equipment
     Manufacturers (TEMS) with our SEGway Signaling products proved successful.
     During 2004, the Company realized several significant design wins with Tier
     1 and Tier 2 carriers, service providers and TEMs that are expected to
     result in meaningful revenue in 2005 and beyond.

5)   Expanded Presence in the Asia Pacific Region: The Company believes a direct
     presence is critical to be a successful supplier in the Asia Pacific
     region. During 2004, additional people and resources were committed to
     increase our exposure in the region and several new design wins were
     realized for our Advanced Managed Platform products.

6)   Continued  Acquisition  Activities:  Management continued to use
     acquisitions as a part of the Company's growth strategy in 2004:

        Mapletree Networks, Inc.(R): In January 2004, the Company
        completed the acquisition of Mapletree Networks, a company that
        provides voice, data and fax processing products using Digital
        Signal Processing (DSP) technology to original equipment
        manufacturers. These new products have been integrated with the
        Company's network access products and integrated platforms to
        enable the Company to compete more effectively in the re-emerging
        voice over IP (VoIP) and wireless communications markets.

Industry Overview

The Company is a supplier of embedded systems platforms, components and software
products that are based on open standards. These platform solutions can be
specifically configured using various components, often from multiple suppliers,
to meet a variety of end applications found in market segments such as
telecommunications infrastructure, data communications infrastructure, military
communications infrastructure and industrial systems.

As 2004 began, the Company's customers, who are primarily equipment
manufacturers in the telecom and data communications market segments, continued
to maintain tight cost controls, limit engineering resources and proceed with
realigning their business models. These fiscal controls created a more
concentrated supplier landscape for 2004 that is trimmer, but more highly
focused on market opportunities. It was not just these equipment manufacturers
who made such adjustments. Across the technology sector, many organizations
downsized staffs and tightened cost controls, including many of our customers
and suppliers.

Industry market research organizations, such as Dataquest and Venture
Development Corporation, are estimating the worldwide, embedded systems market
to be over $100 billion in size by 2008. Traditionally, the largest segment of
this market uses "proprietary," purpose-built embedded systems and products.
Embedded systems built on open standards comprise a smaller segment of this
market, which is estimated to grow to over $10 billion by 2008. While
proprietary systems are expected to continue to dominate this market in the
future, a growing share of embedded systems being implemented, especially in the
more limited market segments served by the Company, is expected to use open
standards-based products. The driving factors behind this changing paradigm
remain twofold. First, systems are becoming increasingly integrated, more
complex, requiring larger investments and longer lead times to design. Second,
as organizations have downsized over the past several years, they have not
replaced the necessary staff to carry out extensive new product development
while successfully meeting the competitive pressures of "time-to-market" found
in most technology businesses. Due to these changes, telecom and data
communications equipment manufacturers are increasing their reliance on
companies such as Performance Technologies to deliver major building blocks or
complete platforms. This allows these suppliers to concentrate their efforts and
expertise on their "value add" which has typically become software and/or
additional hardware elements directed at specific applications.
Many equipment manufacturers entered 2004 with new business models not only in
the research and development areas, but also in purchasing, logistics and supply
groups. Due to these circumstances, many customers welcome the opportunity to
limit their number of suppliers and form strategic relationships with
organizations that have broader capabilities.

Management believes that the products and capabilities acquired from the Intel
Communications Platform Group in 2002 and from Mapletree Networks in 2004 have
substantially expanded the markets served by the Company and have enabled the
Company to become a more strategic partner to our customers.

Over the past several years, the Company has refined its ability to supply
embedded platforms based on the contemporary use of Ethernet technology as an
integral element of the system design. This forward-looking approach to building
embedded systems was created by Performance Technologies' engineers and has
earned the Company a leading position in the industry as this innovative concept
reached standardization and became widely adopted in the embedded marketplace.
During 2004, all Advanced Managed Platform design wins for the Company were
based on this standard, showing widespread acceptance by equipment manufacturers
who incorporated this standard into their next-generation products. Central to
this new system architecture is the use of an embedded Ethernet switch and
Ethernet technology for communication between the blades in a system, and System
Management blades to provide much greater levels of control and reliability for
carrier-grade communications systems. Our engineering expertise continues to
place the Company in a favorable position to participate and win new design
opportunities with customers.

To further bolster its Advanced Managed Platform products, the Company continued
aggressive development of its comprehensive line of embedded Ethernet switches.
Despite a modest economy, the Company's Ethernet switches have had noteworthy
adoption among major customers and again showed 100% revenue growth in 2004, as
they did in 2003. It is management's belief that the Company is the leading
supplier of carrier grade capability with its embedded switching technology and
that this product line will continue to be a key element of the Company's
Advanced Managed Platform product family. These switch products are also
expected to provide noteworthy growth as a stand-alone component sold for third
party integration into customer's embedded platforms.

On a broader but related market observation, management expects its business to
show overall improvement in 2005 based on the ongoing number of public
announcements from carriers concerning capital spending for next-generation
network infrastructure. The telecommunications segment of the market is
dependent on the carriers capital spending directed at upgrading their network
infrastructure to next-generation equipment. In the first quarter 2004, carriers
increased spending on infrastructure upgrade, but for the remainder of 2004,
carrier spending was limited to narrow applications, rather than broader
infrastructure upgrade investment. After several quarters of uncertain
conditions in our target markets through 2004, the fourth quarter showed
positive signs of increased customer demand for our products.

Also, telecommunications as a whole is continuing to demonstrate noteworthy
growth in the European and Asia-Pacific regions. Our presence in the European
region continues to expand with significant customers in the UK, France and
Israel. Asian operators and equipment manufacturers, such as NTT, Huawei,
Samsung and LG have demonstrated growth and strength. Mobile phone growth in the
Asia-Pacific region is also continuing to grow and future networks in this
region will no doubt be IP based because of its low price point and ease of
implementation. Based on the Company's IP network focus, these geographic areas
are expected to show important market acceptance of the Company's products.

Strategy

The Company has a history of successfully adapting its products and services to
a constantly changing technology-driven marketplace. This adaptation has been
demonstrated through the course of several business cycles that have occurred
since its founding in 1981. During the most recent economic downturn, the
Company maintained its commitment to aggressively fund new product development,
as well as to use its strong balance sheet to acquire additional products and
technologies to strengthen its market position.

Beginning in 2003, a new product strategy was adopted. This strategy
repositioned the Company to deliver fully managed, system-level platform
solutions to the embedded systems marketplace. An important milestone in this
strategy was achieved in September 2003 with the introduction of the Advanced
Managed Platform product line. Throughout 2004, the Company focused its
operating efforts on this strategy. This new line of platform solutions
specifically addresses equipment manufacturers' requirements for an increased
level of system integration and services from suppliers. The Company's new
platform products enable "downsized" or limited engineering staffs of equipment
manufacturers' to improve time-to-market for their new products. The Company's
strategy addresses this trend by enabling customers to replace proprietary or
legacy platforms with the latest generation of fully managed system
functionality.

In early 2004, the Company completed the Mapletree Networks acquisition, adding
important voice processing technology to its product offerings for its
communications customers.

With these acquisitions and investments, management believes the Company has
moved from a position of addressing approximately 20% of the available market
served in 2002, to a position of addressing over 60% of the available market
served by the end of 2004.

The Company's initiatives identified for 2005 are as follows:

         Emphasis on Product Innovation: The Company currently funds its
         engineering organization with nearly 20% of every revenue dollar.
         During 2005, management expects to continue to drive the development of
         new products in an effort to offer our customers critical advances in
         technology and to outpace our competition.

         Leveraging Product Capabilities: Management expects to develop a number
         of products for selected high growth IP-based applications including
         media gateway, media server, wireless, voice-over-cable and satellite
         communications. Key for 2005 will be to successfully develop and
         combine certain hardware and software elements from our product
         portfolio to form intelligent embedded solutions which add value for
         application providers in these target markets.

         Expansion of the Company's Customer Base Outside of North America: In
         2004, the EMEA and APAC regions showed noteworthy growth for the
         Company. Management plans to continue to aggressively market to
         potential customers in these regions throughout 2005.

         Continue Acquisition Activities: During 2005, the Company will continue
         to seek additional opportunities to accelerate growth through external
         initiatives. These efforts are targeted at adding products to the
         Advanced Managed Platform product line as well as application areas
         which can add value in addressing customer requirements.

         Greater Operational Efficiency: Multiple efforts are underway during
         2005 to improve the Company's cost structure and operational
         efficiency. These initiatives include centralizing accounting and
         manufacturing operations into corporate operations in Rochester,
         New York. In addition to lowering operating costs, management believes
         consolidated operations will also enable the Company to offer a higher
         service level to our customers.

Certainly, there are identifiable risks associated with carrying out the
Company's expansive corporate and product strategies in the current uncertain
economic climate. Many of the Company's end markets are forecasted to show only
modest growth in 2005. In order to realize growth in this environment, the
Company will have to gain market share from competitors. However, management
believes that based on its analysis of the marketplace and the Company's
strengthened and innovative product portfolio, the identified risks are
manageable. If successful, management believes these initiatives will continue
to reposition the organization as an important strategic partner with many of
its customers, thereby increasing their utilization of the Company's broadened
product capabilities. As the business cycle starts to show improvement, it is
further expected that these ongoing 2005 initiatives can yield significant
rewards through accelerated revenue and profitability growth.

Management expects to continue to leverage top-line growth and decrease
operating expense levels during the year. With an improving business environment
and revenue expansion, the Company should move toward higher levels of
profitability.

Products

Performance Technologies is a supplier of platforms, components, software
solutions and service offerings for the embedded systems marketplace that can be
used in a broad range of applications including telecommunications, data
communications, industrial, military and commercial.

The Company markets its products under a variety of brand names including
IPnexusTM, SEGway, NexusWare and Advanced Managed Platforms.

The overall embedded systems product line offered by the Company is based on
open standards architectures and consists of a wide range of building blocks,
which can be mixed and matched to construct packet-based integrated platforms.

Over the course of 2004, the Company continued to commercialize various platform
configurations allowing customers to select the appropriate platform, components
and software to fit system and application requirements with full confidence
that all elements have been designed to work together.

Advanced Managed Platforms: In September 2003, the Company introduced a new line
of application ready platforms marketed under the trade name Advanced Managed
Platform (AMP). Today, this product line contains the Company's latest
generation of configurable, fully-managed and redundant packet-based platforms
targeted at communications applications, which leverage all of our IPnexus
component-based products. This new platform line is based on an architecture
referred to as PICMG 2.16, which is an embedded technology developed by the
Company and adopted as an industry standard. The Company's Advanced Managed
Platforms offer distinct cost advantages while allowing developers of
next-generation systems to reduce design complexity with increased overall
system reliability and performance. From a market perspective, the Advanced
Managed Platform line continues to prove itself as a viable alternative to
proprietary platforms and directly addresses equipment manufacturers'
requirements for designing high availability into their applications using a
flexible and scalable architecture. Since the introduction of the Advanced
Managed Platform, the Company has realized more than 25 design wins of varying
sizes for its integrated platform products. As of December 2004, a small number
of these design wins had reached production levels. Based on discussions with
customers, management expects an additional number of these design wins to reach
production during 2005.

Key elements of the Company's Advanced Managed Platform products include:

         Intelligent Shelf Management: This offers the ability to effectively
         manage the operation of all the Company's IPnexus products, as well as
         third-party components when they are integrated into a platform.

         Ethernet Switching: The Company's Ethernet switching products operate
         as the "nexus" of the packet-based platform. As part of the Company's
         initiative in creating the PICMG 2.16 standard, the Company undertook
         an aggressive development program aimed at becoming the leading
         supplier of embedded Ethernet switches. During 2004, the Company
         focused on developing advanced carrier grade features and reliability.
         Today, the Company has the broadest carrier grade switch product line
         for 2.16 embedded platforms.

         Platform Components: While chassis, cooling elements (fans) and
         interconnection details are considered "low level technology," the
         Company has designed and maintains a line of these products that have
         advanced features targeted at high availability and rugged, demanding
         operating environments. Platform components are an important element of
         the Company's fully integrated Advanced Management Platform offering.

IPnexus Compute Products: Traditional single board computers continue to play a
significant role in embedded platforms. The Company introduced a variety of new
compute products in 2004 and will continue product introductions in 2005 based
on higher-performance processors and higher capacity memory products. These new
products will be especially applicable to packet-based systems.

IPnexus Network Access and Communications Products: The Company's IPnexus
network access and communications products continue to operate in a broad range
of data communications and telecommunications applications. Performance
Technologies' access products provide a connection between a variety of voice,
data and signaling networks and embedded systems platforms that are used to
control the network and/or process information being transported over networks.
This family has significant synergies with our NexusWare software and the newly
acquired Voice Technology Group products from Mapletree Networks. Several new
IPnexus and communications products were announced in 2004 and new products are
on the product road map for 2005. The access product family includes stand-alone
communication servers and embedded access products that operate as part of
systems based on a variety of open standards.

IPnexus Software and Middleware: NexusWare, the core element of our entire
software offering, is a key differentiating factor in the embedded platform
marketplace. NexusWare includes a comprehensive Linux-based development
environment that can be supplied either as part of the Advanced Managed
Platform, or with the Company's individual IPnexus component products, or
provided to third parties for inclusion in their embedded platform environments.
NexusWare is specifically tailored to assist system engineers in rapidly
integrating and developing packet-based embedded systems, while leveraging a
robust and standardized software foundation that uses the Linux operating
system.

The Company introduced its NexusWare software suite in 2001 and it currently
generates additional software license revenue for the Company. Management
believes the NexusWare software differentiates the Company's product offering
and gives it an important competitive advantage in the market.

Another important aspect of the Company's software offering is the extensive
communications software protocols that can be licensed to customers for a
variety of applications. Protocol functions include standard communication
packages such as X.25, Frame Relay, and SS7 and SS7/IP signaling software, and
specialized packages such as radar protocols used in weather tracking and air
traffic control, and military communications protocols.

IPnexus Customers. Announced customers for IPnexus products include: ADLINK
Technology, Inc., Agilent Technologies, Alcatel SA, APW/Electronic Solutions,
Andrew Corporation, AudioCodes, Data Connections, General Dynamics, Hewlett
Packard Corporation, Lucent Technologies, Motorola Corporation, Nortel Networks,
Northrup Grumman Information Technology, Polycom, Raytheon, Siemens AG, Siemens
Carrier Networks LLC, Stratus Technologies, Sun Microsystems, UT Starcom and
Walkersun.

AdvancedTCA (ATCA): A new open standard is emerging known as AdvancedTCA, or
aTCA. This large, telecommunications-centric architecture is gaining industry
following and is expected to be a complementary alternative to the CompactPCI
2.16 standard the Company has embraced for its current products. Product
development began in 2004 on a new managed platform, which will be released in
mid 2005 that utilizes this young, but maturing, standard.

Voice Technology Products: The 2004 acquisition of Mapletree Networks brought
the Company a wide range of products for the processing of voice and fax
information. The voice aspect of this product line is an integral part of all
VoIP media gateway systems. As the Company proceeds through 2005, the voice
products will act as the foundation for a highly integrated media gateway
solution, which leverages other Company products, including network access,
NexusWare and signaling gateway elements.

Announced customers for the Voice Technology products include: Selta Telematica
SpA, Teles Communications and Vertical Networks.

SEGway Signaling Products. The Company's SEGway Signaling products provide a
signaling bridge between traditional telephone networks and the growing IP
packet-switched network architectures of today. When used in conjunction with
softswitches, media gateways and application servers, SEGway signaling products
can provide the call control functionality or service processing capabilities
of traditional PSTN switches.

Performance Technologies offers a unique suite of signaling solutions in
stand-alone or embedded platform models suitable for new or existing telephony
service providers, carriers or telephony equipment manufacturers. Powered by
carrier-grade SS7 and SS7/IP signaling software, SEGway products are designed
for easy installation and network management and are priced to ensure carriers
save money in meeting the demands of high growth SS7 networks. The Company's
Signaling Blade product provides OEMs with all the functional capabilities
needed to front-end applications requiring access to the SS7 network. This
product incorporates a robust SS7 stack on top of the Company's NexusWare
software to provide customers with a complete SS7 platform. Based on a target
OEM market for this product, 2004 efforts to achieve "design wins" have been an
important metric with which to measure future revenue potential. As a result of
various 2004 design wins, management expects to see revenue growth in 2005 from
this leveraged use of the Company's SS7 Intellectual Property in the embedded
OEM market space.

Announced customers for the SEGway Signaling products include: Alcatel SA,
Comfone AG, Ericsson Telecommunications, GeoLink, Huawei Technologies, Lucent
Technologies, Nortel Networks, Rural Cellular, Siemens, Swisscom AG, TelAlaska,
Telecom Italia Sparkle, Telefonica Moviles Espana, Teleglobe and TSI
Telecommunications Services.

Sales, Marketing and Distribution

The Company markets its products worldwide to a variety of customers through its
direct sales force and various channels including OEMs, Value Added Resellers
(VARs), distributors and systems integrators. Almost all of the Company's North
American business is sold through the Company's direct sales force.

Due to the highly technical nature of the Company's products, it is essential
that the Company's salespeople are technically oriented and are knowledgeable in
the embedded systems, networking 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.

Currently, 38 sales, marketing and sales support personnel are located in the
Company's Rochester, New York; San Diego and San Luis Obispo, California; Old
Saybrook, Connecticut; Ottawa, Canada; Shanghai, China and Henley-on-Thames,
United Kingdom offices. In addition, independent sales representatives and
agents cover 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 orders from existing
customers. These strategies include an active and ongoing campaign to direct
potential customers to the Company's Web site, hosting technology seminars,
direct mail, email campaigns, direct telemarketing, active participation in
technical standards groups, participation in regional, national and
international trade shows, selected trade press advertisements and technical
articles.

Sales to customers outside of North America represented 31%, 21% and 25% of the
Company's revenue in 2004, 2003 and 2002, respectively. 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.


<PAGE>

Customers

The Company has more than 50 active customers worldwide, primarily in the
server, telecommunications and embedded systems markets. Many of the Company's
major customers are Fortune 1000 companies in the United States or companies of
similar stature in Europe and Asia. In 2004, the Company's two largest
customers, Lucent Technologies and UT Starcom, represented 13% and 11% of
revenue, respectively. The Company's four largest customers (Lucent
Technologies, UT Starcom, Andrew Corporation, and MetaSwitch) represented 38% of
the Company's revenue.

At December 31, 2004, approximately 75% of the Company's customers are in the
telecommunications industry and the Company's products are generally integrated
into products for wireless and next-generation IP network infrastructure. These
products are targeted at customers in the following sectors: telecommunication
equipment manufacturers, server manufacturers, telecommunications service
providers and operators, wireless carriers and platform manufacturers. The
Company's other customers represent a range of industries utilizing
open-architecture embedded systems.

Backlog

The scheduled backlog of orders amounted to $10.0 million and $11.3 million at
January 30, 2005 and January 31, 2004, respectively. Orders are subject to
postponement of delivery or cancellation in the normal course of business. A
substantial portion of the Company's revenue in each quarter results from orders
placed within the quarter and shipped in the final month of the same quarter.
Unfortunately, forward-looking visibility on customer orders continues to be
very limited with almost no visibility beyond ninety days. (See Management's
Discussion & Analysis included elsewhere in this report).

Seasonality

The Company's business is not generally subject to large seasonal swings but is
frequently softer during the summer months due to the European and United States
vacation seasons. 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

Embedded systems are either based on proprietary technology or are based on open
standards. The Company's products are primarily based on open standards, which
is the smaller, but faster growing portion of this market. Frequently, the
Company's stiffest competition is the in-house engineering staff of its
customers.

The embedded systems market continues to be characterized by rapid technological
innovations resulting in new product introductions and frequent advances in
price/performance ratios. Competitive factors in this market include product
performance, functionality, product quality and reliability, customer service
and support, marketing capability, corporate reputation and brand recognition,
and changes in relative price/performance ratios.

Competitors are generally split into two categories, the full systems suppliers
and technology component suppliers.

For its Advanced Managed Platforms, the Company faces a group of competitors
including Kontron AG, Motorola Computer Group, Radisys Corporation and SBS
Technologies. Management believes that its continuing emphasis on fully
integrated and managed system level platform solutions, with a high level of the
Company's component and software content, are a key differentiating factor for
winning new business.

The Company's Switching products operate in the CompactPCI systems architecture
referred to as the PICMG 2.16 standard. This architecture was developed by the
Company and adopted by the industry in the fall of 2001. Today, there are
several competitors offering products or technology in this marketplace. Current
competitors include Continuous Computing, DSS Networks, Motorola Computer Group,
Radisys Corporation, Ramix (owned by GE Fanuc Embedded Systems), SBS
Technologies and Zynx Networks. The size of the Ethernet switching market is
small compared to the enterprise switch market, and larger companies in that
market are not expected to enter this segment due to the customization
requirements and relatively low volumes, as compared to the enterprise market.

For its Network Access and Communications products, the Company believes its key
differentiators are its depth of market experience, suite of communications
software, and NexusWare. The Company's products compete with products from
companies including Adax Incorporated, Audiocodes, Artesyn Technologies,
Interphase Corporation and NMS Communications.

For its Voice Processing products, the Company is focusing its development
efforts on combining this technology with its other technologies to form
intelligent solutions offering additional value and capabilities. Targeted
application markets include media gateway, media server, wireless,
voice-over-cable and satellite communications. The Company's products currently
compete with products from companies including Audiocodes, Brooktrout, Motorola
Computer Group, TI/Telogy and Voiceboard.

For its SEGway Signaling products, the Company generally focuses its engineering
on products that use Internet Protocol (IP) to carry signaling traffic. Since
this is a newer area in the signaling market, the Company believes it has an
advantage over competitors' products. The Company's products currently compete
with products from Adax Incorporated and Ulticom, and several larger companies
that have proprietary SS7 technology or products.

Research and Development

The Company's research and development expenses were approximately $10.2
million, $9.5 million and $6.9 million for 2004, 2003 and 2002, respectively.
These expenses consist primarily of employee costs, material consumed in
developing and designing new products, and amounts expended for software
license/tools. The Company expects to continue to invest heavily in research and
development in order to create innovative new products for the embedded systems
market.

The Company has significant core competencies applicable to computing platforms,
single board computers, voice and data communications, voice processing, carrier
grade Ethernet networking, high availability, hot swap, redundant technologies
and signaling communications. The Company also has significant software
expertise that it applies to embedded systems and platforms.

Proprietary Technology

The Company's success depends upon retaining and maximizing the Company's
proprietary technologies. To date, the Company has relied principally upon
trademark, copyright and trade secret laws to protect its proprietary
technology. The Company generally enters into confidentiality or license
agreements with its customers, distributors and potential customers that contain
confidentiality provisions, 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 to date has provided a high
degree of confidentiality with respect to the underlying intellectual property.

Suppliers

In the fast paced technology environment, manufacturers are "obsoleting"
electronic components more rapidly than ever before. In addition, industry
consolidation is resulting in fewer manufacturers offering electronic
components. In many situations, the Company is utilizing sole or limited source
components on its products. The Company is finding it more challenging to obtain
adequate supplies of components than even a couple of years ago. Lack of
availability of components can cause delays in shipments. In addition, the costs
and time delays caused by redesigning specific products when adequate components
are not available are becoming prohibitive. 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 PCB manufacturing facility in
Rochester, New York where it manufactures its network access, switching,
signaling and single board computing products. The Computing Products Group
manufactures its chassis products under contract, and performs system level
manufacturing and integration in-house. In a plan announced in February 2005,
management intends to transition system level manufacturing and integration of
its chassis products to its Rochester manufacturing operation during 2005.

Rochester manufacturing operates under an integrated MRP system. Many of the
Company's products have high software content and are generally produced in low
volumes. By utilizing an in-house manufacturing capability, management believes
that the Company has achieved some safety from the risks inherent in utilizing
PCB contract manufacturing. These risks typically include a contract
manufacturer's inability to meet flexible manufacturing requirements, inventory
control and cost containment. In addition, use of in-house manufacturing enables
the Company to maintain a high quality level for its products and greater
responsiveness to customer's delivery requirements. The Company has limited
alternative capabilities through third parties to perform such manufacturing
activities. In the event of an interruption of production at its Rochester
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.

The Company intends to purchase and implement a new advanced planning and
scheduling system during 2005, which will enhance its current MRP manufacturing
system in Rochester. Delays in the implementation of this system, interruption
in business activities while implementing this system, or actual costs higher
than estimated, could adversely impact the Company's results of operations.

Employees

In October 2004, management began formulating plans and taking steps to
centralize its multi-location operations and to streamline the organization.
During the fourth quarter, the Company completed integration of the Voice
Technology Group's (VTG) sales, marketing and administrative functions into its
corporate operations. In a plan announced in February 2005, management expects
to integrate accounting and manufacturing operations for VTG by the end of the
first quarter of 2005 and for the Computing Products Group in San Luis Obispo,
CA, to its Rochester headquarters by the end of the third quarter 2005.

As of December 31, 2004, the Company had 242 full-time employees, four part-time
and contract employees, and two engineering cooperative student employees.
Management believes its relations with its employees are generally good. The
Company's employees are not subject to collective bargaining agreements.

The Company's full-time employees work in the following areas:

                  Research and Development             107
                  Marketing and Sales                   38
                  Manufacturing                         71
                  General and Administrative            26

Management believes that the Company's future success will depend on its ability
to continue to attract and retain qualified personnel.

Risk Factors

If we do not respond adequately to technological change, our competitive
position will decline.

The market for our products is characterized by rapid technological change and
frequent introduction of products based on new technologies. As new products are
introduced, the industry standards change. Additionally, the overall embedded
systems market, particularly the telecommunications industry, is volatile as the
effects of new technologies, new standards, new products and short life cycles
contribute to changes in the market and the performance of industry
participants. Our future revenue will depend upon our ability to anticipate
technological changes and to develop and introduce enhanced products 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 our products or their component parts, or the failure
to achieve market acceptance for our products would have a material adverse
effect on our revenue and operating results. Further, in sluggish economies such
as today, current technologies may become obsolete before being replaced by new
technologies.

We operate in an extremely competitive industry and our revenues and operating
results will suffer if we do not compete effectively.

The embedded systems market, particularly the telecommunications industry, is
extremely competitive. We face a number of large and small competitors. Many of
our principal competitors have established brand name recognition and market
positions and have substantially greater experience and financial resources than
us to deploy on promotion, advertising, research and product development. In
addition, as we broaden our product offerings, we expect to face competition
from new competitors. Companies in related markets could offer products with
functionality similar or superior to that offered by our products. Increased
competition could result in price reductions, reduced margins and loss of market
share, all of which would materially and adversely affect our revenue and
operating results. Large companies have recently acquired several of our
competitors. These acquisitions are likely to permit our 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. We expect that competition will increase substantially
as a result of these and other industry consolidations and alliances, as well as
the emergence of new competitors. We cannot guarantee that we will be able to
compete successfully with our existing or new competitors or that competitive
pressures faced by us will not have a material adverse effect on our revenue and
operating results.

We are dependent on a number of key customers, the loss of any of which would
harm our revenues and operating results.

We cannot assure that our principal customers will continue to purchase products
from us at current levels. Customers typically do not enter into long-term
volume purchase contracts with us and customers have certain rights to extend or
delay the shipment of their orders. Even when our contracts have penalties for
cancellation we may, as a practical matter, waive such penalties to preserve our
business relationship. The loss of one or more of our major customers, the
reduction, delay or cancellation of orders, or a delay in shipment of our
products to such customers, would have a material adverse effect on our revenue
and operating results.

Carriers and system operators in our target markets are experiencing
consolidation which could delay or cancel ongoing network infrastructure
expansion and upgrade programs.

The telecommunications industry in many of the industrialized areas of the world
is experiencing an aggressive phase of consolidation. While these activities may
strengthen the industry in the long term, they are often disruptive to ongoing
capital programs and projects in the short term. These disruptions and delays
can have a material adverse effect on our revenue and operating results.

Achieving "design wins" is an important indicator of success in our industry,
however, many factors beyond our control influence whether we achieve design
wins.

A design win occurs when a customer or prospective customer notifies us that our
product has been selected to be integrated with their product. Ordinarily, there
are several steps between the time of the design win and when customers initiate
production shipments. Typically, design wins reach production volumes at varying
rates if they reach production at all. 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, and changes
in customer markets and economic conditions can adversely affect a design win
before production is reached or during deployment. Traditionally, design wins
have been an important metric for management and industry analysts to judge our
product acceptance in its marketplace. Unfortunately, during weak economic
periods, fewer customers do new design activity and a smaller number of these
design wins move into production.

Our annual and quarterly results can fluctuate greatly, which can have a
disproportionate effect on net income and the price of our common stock.

Our future annual and quarterly operating results can fluctuate significantly
depending on factors such as the timing and shipment of significant orders, new
product introductions by us and our competitors, market acceptance of new and
enhanced versions of our products, changes in pricing policies by us and our
competitors, the mix of distribution channels through which our products are
sold, inability to obtain sufficient supplies of sole or limited source
components for our products, and seasonal and general economic conditions. Our
expense levels are based, in part, on our expectations as to future revenue.
Since a substantial portion of our revenue in each quarter results from orders
placed within the quarter and often shipped in the final weeks of that quarter,
revenue levels are difficult to predict. If revenue levels are below
expectations, operating results will be adversely affected. Net income would be
disproportionately affected by a reduction in revenue because only a small
portion of our net expenses varies with our revenue. In addition, the common
stock of the Company is thinly traded and fluctuations in operating results can
cause significant fluctuations in the price of our common stock.

We depend on a limited number of third-party suppliers to provide us with
important components for our products. If we were unable to obtain components
from these suppliers, our revenue and operating results would suffer.

Certain components used in our products are currently available to us from only
one or a limited number of sources. There can be no assurance that future
supplies will be adequate for our needs or will be available on prices and terms
acceptable to us. Our 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 our gross margins, either of which would have a material
adverse effect on our revenue and operating results.

Potential limitations in our manufacturing arrangements could impair our ability
to meet our customers' expectations.

In order to avoid relying on outside contract manufacturers, we manufacture our
network access, switch, signaling and single board computer products at our
Rochester, New York facility. The Company's platform products have been
manufactured at contract manufacturers. We do not have significant alternative
manufacturing capabilities, either internally or through third parties, to
perform manufacturing of our products. Even if we were able to identify
alternative third-party contract manufacturers, we cannot assume that we would
be able to retain their services on terms and conditions acceptable to us. In
the event of an interruption in production, we would not be able to deliver
products on a timely basis, which would have a material adverse effect on our
revenue and operating results. Although we currently have business interruption
insurance, we cannot assure that such insurance would adequately cover our lost
business as a result of such an interruption.

If we do not adequately protect our proprietary technology, or if we infringe on
the intellectual property rights of others, our revenues and operating results
would suffer.

Our success depends upon our proprietary technologies. To date, we have relied
principally upon trademark, copyright and trade secret laws to protect our
proprietary technologies. We generally enter into confidentiality or license
agreements with our customers, distributors and potential customers and limit
access to, and distribution of, the source code to our software and other
proprietary information. Our employees are subject to our employment policy
regarding confidentiality. We cannot assure that the steps taken by us in this
regard will be adequate to prevent misappropriation of our technologies or to
provide an effective remedy in the event of a misappropriation by others.

Although we believe that our products do not infringe on the proprietary rights
of third parties, we cannot assure that infringement claims will not be
asserted, resulting in costly litigation in which we may not ultimately prevail.
Adverse determinations in such litigation could result in the loss of our
proprietary rights, subject us to significant liabilities, require us to seek
licenses from third parties or prevent us from manufacturing or selling our
products, any of which would have a material adverse effect on our 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 or new
technology developed, we may have to enter into technology licenses from others.
We do not know whether these third party technology licenses will be available
to us on commercially reasonable terms. The loss of, or inability to obtain, any
of these technology licenses could result in delays or reductions in our product
shipments. Any such delays or reductions in product shipments would have a
material adverse effect on our revenue and operating results.

We are dependent upon a number of key personnel, the loss of these people or
delays in replacing them would harm our operating results.

Our success depends on the continued contributions of our personnel, many of
whom would be difficult to replace. Although our employees are subject to our
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 our operating results.

Delays in purchasing and implementing an advanced planning and scheduling system
could harm our operating results.

As a continuing effort to improve the flow of management information and control
of our operations, we intend to purchase, install, and implement an advanced
planning and scheduling (APS) system during 2005. We are currently in the
process of evaluating our requirements and available APS systems. We are
examining the hardware, software, consulting, and implementation costs of
available systems as well as the internal time and resources required for
implementation. Our current estimates of the time and costs necessary to
implement a system are based upon the facts and information available today. New
developments may occur that could affect our estimates of the amount of time and
the costs necessary to implement such a system. Significant delays in the
implementation of a system, interruption in business activities while
implementing a system, or actual costs higher than estimated, could adversely
impact our operating results.

We may hold investments in companies from time to time. These investments or
other future investments are subject to potential impairment.

We hold investments in privately held companies from time to time. We may make
additional investments in the future in these or other companies. During 2003 we
recorded an impairment of one of our investments and during 2004, established a
reserve against another investment. Depending upon the future success of these
companies in meeting their operating goals, an impairment charge or additional
reserve could be recorded in the future. The occurrence of a future impairment
or additional reserve could adversely affect our results.

ITEM 2 - Properties

The Company's corporate headquarters are located in 57,000 square feet of office
and manufacturing space in Rochester, New York. The Company moved to this leased
facility in April 2002. This lease expires in 2012. Corporate headquarters
include the executive offices, along with sales, marketing, engineering and
manufacturing operations. There is sufficient room for growth in this facility
in the intermediate term including the transfer of manufacturing operations from
the VTG and Computing Products Groups and it is capable of accommodating a
variety of expansion options. In 2001, the Company purchased land adjacent to
this facility to accommodate future expansion.

The Company's Computing Products Group is located in 61,000 square feet of
office and manufacturing space leased in San Luis Obispo, California. This lease
expires in 2008. This facility currently includes sales, marketing and
engineering personnel, as well as manufacturing. Approximately 14,000 square
feet of this facility is currently sublet to a tenant and the Company is
actively seeking other tenants to sublet additional space in the building.

The Company's Voice Technology Group is located in 9,000 square feet of office
space leased in Norwood, Massachusetts. This lease expires in 2007 and the
Company has the right to terminate this lease upon twelve months notice. There
is sufficient room for growth in this facility during the lease term.

The Company's Signaling Group has sales, marketing, and engineering staff
located in 13,000 square feet of office space leased in a building located in
downtown Ottawa, Canada. The office lease agreements in this building expire in
May 2006.

The Company also leases sales and engineering offices in San Diego, California
and sales offices in Connecticut and the United Kingdom.

ITEM 3 - Legal Proceedings

From time to time, the Company is involved in litigation relating to claims
arising out of its operations in the normal course of business. The Company is
not presently a party to any 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 2003,
the settlement agreement for the class action suit brought against the Company
in May 2000 was accepted by the Court and was paid by the Company.

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 2004.




PART II

ITEM 5 - Market for the Registrant's Common Equity, Related Stockholder Matters
         and Issuer Purchases of Equity Securities

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.

                  2004                       High              Low
         ------------------------------------------------------------------
         First Quarter                     $ 21.11          $ 13.48
         Second Quarter                      19.17             8.47
         Third Quarter                        9.76             5.30
         Fourth Quarter                    $  9.30          $  5.39

                  2003                       High              Low
         -------------------------------------------------------------------
         First Quarter                     $  4.62          $  3.25
         Second Quarter                       7.69             3.44
         Third Quarter                       12.79             7.22
         Fourth Quarter                    $ 14.86          $ 10.07

As of March 9, 2005, there were 174 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:    2004     2003     2002     2001     2000
------------------------------------------------------------------------------
Sales                              $53,489  $49,992  $27,014  $36,517  $38,963
Net income                           2,780    3,050      326    5,186    7,050
Basic earnings per share:
  Net income                       $   .22  $   .25  $   .03  $   .42  $   .54
  Weighted average common shares    12,720   12,259   12,263   12,282   13,106
Diluted earnings per share:
  Net income                       $   .21  $   .24  $   .03  $   .41  $   .51
  Weight average common and
    common equivalent shares        13,219   12,692   12,373   12,708   13,769


Excluding non-recurring items (4)   2004 (1) 2003 (2) 2002 (3) 2001     2000
                                   -------------------------------------------
  Net income                       $ 3,801  $ 3,529  $ 1,186  $ 5,186  $ 7,050
  Basic earnings per share         $   .30  $   .29  $   .10  $   .42  $   .54
  Diluted earnings per share       $   .29  $   .28  $   .10  $   .41  $   .51


At December 31:                     2004     2003     2002     2001     2000
------------------------------------------------------------------------------
Working capital                    $41,637  $38,219  $32,130  $34,728  $36,975
Total assets                       $57,011  $51,660  $45,204  $42,954  $44,758
Total stockholders' equity         $50,421  $43,952  $38,809  $38,342  $39,468

All per share amounts described below are presented on a diluted basis.
Management believes that the Company's results excluding non-recurring items
provide better comparability of its operations as non-recurring items result
from facts and circumstances that vary in frequency, amounts and cause.

(1) In 2004, using applicable tax rates, amounts exclude non-recurring items
amounting to $1.0 million, or $.08 per share. These non-recurring items in 2004
include a gain on sale of an investment in an unaffiliated company amounting to
$1.2 million, $.09 per share, in-process research and development expense of $.2
million, or $.01 per share, a valuation charge on a note receivable in an
unaffiliated company amounting to $3.0 million, or $.15 per share, and a
restructuring charge amounting to $.2 million, or $.01 per share.

(2) In 2003, using an effective tax rate of 26%, amounts exclude non-recurring
expenses amounting to $.5 million, or $.04 per share. These non-recurring
expenses in 2003 include an incremental restructuring charge of $.1 million, or
$.01 per share, and a minority investment impairment charge of $.4 million, or
$.03 per share.

(3) In 2002, using an effective tax rate of 31%, amounts exclude non-recurring
expenses amounting to $.9 million, or $.07 per share. These non-recurring
charges in 2002 include restructuring charges of $.6 million, or $.03 per share,
in-process research and development expense of $.4 million, or $.03 per share,
and class action settlement costs of $.1 million, or $.01 per share.

(4) This data is a non-GAAP measure that should be read in conjunction with the
GAAP disclosures above, as well as footnotes (1), (2) and (3) above.

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 caption
"Business," for further information regarding "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 technological changes accompanied by
frequent new product introductions, competitive pressures, dependence on key
customers, the attainment of design wins, fluctuations in quarterly and annual
results, the reliance on a limited number of third party suppliers, limitations
of the Company's manufacturing arrangements, the protection of the Company's
proprietary technology, the dependence on key personnel, changes in critical
accounting estimates, potential delays associated with the purchase and
implementation of an advanced planning and scheduling system and potential
impairments related to investments. In addition, during weak economic periods,
customers' visibility deteriorates causing delays in the placement of orders.
These factors often result in a substantial portion of the Company's revenue
being derived from orders placed within a quarter and shipped in the final month
of the same 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

Performance Technologies, Incorporated is a supplier of platforms, components,
software, and service solutions for the embedded systems marketplace that can be
used in a broad range of applications and end markets.

Since its founding in 1981 as a Delaware corporation, the Company has
consistently designed innovative embedded products and component solutions that
focus on attributes such as reduced time-to-market, enhanced performance, high
availability and cost advantages for a user base that includes communications,
military and commercial applications. The Company has a history of successfully
adapting its products and services to a constantly changing, technology-driven
marketplace through the course of several business cycles that have occurred
since its founding.

The Company markets its products through its direct worldwide sales force under
a variety of brand names including IPnexus, SEGway, NexusWare and Advanced
Managed Platforms.

The Company's IPnexus product line, based on open system architectures, consists
of a wide range of embedded building blocks, which can be mixed and matched to
construct highly integrated, packet-based platforms. Beginning in 2003,
management adopted a new product strategy to reposition the Company to deliver
fully managed, system-level platform solutions to the marketplace. The launch of
the Advanced Managed Platform product line in September 2003 marked the
introduction of an extensive family of platform solutions that enable equipment
manufacturers to improve time-to-market for their products. Customers can select
Advanced Managed Platforms with the Intelligent Shelf Manager, NexusWare,
various components and software to fit system and application requirements with
full confidence that all elements have been designed and engineered to function
together.

Historically, the Company's growth has been generated through a combination of
internal growth and acquisition of new products or complementary technologies.
In October 2002, the Company acquired a portion of Intel Corporation's
Communications Platform Group for its chassis and compute products. In January
2004, the Company completed the acquisition of the assets of Mapletree Networks
to acquire its voice processing technology. The products from both acquisitions
have enhanced the Company's product offerings to its customers. The Company
continues to focus on acquisitions as an important part of its growth strategy.

Critical Accounting Estimates and Assumptions

In preparing the financial statements in accordance with GAAP, management is
required to make estimates and assumptions that have an impact on the assets,
liabilities, revenue and expense amounts reported. These estimates can also
affect supplemental information disclosures by the Company, including
information about contingencies, risk and financial condition. The Company
generally can not make estimates until preliminary results for a financial
quarter are known and analyzed. The Company believes, given current facts and
circumstances, its estimates and assumptions are reasonable, adhere to GAAP, and
are consistently applied. Inherent in the nature of an estimate or assumption is
the fact that actual results may differ from estimates and estimates may vary as
new facts and circumstances arise. The critical accounting policies, judgments
and estimates that management believes have the most significant effect on the
financial statements are set forth below:

o        Revenue Recognition
o        Software Development Costs
o        Valuation of Inventory
o        Income Taxes
o        Product Warranty
o        Impairment of Investments
o        Carrying Value of Goodwill

Revenue Recognition: The Company recognizes revenue in accordance with the SEC
Staff Accounting Bulletin (SAB) No. 104, "Revenue Recognition." The Company
recognizes revenue when persuasive evidence of an arrangement exists, delivery
has occurred or services have been provided, the sale price is fixed or
determinable, and collectability is reasonably assured. Additionally, the
Company sells its products on terms which transfer title and risk of loss at a
specified location, typically shipping point. Accordingly, revenue recognition
from product sales, which represents the majority of the Company's revenue,
occurs when all factors are met, including transfer of title and risk of loss,
which occurs upon shipment by the Company. Revenue earned from arrangements for
software systems requiring significant production, modification, or
customization of software is recognized over the contract period as performance
milestones are fulfilled. If all conditions of revenue recognition are not met,
the Company defers revenue recognition. 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. The Company believes that the accounting estimate
related to revenue recognition is a "critical accounting estimate" because the
Company's terms of sale can vary, and management exercises judgment in
determining whether to defer revenue recognition. Such judgments may materially
affect net sales for any period. Management exercises judgment within the
parameters of GAAP in determining when contractual obligations are met, title
and risk of loss are transferred, sales price is fixed or determinable and
collectability is reasonably assured.

Software Development Costs: All software development costs incurred in
establishing the technological feasibility of computer software products to be
sold are research and development costs. Software development costs incurred
subsequent to the establishment of technological feasibility of a computer
software product to be sold and prior to general release of that product are
capitalized. Amounts capitalized are amortized commencing after general release
of that product over the estimated remaining economic life of that product,
generally three years, or using the ratio of current revenues to current and
anticipated revenues from such product, whichever provides greater amortization.
If in the judgment of management, technological feasibility for a particular
project has not been met or recoverability of amounts capitalized is in doubt,
project costs are expensed as research and development or charged to costs of
goods sold, as applicable. The Company believes that the accounting estimate
related to software development costs is a "critical accounting estimate"
because the Company's management exercises judgment in determining whether
project costs are expensed as research and development or capitalized as an
asset. Such judgments may materially affect expense amounts for any period.
Management exercises judgment within the parameters of GAAP in determining when
technological feasibility has been met and recoverability of software
development costs is reasonably assured.

Valuation of Inventories: Inventories are stated at the lower of cost or market,
using the first-in, first-out method. The Company's inventory includes purchased
parts and components, work in process and finished goods. The Company provides
inventory reserves for excess, obsolete or slow moving inventory after periodic
evaluation of historical sales, current economic trends, forecasted sales,
estimated product lifecycles and estimated inventory levels. The factors that
contribute to inventory valuation risks are the Company's purchasing practices,
electronic component obsolescence, accuracy of sales and production forecasts,
introduction of new products, product lifecycles and the associated product
support. The Company manages its exposure to inventory valuation risks by
maintaining safety stocks, minimum purchase lots, managing product end-of-life
issues brought on by aging components or new product introductions, and by
utilizing certain inventory minimization strategies such as vendor-managed
inventories. The Company believes that the accounting estimate related to
valuation of inventories is a "critical accounting estimate" because it is
susceptible to changes from period-to-period due to the requirement for
management to make estimates relative to each of the underlying factors ranging
from purchasing, to sales, to production, to after-sale support. If actual
demand, market conditions or product lifecycles are adversely different from
those estimated by management, inventory adjustments to lower market values
would result in a reduction to the carrying value of inventory, an increase in
inventory write-offs and a decrease to gross margins.

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 the temporary differences
between the carrying amounts and the tax basis of such assets and liabilities.
The Company would record a valuation allowance to reduce deferred tax assets to
the amount that is more likely than not to be realized. The Company believes
that the accounting estimate related to income taxes is a "critical accounting
estimate" because the Company exercises judgment in estimating future taxable
income, including prudent and feasible tax planning strategies, in assessing the
need for any valuation allowance. If the Company should determine that it would
not be able to realize all or part of its net deferred tax assets in the future,
an adjustment to the deferred tax asset would be charged to income in the period
such determination was made. Likewise, in the event that the Company were to
determine that it would be able to realize its deferred tax assets in the future
in excess of the net recorded amount, an adjustment to the deferred tax asset
would increase income in the period such determination was made.

Product Warranty: The Company has warranty obligations in connection with the
sale of certain of its products. The warranty period for these products is
generally one year. The costs incurred to provide for these warranty obligations
are estimated and recorded as an accrued liability at the time of sale. The
Company estimates its future warranty costs based on historical performance
rates and related costs to repair given products. The Company believes that the
accounting estimate related to Product Warranty is a "critical accounting
estimate" because the Company exercises judgment in determining future estimated
warranty costs. Should actual performance rates or repair costs differ from
estimates, revisions to the estimated warranty liability would be required.

Impairment of Investments: During 2003, the Company held convertible debt and
equity investments in one company and in 2004, made a debt investment in another
company. On a periodic basis, the Company reviews and evaluates its investments
for potential impairment. In determining whether impairment has occurred, the
Company considers such factors as the original expectations of the investment,
performance of the investee company since the date of the investment, and
current and future prospects for the investee company. If events or changes in
circumstances occur in which an other than temporary loss has occurred, the
Company will record an impairment of the investment by writing down the
investment to the Company's estimate of fair value at the time of the
impairment. The Company believes that the accounting estimate related to
Impairment of Investments is a "critical accounting estimate" because the
Company exercises judgment in determining whether an other than temporary loss
has occurred and the Company also estimates the fair value of the investment at
the time of the impairment.

Carrying Value of Goodwill: The Company conducts tests for impairments of
goodwill annually or more frequently if circumstances indicate that the asset
might be impaired. The Company believes that the accounting estimate related to
goodwill is a "critical accounting estimate" because these impairment tests
include management estimates of future cash flows that are dependent upon
subjective assumptions regarding future operating results including growth
rates, discount rates, capital requirements and other factors that impact the
estimated fair value. An impairment loss is recognized to the extent that an
asset's carrying amount exceeds its fair value.

Strategy

The Company has a history of successfully adapting its products and services to
a constantly changing technology-driven marketplace. This adaptation has been
demonstrated through the course of several business cycles that have occurred
since its founding in 1981. During the most recent economic downturn, the
Company maintained its commitment to aggressively fund new product development,
as well as use its strong balance sheet to acquire additional products and
technologies to strengthen its market position.

Beginning in 2003, a new product strategy was adopted. This strategy
repositioned the Company to deliver fully managed, system-level platform
solutions to the embedded systems marketplace. An important milestone in this
strategy was achieved in September 2003 with the introduction of the Advanced
Managed Platform product line. Throughout 2004, the Company focused its
operating efforts on this strategy. This new line of platform solutions
specifically addresses equipment manufacturers' requirements for an increased
level of system integration and services from suppliers. The Company's new
platform products enable equipment manufacturers' downsized or limited
engineering staffs to improve time-to-market for their new products and to
replace proprietary or legacy platforms with the latest generation of fully
managed system functionality.

Please refer to PART 1, ITEM 1, under the caption "Business," for further
information regarding the Company's "Strategy."

Key Performance Indicators

The Company's integrated platforms, components and software solutions are
incorporated into current and next-generation embedded systems infrastructure.
Traditionally, "design wins" have been an important metric for management to
judge the Company's product acceptance in its marketplace. Design wins, if
implemented, reach production volumes at varying rates, generally beginning
twelve to eighteen months after the design win occurs. A variety of risks such
as schedule delays, cancellations, changes in customer markets and economic
conditions can adversely affect a design win before production is reached, or
during deployment.

The Company modified its criteria for the measurement of "design wins" in 2004
to provide greater granularity in predicting forward looking potential for the
Company and to assist in measuring day-to-day execution of product, sales and
marketing programs. During 2004, the Company was notified of 22 design wins for
its products with each expected to generate greater than $.5 million of
annualized revenue when reaching production volumes. These new design wins were
for its integrated platform solutions (with multiple products) (13), and
individual component design wins for IPnexus access (2), IP Switching (2),
SEGway (4), and Voice Processing (1) products. During 2003, the Company's metric
for design wins only included customers that were expected to generate greater
than $1.0 million of annualized revenue when reaching production volumes. Based
on this measurement criterion, the Company was notified of 16 design wins for
its products. These 2003 design wins were for its integrated platform solutions
(with multiple products) (8), individual component design wins for IP Switching
(2), IPnexus access (2), Computing products (1) and SEGway products (3). Not all
design wins are expected to result in production orders. Regardless of the
change in the measurement metric, the Company believes that the growth in the
number of design wins for integrated platform solutions from 2003 to 2004
reflects increasing customer demand for more complete platform solutions from a
single vendor.

Management believes another key indicator for the Company's business is the
volume of orders received from its customers. During weak economic periods,
customers' visibility deteriorates causing delays in the placement of orders.
While forward-looking visibility on customer orders continues to be very
limited, shipments to customers in 2004 amounted to $53.5 million (including the
VTG products) and $51.0 million (excluding the VTG products), compared to $50.0
million in 2003. Revenue in 2004 was impacted by a decline in business from the
Company's two largest customers in 2003, Andrew Corporation and UT Starcom, Inc.
Shipments to these two customers declined by $6.6 million, to $10.3 million in
2004 due to changes in their businesses.

Industry Overview

As 2004 began, the Company's customers, who are primarily equipment
manufacturers in the telecom and data communications market segments, continued
to maintain tight cost controls, limit engineering resources and proceed with
realigned business models. These fiscal controls created a more concentrated
supplier landscape for 2004 that is trimmer, but more highly focused on market
opportunities. It was not just these equipment manufacturers who made such
adjustments. Across the technology sector, many organizations downsized staffs
and tightened cost controls, including many of our customers and suppliers.

Industry marketing research organizations, such as Dataquest and Venture
Development Corporation, are estimating the worldwide, embedded systems market
to be over $100 billion in size by 2008. Traditionally, the largest segment of
this market uses "proprietary," purpose-built embedded systems and products.
Embedded systems built on open standards comprise a smaller segment of this
market, which is estimated to grow to over $10 billion by 2008. While
proprietary systems are expected to continue to dominate this market in the
future, a growing share of embedded systems being implemented, especially in the
more limited market segments served by the Company, is expected to use open
standards-based products. The driving factors behind this changing paradigm
remain twofold. First, systems are becoming increasingly integrated, more
complex, requiring larger investments and longer lead times to design. Second,
as organizations have downsized over the past several years, they have not
replaced the necessary staff to carry out extensive new product development
while successfully meeting the competitive pressures of "time-to-market" found
in most technology businesses. Due to these changes, telecom and data
communications equipment manufacturers are increasing their reliance on
companies such as Performance Technologies to deliver major building blocks or
complete platforms, allowing the supplier to "layer on" their "value add" which
has become software and/or additional hardware elements directed at specific
applications. Please refer to PART 1, ITEM 1, under the caption "Business", for
further discussion of the Industry, economic environment and the Company's
initiatives for 2005.

Financial

Revenue:

Revenue for 2004 amounted to $53.5 million, compared to $50.0 million in 2003.
The increase in revenue of $3.5 million includes $2.5 million of revenue from
the newly acquired Voice Technology Group. Revenue in 2004 was impacted by a
decline in business from the Company's two largest customers in 2003, Andrew
Corporation and UT Starcom, Inc. Shipments to these two customers declined by
$6.6 million, to $10.3 million in 2004 due to changes in their businesses.

Sales outside of North America amounted to $16.4 million and $10.4 million in
2004 and 2003, respectively. The increase in 2004 is attributable to the
Company's continuing efforts to extend its presence in Europe and emerging
markets.

Earnings:

GAAP information
----------------

Net income in 2004 amounted to $2.8 million, or $.21 per diluted share based on
13.2 million shares outstanding. Net income in 2003 amounted to $3.0 million, or
$.24 per diluted share based on 12.7 million shares outstanding.

Non-GAAP information
--------------------

Management believes that the Company's results excluding non-recurring items
provide better comparability of its operations as non-recurring items result
from facts and circumstances that vary in frequency, amounts and cause.

Net income for 2004 amounted to $3.8 million, or $.29 per diluted share
excluding non-recurring items based on 13.2 million shares outstanding. For
2004, the following non-recurring items affected the comparability of net income
between years:

      o In-process research and development costs related to the Mapletree
        acquisition($.2 million, or $.01 per diluted share);
      o Gain from the sale of an investment in Momentum Computer ($1.2 million,
        or $.09 per diluted share);
      o Valuation charge related to a note receivable from InSciTek
        ($3.0 million, or $.15 per diluted share);
      o Restructuring charges related to cost structure improvement efforts
        ($.2 million, or $.01 per diluted share).

Net income for 2003 amounted to $3.5 million, or $.28 per diluted share
excluding non-recurring expenses based on 12.7 million shares outstanding. For
2003, the following non-recurring expenses affected the comparability of net
income between years:

      o An incremental restructuring charge ($.1 million, or $.01 per diluted
        share);
      o Minority investment impairment charge ($.4 million, or $.03 per diluted
        share).

Cash, cash equivalents and investments amounted to $25.6 million and $29.6
million at December 31, 2004 and 2003, respectively, and no long-term debt
existed at either date.

Cash generated from operating activities amounted to $.6 million in 2004 and
$5.6 million in 2003. The overpayments of income taxes ($2.5 million) plus
increases in accounts receivable ($1.9 million) and inventories ($1.4 million)
contributed to the decline in cash generated from operating activities in 2004,
compared to 2003.

Acquisitions, Equity Investments and Notes Receivable:
------------------------------------------------------

Mapletree Networks, Inc. (subsequently, the Voice Technology Group, or VTG) - On
January 23, 2004, the Company acquired substantially all of the assets of
Mapletree Networks, Inc., a company that provided voice, data and fax processing
technology to original equipment manufacturers. The initial investment consisted
of cash and the assumption of certain debt at closing of $6.6 million and other
acquisition costs of $.4 million. The Company agreed to pay an additional $1.6
million of purchase price if the operations of the acquired group (operated by
the Company on a stand-alone basis) achieved certain milestones ("earn-out").
Based upon the operating results of the acquired group in the second quarter
2004, the earn-out was terminated. During the fourth quarter 2004, the Company
resolved certain matters related to the acquisition resulting in a payment to
the Company of approximately $1.7 million, which represented a partial return of
purchase price. Beginning at the time of acquisition, the Company's revenue and
expenses reflect the operations of VTG.

Momentum Computer, Inc. (Momentum) - Momentum is a developer of specialized
single board computer products. At the time of the Company's initial investment
in September 2002, the Company acquired a 47% ownership interest in Momentum.
During 2003, the Company reduced its ownership in Momentum to 30% when the
Company sold a portion of its investment back to the majority stockholder of
Momentum. Based upon the Company's expectations of Momentum's performance at the
time of the investment and its business prospects in late 2003, the Company
concluded that an other than temporary impairment of this investment occurred
and the Company recorded an impairment charge of $.4 million for this investment
during the fourth quarter 2003. During the third quarter 2004, the Company
completed the sale of its investment in Momentum for $2.1 million and realized a
gain of $1.2 million. Cash received in the fourth quarter 2004 from the sale
amounted to $3.1 million, including the collection of a $1.0 million note
receivable.

InSciTek Microsystems, Inc. (InSciTek) - On February 18, 2004, the Company
entered into an agreement to invest up to $3.0 million in InSciTek in the form
of an interest bearing convertible note. During 2004, the Company invested $3.0
million in conjunction with this agreement (including committed funding of $.4
million in January 2005). As of December 31, 2004, InSciTek had not raised
sufficient outside capital to assure its future as a going concern. Therefore,
during the fourth quarter 2004, the Company recorded a valuation charge related
to this note receivable in the amount of $3.0 million as collection of this note
is doubtful. The Company has the option to acquire ownership of InSciTek during
a future specified period. The note bears interest at 10% annually and is
convertible into shares of common stock of InSciTek. All unpaid accrued interest
and all outstanding principal is payable in full on December 31, 2008.

Centralization of Functions:
----------------------------

During most of 2004, uncertainty in the telecommunications sector using the
Company's products and services placed pressure on revenue and operating
earnings. Despite this weakness, management continues to believe the Company is
strategically positioned to improve its financial performance when target
markets become more positive. Nonetheless, management began formulating plans
and taking steps in September 2004 to reduce annualized expenses by
approximately $2.0 million with a primary focus on centralizing its
multi-location operations and streamlining the organization. During 2004, the
Company completed integration of the VTG sales, marketing and administrative
functions into its corporate operations and during the first quarter 2005,
management expects to complete the integration of the VTG accounting and
manufacturing operations into the existing Rochester, NY, headquarters. Also
during the first quarter 2005, the Company began transitioning the accounting
and manufacturing operations of the Computing Products Group in San Luis Obispo,
CA, to its Rochester headquarters. This transition is expected to be completed
by the end of the third quarter 2005. During 2004, the Company incurred a charge
of $.2 million related to these restructuring efforts. Additional charges
related to restructuring actions are expected during 2005.

When this centralization plan is completed, operating expenses are expected to
be reduced by $1.3 million annually and manufacturing overhead (cost of goods)
is expected to be reduced by $.7 million annually. However, the Company expects
to increase expenditures in certain areas during 2005 to stimulate growth.

Results of Operations

The following table sets forth, for the years indicated, certain consolidated
financial data expressed as a percentage of sales, 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. The table includes the
results of operations of the Voice Technology Group from its date of acquisition
on January 23, 2004 and the results of operations of the Computing Products
Group since it was acquired on October 2, 2002.

                                             Year Ended December 31,
                                       2004           2003           2002
                                    ----------     ----------     ----------
Sales                                 100.0%         100.0%         100.0%
Cost of goods sold                     52.4           50.6           47.6
                                    ----------     ----------     ----------
Gross profit                           47.6           49.4           52.4

Operating expenses:
  Selling and marketing                12.0           11.8           16.2
  Research and development             19.2           19.0           25.6
  General and administrative            8.9            9.3           10.1
  Restructuring charges                  .4             .2            2.1
  In-process research and development    .4                           1.4
  Class action legal settlement                                        .5
                                    ----------     ----------     ----------
     Total operating expenses          40.9           40.3           55.9
                                    ----------     ----------     ----------
Income (loss) from operations           6.7            9.1           (3.5)

Note receivable valuation charge       (5.6)
Other income, net                       1.4            1.0            2.0
                                    ----------     ----------     ----------
Income (loss) before income taxes,
 equity in income (loss) of
 unconsolidated company, gain on sale
 of investment and impairment of
 minority interest investment           2.5           10.1           (1.5)

Income tax (benefit) provision          (.2)           2.6           (3.0)
                                    ----------     ----------     ----------
Income before equity in income (loss)
 of unconsolidated company, gain on
 sale of investment and impairment
 of minority interest investment        2.7            7.5            1.5

Equity in income (loss) of
 unconsolidated company                  .3            (.6)           (.3)

Gain on sale of investment in
 unconsolidated company, net of tax     2.2

Impairment of minority interest
 investment                                            (.8)
                                    ----------     ----------     ----------

      Net income                        5.2%           6.1%           1.2%
                                    ==========     ==========     ==========



Excluding non-recurring items (4)      2004(1)        2003(2)        2002(3)
                                    ----------     ----------     ----------

Income (loss) before income taxes,
 equity in income (loss) of
 unconsolidated company, gain on sale
 of investment and impairment of
 minority interest investment           8.9%          10.4%           2.5%

Income tax provision (benefit)          2.1            2.7           (2.2)
                                    ----------     ----------     ----------
Income before equity in income (loss)
 of unconsolidated company, gain on
 sale of investment and impairment
 of minority interest investment        6.8            7.7            4.7

Equity in income (loss) of
 unconsolidated company                  .3            (.6)           (.3)
                                    ----------     ----------     ----------

      Net income, excluding
       non-recurring items              7.1%           7.1%           4.4%
                                    ==========     ==========     ==========

All per share amounts described below are presented on a diluted basis.
Management believes that the Company's results excluding non-recurring items
provide better comparability of its operations as non-recurring items result
from facts and circumstances that vary in frequency, amounts and cause.

(1) In 2004, using applicable tax rates, amounts exclude non-recurring items
amounting to $1.0 million, or $.08 per share. The non-recurring items in 2004
include a gain on sale of an investment in an unaffiliated company amounting to
$1.2 million, $.09 per share, in-process research and development expense of $.2
million, or $.01 per share, a valuation charge on a note receivable from an
unaffiliated company amounting to $3.0 million, or $.15 per share, and a
restructuring charge amounting to $.2 million, or $.01 per share.

(2) In 2003, using an effective tax rate of 26%, amounts exclude non-recurring
expenses amounting to $.5 million, or $.04 per share. The non-recurring expenses
in 2003 include an incremental restructuring charge of $.1 million, or $.01 per
share, and a minority investment impairment charge of $.4 million, or $.03 per
share.

(3) In 2002, using an effective tax rate of 31%, amounts exclude non-recurring
expenses amounting to $.9 million, or $.07 per share. The non-recurring charges
in 2002 include restructuring charges of $.6 million, or $.03 per share,
in-process research and development expense of $.4 million, or $.03 per share,
and class action settlement costs of $.1 million, or $.01 per share.

(4) This data is a non-GAAP measure and should be read in conjunction with the
GAAP disclosures above as well as footnote (1), (2) and (3) above.

Year Ended December 31, 2004 compared with the Year Ended December 31, 2003

Sales. Total revenue for 2004 was $53.5 million, compared to $50.0 million for
2003. For the years indicated, the Company's products are grouped into four
distinct categories in one market segment: Communications (network access,
signaling and voice (acquired in January 2004)) products, Computing products
(acquired in October 2002), IPnexus switching products and Other products.
Revenue from each product category is expressed as a percentage of sales for
2004 and 2003 as follows:

                                          2004           2003
                                       ----------     ----------

     Communications products               46%            52%
     Computing products                    34%            37%
     IPnexus switching products            19%            10%
     Other products                         1%             1%
                                       ----------     ----------
          Total                           100%           100%
                                       ==========     ==========

Communications products:

Network access products provide a connection between embedded systems platforms
and a variety of networks and are used to control the network and/or process
information being transported over networks. Many of the Company's signaling
products enable the transport of signaling messages over packet-switched (IP)
networks. Voice Technology products enable voice, data and fax processing for
communications applications.

Revenue from the Communications products amounted to $24.5 million and $26.1
million in 2004 and 2003, respectively. This decrease of $1.6 million, or 6%,
was primarily the result of a significant decline in revenue from a major
customer in 2003 whose product requirements unexpectedly decreased in the second
quarter of 2004. This decrease was partially offset by the addition of Voice
Technology products in 2004, totaling $2.5 million.

Computing products:

Computing products include a range of single board computers, a variety of
embedded system chassis and associated chassis management products. These
products enable the Company to provide integrated platform solutions
incorporating multiple components from the Company's portfolio. This category
includes revenue generated by the Computing Products group acquired in October
2002.

In 2004, Computing products revenue amounted to $18.1 million, compared to $18.3
million in 2003. This decrease amounted to $.2 million, or 1% of sales. This
product category experienced a significant decline in revenue in 2004 due to a
major customer's significant decrease ($2.4 million) in product requirements.
This decrease was partially offset in 2004 by new customers ordering integrated
platforms.

IPnexus switching products:

The Company's IPnexus switching product family has been designed for the
rigorous requirements of the embedded systems that use the industry standard
PICMG 2.16 architecture.

Revenue from switching products increased by $5.3 million, or 106%, from $5.0
million in 2003 to $10.3 million in 2004. One customer accounted for $3.5
million of this growth. The remainder of the switching revenue growth was
generated by an expanding customer base.

Other products:

This revenue is primarily related to legacy products. Many of these products are
project oriented and shipments can fluctuate on a quarterly and annual basis.
Revenue from these products amounted to $.7 million and $.6 million in 2004 and
2003, respectively.

Gross profit. Gross profit consists of sales, less cost of goods sold including
material costs, manufacturing expenses, depreciation, amortization of software
development costs, expenses associated with engineering contracts and technical
support function expenses. During the first half of 2004, the Company began
manufacturing a greater number of its single board computer products at its
Rochester manufacturing facility, rather than outsourcing the production to
contract manufacturing.

Gross margin was 47.6% and 49.4% in 2004 and 2003, respectively. The decline in
gross margin was partially attributable to Voice Technology products which
negatively impacted gross margin due to low sales volumes and the acquisition
accounting for inventory related to the Mapletree purchase. Increased
amortization of software development costs also had a negative impact on gross
margins. Included in cost of goods sold, is the amortization of software
development costs which totaled $1.7 million and $1.0 million, for 2004 and
2003, respectively. Partially offsetting this decline in gross margin was the
savings generated by manufacturing single board computers at the Rochester
facility.

Total Operating Expenses. Total operating expenses in 2004 amounted to $21.9
million in 2004, compared to $20.1 million in 2003. For 2004, the operating
expenses of the Voice Technology Group are included from the date of acquisition
on January 23, 2004. During the third quarter 2004, management began formulating
plans and taking steps to reduce annualized expenses by approximately $2.0
million with a primary focus on centralizing its multi-location operations and
streamlining the organization. When this centralization plan is completed,
operating expenses are expected to be reduced by $1.3 million annually and
manufacturing overhead (cost of goods) is expected to be reduced by $.7 million.

Selling and marketing expenses totaled $6.4 million in 2004, compared to $5.9
million in 2003. This increase of $.5 million is primarily attributable to the
inclusion of the Voice Technology Group expenses.

Research and development expenses totaled $10.2 million and $9.5 million in 2004
and 2003, respectively. This increase of $.7 million is related to the inclusion
of the Voice Technology Group expenses, offset by no corporate bonus and an
increase in capitalized software development costs in 2004. The Company
capitalizes certain software development costs, which reduces the amount of
software development charged to operating expense. Amounts capitalized were $2.2
million and $1.5 million for 2004 and 2003, respectively. Gross expenditures for
engineering and software development amounted to $12.4 million in 2004 and $11.0
million in 2003. The increased spending for engineering, research and software
development is principally the result of the VTG organization acquired in
January 2004.

General and administrative expenses amounted to $4.8 million and $4.6 million in
2004 and 2003, respectively. This increase of $.2 million in 2004 is primarily
related to Voice Technology Group expenses and external costs associated with
Sarbanes-Oxley compliance, offset by no corporate bonus in 2004.

Restructuring charges amounted to $.2 million and $.1 million in 2004 and 2003,
respectively. In 2003, the Company incurred an incremental restructuring charge
related to the lease of its Raleigh, North Carolina facility. This incremental
charge was the result of a revised management estimate regarding future expected
sublease receipts for this facility. During 2004, the Company completed
integration of the VTG sales, marketing and administrative functions into its
corporate operations. The Company incurred $.2 million of expense related to
these restructuring efforts in 2004.

In-process research and development expense amounted to $.2 million in 2004.
This was a charge for in-process research and development costs associated with
the Voice Technology Group acquisition expensed in accordance with Financial
Accounting Standards Board Interpretation No. 4, "Applicability of SFAS No. 2 to
Business Combinations Accounted for by the Purchase Method."

Note Receivable Valuation Charge. At December 31, 2004, the Company held a note
receivable from InSciTek. As of December 31, 2004, InSciTek had not raised
sufficient outside capital to assure its future as a going concern. Therefore,
during the fourth quarter 2004, the Company recorded a valuation charge related
to this note receivable in the amount of $3.0 million as collection of this note
is doubtful.

Other Income, net. Other income consists primarily of interest income. The
Company's funds are primarily invested in high quality auction rate municipal
securities. Interest rates increased in 2004, compared to 2003, resulting in
increased interest income. Also contributing to this increase was an increase in
interest income from notes receivable from unconsolidated companies.

Income Taxes. The Company's income tax benefit in 2004 totaled $.1 million,
compared to an income tax provision of $1.3 million in 2003. The Company's
effective income tax rate is a combination of federal, state and foreign tax
rates and is generally lower than statutory rates because it includes benefits
derived from its international operations, research activities, tax-exempt
interest and foreign sales. For 2004, the Company's effective tax rate was
(6.5%). This income tax benefit was primarily the result of the benefits derived
from tax credits and international operations which exceeded the statutory tax
amounts. For 2003, the Company's effective tax rate was 26.3% and also included
the favorable resolution of prior year tax uncertainties. On October 22, 2004,
President Bush signed into law the American Jobs Creation Act of 2004 (H.R.
4520). The Act contains numerous corporate tax provisions which could affect the
Company's current and future tax provisions. The Company is currently assessing
any potential impact of these provisions.

Equity in Income (Loss) of Unconsolidated Company. In the third quarter 2004,
the Company sold its ownership interest in Momentum Computer, Inc., a developer
of specialized single board computer products. During 2004, the Company's
allocation of Momentum's income totaled $.2 million. During 2003, the Company
recorded losses of $.3 million related to its allocation of Momentum's net loss.
During the fourth quarter 2003, the Company recorded an impairment of its
investment due to Momentum's weaker than expected financial results. The Company
wrote this investment down by $.4 million, to $.4 million at December 31, 2003,
the Company's estimate of the investment's fair value at that date.

Gain on Sale of Investment in Unconsolidated Company, net of tax. In the third
quarter 2004, the Company sold its ownership interest in Momentum Computer, Inc.
and realized a gain of $1.2 million, after tax of $.3 million.


Year Ended December 31, 2003 compared with the Year Ended December 31, 2002

Sales. Total revenue for 2003 was $50.0 million, compared to $27.0 million for
2002. For the years indicated in the following table, the Company's products are
grouped into four distinct categories in one market segment: Communications
(network access and signaling), Computing products (acquired in October 2002),
IPnexus switching products, and Other products. Revenue from each product
category, expressed as a percentage of sales for 2003 and 2002, is as follows:

                                          2003           2002
                                       ----------     ----------
     Communications products               52%            70%
     Computing products                    37%            18%
     IPnexus switching products            10%             9%
     Other products                         1%             3%
                                       ----------     ----------
         Total                            100%           100%
                                       ==========     ==========

Communications products:

Revenue from these products amounted to $26.1 million and $18.8 million in 2003
and 2002, respectively. This 39% increase in revenue in 2003 was the result of
the economic stabilization within the Company's target markets and increased
shipments related to existing design wins and new customers for these products
in 2003.

Computing products:

This category represents revenue generated by the Computing Products Group
acquired in October 2002. For the last three months of 2002, revenue from these
products amounted to $5.0 million. For 2003, revenue amounted to $18.3 million
reflecting a full year of sales. On an annualized basis, revenue from the
Computing Products Group was lower in 2003 compared to 2002, due to a decrease
in revenue from a single large customer in late 2003.

IPnexus switching products:

Revenue from switching products grew by 108% to $5.0 million in 2003, from $2.4
million in 2002. This growth reflects the rising adaptation of the new embedded
systems architecture, which requires use of Ethernet switches and the Company's
focus of providing a broad family of products to meet this need.

Other Products:

Revenue from other products amounted to $.6 million and $.8 million in 2003 and
2002, respectively. This revenue is related to legacy products.

Gross Profit. Gross profit consists of sales, less cost of goods sold including
material costs, manufacturing expenses, depreciation, amortization of software
development costs, expenses associated with engineering contracts and technical
support function expenses. Gross margin was 49.4% and 52.4% of sales in 2003 and
2002, respectively. Gross margin as a percentage of sales decreased in 2003
primarily because of the increase in shipments of lower margin Computing
products. Gross margins for Computing products are generally lower than the
gross margins realized by the Company's other product categories because the
Computing products are more hardware centric products and include less
proprietary technology as compared to the Company's other products. Since the
Computing Products Group's operations were included for the full year in 2003,
compared with only three months in 2002, revenue from Computing products
constituted a greater percentage of total revenue causing a decrease in overall
gross margins. The decrease in gross margins attributable to the Computing
products was partially offset by increases in gross margin for the other product
categories as the Company's fixed manufacturing overhead was spread over a
larger volume of shipments in 2003, compared to 2002.

Total Operating Expenses. Total operating expenses amounted to $20.1 million in
2003, compared to $15.1 million in 2002. For 2003, the operating expenses
include a full year of operations of the Computing Products Group, compared to
only three months in 2002. During 2002, the Company took actions to improve its
cost structure by more appropriately aligning expenses with current revenue
levels. These expense reductions amounted to $2.6 million annually and were
attained by reducing staffing levels by approximately 20% and by consolidating
one remote office location to more efficiently provide engineering and product
support.

Selling and marketing expenses totaled $5.9 million in 2003, compared to $4.4
million in 2002. This increase of $1.5 million in 2003 is primarily attributable
to the inclusion of the Computing Products Group for a full year of operations
amounting to $1.0 million and an increase of $.5 million related to additional
sales people and related expenses.

Research and development expenses totaled $9.5 million and $6.9 million in 2003
and 2002, respectively. This increase of $2.6 million in 2003 is primarily
attributable to the inclusion of the Computing Products Group for a full year
increasing expense by $2.3 million. The Company capitalizes certain software
development costs, which reduces the amount of software development charged to
operating expense. Amounts capitalized were $1.5 million and $1.2 million for
2003 and 2002, respectively. Gross expenditures for engineering and software
development were $11.0 million and $8.1 million for 2003 and 2002, respectively.

General and administrative expenses amounted to $4.6 million and $2.7 million in
2003 and 2002, respectively. This increase of $1.9 million in 2003 is primarily
related to the inclusion of the Computing Products Group for the entire year
increasing expenses by $1.0 million, plus increases in personnel related and
other administrative costs of $.9 million associated with the Company's growth
in 2003, compared to 2002.

Restructuring charges amounted to $.1 million and $.6 million in 2003 and 2002,
respectively. In 2002, these non-recurring expenses were associated with actions
the Company took to improve its cost structure and included severance related to
staffing reductions and expenses associated with closing the Raleigh, North
Carolina engineering facility. In 2003, the Company incurred an incremental
restructuring charge related to the lease of its Raleigh, North Carolina
facility. This incremental charge was the result of a revised management
estimate regarding future expected sublease receipts for this facility.

In-process research and development expenses were $.4 million in 2002. This was
a charge for in-process research and development costs associated with the
Computing Products Group acquisition expensed in accordance with Financial
Accounting Standards Board Interpretation No. 4, "Applicability of SFAS No. 2 to
Business Combinations Accounted for by the Purchase Method."

Class action legal settlement charges were $.1 million in 2002. In September
2002, the Company signed a Memorandum of Understanding for settlement of the
class action litigation outstanding since May 2000. During 2003, the settlement
agreement was accepted and approved by the Court and the settlement was paid by
the Company.

Other Income, net. Other income consists primarily of interest income. The
Company's funds are primarily invested in high quality auction rate municipal
securities. Interest rates declined in 2003, compared to 2002, resulting in
reduced interest income. Offsetting this reduction was an increase in interest
income from the note receivable issued to an unconsolidated company in September
2002.

Income Taxes. The Company's income tax provision for 2003 totaled $1.3 million,
compared to an income tax benefit of $.8 million in 2002. The Company's
effective income tax rate is a combination of federal, state and foreign tax
rates and is generally lower than statutory rates because it includes benefits
derived from its international operations, research activities, tax-exempt
interest and foreign sales. For 2003, the Company's effective tax rate was 26.3%
and also included the favorable resolution of prior year tax uncertainties. For
2002, the Company's income tax was a tax benefit due the Company and included
the effect of in-process research and development expenses as well as the
favorable resolution of prior year tax uncertainties.

Equity in Income (Loss) of Unconsolidated Company. In September 2002, the
Company completed a minority interest investment in Momentum Computer, Inc., a
developer of specialized single board computer products located in Carlsbad,
California. During 2003, the Company recorded losses of $.3 million related to
its allocation of Momentum's net loss. During the fourth quarter 2003, the
Company reduced its investment in Momentum to 30 percent and recorded an
impairment of its investment due to Momentum's weaker than expected financial
results. The Company wrote this investment down by $.4 million, to $.4 million
at December 31, 2003, the Company's estimate of the investment's fair value at
that date. During 2002, a loss of $.1 million was recorded reflecting the
allocation of Momentum's net loss to the Company.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2004, the Company's primary source of liquidity included cash,
cash equivalents and investments of $25.6 million. The Company had working
capital of $41.6 million at December 31, 2004.

Cash generated by operating activities was $.6 million for 2004. This amount
included net income of $2.8 million, non-cash adjustments (depreciation and
amortization of $2.6 million, inventory reserves of $.9 million, a note
receivable valuation charge of $3.0 million, and a gain on the sale of Company's
investment in Momentum of $1.5 million). Cash used in operations due to changes
in operating assets and liabilities included increases (accounts receivable of
$1.9 million and inventory of $1.4 million) and decreases (accounts payable and
accrued expenses of $1.0 million, and income taxes payable of $2.5 million). The
uses of cash from the operating activities primarily relate to an increase in
sales and production volumes.

Cash used by investing activities during 2004 amounted to $5.9 million. The
largest use of cash in investing activities was the Company's acquisition of
Mapletree in 2004 for $5.3 million of cash. Also contributing to the use of cash
was the Company's investment in InSciTek, which totaled $2.7 million and
capitalized software development costs of $2.2 million. Offsetting these uses of
cash was the cash generated by the sale of the Company's equity and debt
investments in Momentum, which totaled $3.1 million, and net proceeds from the
sale of investments of $1.7 million.

Cash provided by financing activities totaled $3.0 million for 2004 and included
funds received from the exercise of stock options.

Off Balance Sheet Arrangements

The Company is not party to any off balance sheet arrangements other than those
noted below under contractual obligations.

Contractual Obligations

The Company leases facilities under operating leases. Under the terms of the
facility lease in Rochester, New York, which expires in March 2012, the Company
agreed to pay an annual rental of $740,000 in the first full year, with
pre-established adjustments each year thereafter. Under the terms of the
facility lease in San Luis Obispo, California, which expires in December 2008,
the Company agreed to pay an annual rental of $422,000 with an annual adjustment
based on the Consumer Price Index. 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 through 2007.

The Company enters into purchase commitments during the normal course of its
operations. Certain of the purchase commitments of the Company are
non-cancellable. At December 31, 2004, the Company's purchase commitments expire
through December 31, 2005. Included in the table below is the total of
non-cancellable purchase commitments outstanding as of December 31, 2004.

Future minimum payments for non-cancellable operating leases having a remaining
term in excess of one year and outstanding non-cancellable purchase commitments
at December 31, 2004 are as follows:

                                Operating Leases      Purchase Commitments
                                ----------------      --------------------
          2005                    $  1,558,000              $829,000
          2006                       1,445,000
          2007                       1,389,000
          2008                       1,329,000
          2009                         768,000
          Thereafter                 1,757,000
                                  ------------
          Total                   $  8,246,000
                                  ============

The Company is not a party to any other significant contractual obligations.

Current Position

Assuming there is no significant change in the Company's business, management
believes that its current cash, cash equivalents and investments together with
cash generated from operations should be sufficient to meet the Company's
anticipated operating needs, including working capital and capital expenditure
requirements, for at least the next twelve months. However, management is
continuing its strategic acquisition program to further accelerate its growth
and market penetration efforts. These efforts could have an impact on the
Company's working capital, liquidity or capital resources and the Company may
raise additional capital to facilitate these efforts.

Recently Issued Accounting Pronouncements

In December 2004, SFAS No. 123 "Accounting for Stock-Based Compensation (Revised
2004)" was issued. This statement establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services. This statement requires an entity to measure the cost of employee
services received in exchange for an award of equity instruments, based on the
fair value of the award at the grant date. That cost will be recognized over the
period during which an employee is required to provide service in exchange for
the award. This new pronouncement is effective for the Company in the third
quarter 2005. As of the required effective date, all entities that used the
fair-value-based method for either recognition or disclosure under SFAS No. 123
may apply this statement using a modified version of prospective application.
Under this method, compensation cost is recognized for the portion of
outstanding awards for which the requisite service has not yet been rendered.
The Company is currently assessing the impact this statement will have on its
financial statements.

In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - An Amendment
of ARB No. 43, Chapter 4". SFAS No. 151 states that abnormal amounts of idle
facility expense, freight, handling costs, and wasted material (spoilage) should
be recognized as current-period charges. Additionally, SFAS No. 151 requires
that allocation of fixed production overheads to the costs of conversion be
based on the normal capacity of the production facilities. The Company is
required to adopt SFAS No. 151 effective January 1, 2006. The Company does not
expect the adoption of SFAS No. 151 will have a material impact on its
consolidated results of operations and financial condition.

In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets
- An Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions".
SFAS No. 153 is based on the principle that nonmonetary asset exchanges should
be recorded and measured at the fair value of the assets exchanged, with certain
exceptions. This standard requires exchanges of productive assets to be
accounted for at fair value, rather than at carryover basis, unless (1) neither
the asset received nor the asset surrendered has a fair value that is
determinable within reasonable limits or (2) the transactions lack commercial
substance. SFAS No. 153 specifies that a nonmonetary exchange has commercial
substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. The Company is required to adopt SFAS
No. 153 effective for its fiscal period beginning after June 15, 2005, and does
not expect the adoption of SFAS No. 153 will have a material impact on its
consolidated results of operations and financial condition.

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.
The Company 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 auction rate municipal securities. The Company is also
subject to foreign exchange risk related to its operations in Ottawa, Canada.
The Company believes that its exposure to foreign currency risk is minimal. 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 Registered Public Accounting Firm                 36
   Consolidated Balance Sheets at December 31, 2004 and 2003               38
   Consolidated Statements of Income for the Years Ended
    December 31, 2004, 2003 and 2002                                       39
   Consolidated Statements of Changes in Stockholders' Equity for the
    Years Ended December 31, 2004, 2003 and 2002                           40
   Consolidated Statements of Cash Flows for the Years Ended
    December 31, 2004, 2003 and 2002                                       41
   Notes to Consolidated Financial Statements                              42

Index to Financial Statement Schedule:

Schedule II - Valuation and qualifying accounts
   Allowance for doubtful accounts                                         60
   Valuation allowance for note receivable                                 60
   Reserve for inventory obsolescence                                      61

All other schedules have been omitted because they are not applicable or the
required information is shown in the Consolidated Financial Statements or notes
thereto.

<PAGE>
             Report of Independent Registered Public Accounting Firm

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

We have completed an integrated audit of Performance Technologies,
Incorporated's 2004 consolidated financial statements and of its internal
control over financial reporting as of December 31, 2004 and audits of its 2003
and 2002 consolidated financial statements in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Our opinions,
based on our audits, are presented below.

Consolidated financial statements and financial statement schedule
------------------------------------------------------------------

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, 2004
and 2003, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2004 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit of financial statements 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.

Internal control over financial reporting
-----------------------------------------

Also, in our opinion, management's assessment, included in Management's Report
on Internal Control Over Financial Reporting appearing under Item 9A, that the
Company maintained effective internal control over financial reporting as of
December 31, 2004 based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), is fairly stated, in all material respects, based on those
criteria. Furthermore, in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2004, based on criteria established in Internal Control - Integrated Framework
issued by the COSO. The Company's management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting. Our
responsibility is to express opinions on management's assessment and on the
effectiveness of the Company's internal control over financial reporting based
on our audit. We conducted our audit of internal control over financial
reporting in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. An audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial reporting,
evaluating management's assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.

A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.

PricewaterhouseCoopers LLP
Rochester, New York
March 16, 2005
<PAGE>


             PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS


                                     ASSETS

                                                      December 31,
                                                2004                2003
                                                ----                ----

Current assets:
   Cash and cash equivalents                 $10,361,000         $12,639,000
   Investments                                15,250,000          16,950,000
   Accounts receivable, net                   10,185,000           7,857,000
   Inventories, net                            6,573,000           5,443,000
   Prepaid income taxes                          771,000
   Prepaid expenses and other assets             801,000             626,000
   Deferred taxes                              3,088,000           1,714,000
                                            -------------       -------------
         Total current assets                 47,029,000          45,229,000

Property, equipment and improvements, net      2,186,000           2,432,000
Software development costs, net                3,653,000           2,597,000
Notes receivable from unconsolidated
 companies, net                                                    1,000,000
Investment in unconsolidated company                                 402,000
Goodwill                                       4,143,000
                                            -------------       -------------
         Total assets                        $57,011,000         $51,660,000
                                            =============       =============


                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Accounts payable                           $1,476,000          $1,231,000
   Income taxes payable                                            1,760,000
   Accrued expenses                            3,916,000           4,019,000
                                            -------------       -------------
         Total current liabilities             5,392,000           7,010,000

Deferred taxes                                 1,198,000             698,000
                                            -------------       -------------
         Total liabilities                     6,590,000           7,708,000
                                            -------------       -------------

Commitments and contingencies (Note J and Q)

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                 13,476,000          12,863,000
   Retained earnings                          41,978,000          40,532,000
   Treasury stock - at cost, 482,681
     and 811,049 shares held at
     December 31, 2004 and 2003,
     respectively                             (5,188,000)         (9,536,000)
   Accumulated other comprehensive income
     (loss)                                       22,000             (40,000)
                                            -------------       --------------
         Total stockholders' equity           50,421,000          43,952,000
                                            -------------       --------------
         Total liabilities and
          stockholders' equity               $57,011,000         $51,660,000
                                            =============       ==============

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


<PAGE>


             PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME



                                            Year Ended December 31,
                                       2004           2003            2002
                                       ----           ----            ----

Sales                              $53,489,000    $49,992,000     $27,014,000
Cost of goods sold                  28,027,000     25,293,000      12,846,000
                                  -------------  -------------   -------------
Gross profit                        25,462,000     24,699,000      14,168,000
                                  -------------  -------------   -------------
Operating expenses:
   Selling and marketing             6,403,000      5,881,000       4,385,000
   Research and development         10,243,000      9,493,000       6,914,000
   General and administrative        4,786,000      4,639,000       2,735,000
   Restructuring charges               217,000        118,000         573,000
   In-process research and
    development                        218,000                        366,000
   Class action legal settlement                                      143,000
                                  -------------  -------------   -------------
      Total operating expenses      21,867,000     20,131,000      15,116,000
                                  -------------  -------------   -------------
Income (loss) from operations        3,595,000      4,568,000        (948,000)

Note receivable valuation charge    (3,000,000)
Other income, net                      747,000        522,000         550,000
                                  -------------  -------------   -------------
Income (loss) before income taxes,
 equity in income (loss) of
 unconsolidated company, gain on
 sale of investment and impairment
 of minority interest investment     1,342,000      5,090,000        (398,000)

Income tax (benefit) provision         (87,000)     1,339,000        (819,000)
                                  -------------  -------------   -------------
Income before equity in income
 (loss)of unconsolidated company,
 gain on sale of investment and
 impairment of minority interest
 investment                          1,429,000      3,751,000         421,000

Equity in income (loss) of
 unconsolidated company                182,000       (309,000)        (95,000)

Gain on sale of investment in
 unconsolidated company, net of tax  1,169,000

Impairment of minority interest
 investment                                          (392,000)
                                  -------------  -------------   -------------
      Net income                   $ 2,780,000    $ 3,050,000     $   326,000
                                  =============  =============   =============

Basic earnings per share           $       .22    $       .25     $       .03
                                  =============  =============   =============

Diluted earnings per share         $       .21    $       .24     $       .03
                                  =============  =============   =============

Weighted average number of common
 shares used in basic earnings per
 share                              12,720,301     12,258,575      12,263,351
Potential common shares                498,604        433,624         109,721
                                  -------------  -------------   -------------
Weighted average number of common
 shares used in diluted earnings
 per share                          13,218,905     12,692,199      12,373,072
                                  =============  =============   =============

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


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

                                                                                                          Accumulated
                                                       Additional                                            Other
                               Common Stock              Paid-in         Retained        Treasury        Comprehensive
                            Shares        Amount         Capital         Earnings          Stock           Income(Loss)      Total
                         -----------    ----------     ------------     -----------     -------------     ------------- ------------
Balance -
 January 1, 2002         13,260,038      $133,000      $12,698,000      $38,846,000     $(13,284,000)         $(51,000) $38,342,000
Comprehensive income:
 2002 net income                                                            326,000                                         326,000
 Other                                                                                                         (17,000)     (17,000)
Total comprehensive                                                                                                     ------------
 income                                                                                                                     309,000
Exercise of 45,362
 options                                                                   (371,000)         621,000                        250,000
Tax benefit-option plan                                     27,000                                                           27,000
Purchase of treasury
 stock-34,511 shares                                                                        (119,000)                      (119,000)
Balance -                -----------    ----------     ------------     ------------    -------------     ------------- ------------
 December 31, 2002       13,260,038       133,000       12,725,000       38,801,000      (12,782,000)          (68,000)  38,809,000
Comprehensive income:
 2003 net income                                                          3,050,000                                       3,050,000
 Other                                                                                                          28,000       28,000
Total comprehensive                                                                                                     ------------
  income                                                                                                                  3,078,000
Exercise of 258,997
 options                                                                 (1,319,000)       3,440,000                      2,121,000
Restricted stock
 compensation expense                                       67,000                                                           67,000
Tax benefit-option plan                                     71,000                                                           71,000
Purchase of treasury
 stock-56,350 shares                                                                        (194,000)                      (194,000)
Balance -                -----------    ----------     ------------     ------------    -------------     ------------- ------------
 December 31, 2003       13,260,038       133,000       12,863,000       40,532,000       (9,536,000)          (40,000)  43,952,000
Comprehensive income:
 2004 net income                                                          2,780,000                                       2,780,000
 Other                                                                                                          62,000       62,000
Total comprehensive                                                                                                     ------------
 income                                                                                                                   2,842,000
Exercise of 322,729
 options                                                                 (1,334,000)       4,348,000                      3,014,000
Restricted stock
 compensation expense                                       32,000                                                           32,000
Tax benefit-option plan                                    581,000                                                          581,000
                         -----------    ----------     ------------     ------------    -------------     ------------- ------------
Balance -
 December 31, 2004       13,260,038      $133,000      $13,476,000      $41,978,000      $(5,188,000)          $22,000  $50,421,000
                         ===========    ==========     ============     ============    =============     ============= ============
</TABLE>



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

<PAGE>

             PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                Year Ended December 31,
                                            2004         2003         2002
                                            ----         ----         ----
Cash flows from operating activities:
  Net income                            $ 2,780,000    $ 3,050,000  $   326,000
  Non-cash adjustments:
     Depreciation and amortization        2,638,000      2,277,000    2,124,000
     Provision for bad debts                 52,000         87,000      200,000
     Note receivable valuation charge     3,000,000
     Reserve for inventory obsolescence     921,000      1,275,000      980,000
     Non-cash restructuring charges                        118,000      209,000
     Restricted stock compensation
      expense                                32,000         67,000
     Deferred taxes                        (874,000)      (196,000)      32,000
     Gain on sale on investment in
      unconsolidated company             (1,504,000)
     In-process research and development    218,000                     366,000
     Equity in (income) loss of
      unconsolidated company               (182,000)       309,000       95,000
     Impairment of minority interest
      investment                                           392,000
     Tax benefit from stock option
      exercises                             581,000         71,000       27,000
  Changes in operating assets and
   liabilities, net of acquisition:
    Accounts receivable                  (1,899,000)    (1,322,000)      80,000
    Inventories                          (1,445,000)    (2,168,000)    (104,000)
    Prepaid expenses and other assets      (171,000)       316,000     (226,000)
    Accounts payable and accrued
     expenses                            (1,007,000)        26,000    1,221,000
    Income taxes payable and prepaid
     income taxes                        (2,531,000)     1,258,000      150,000
                                        ------------  ------------- ------------
       Net cash provided by operating
        activities                          609,000      5,560,000    5,480,000
                                        ------------  ------------- ------------

Cash flows from investing activities:
  Purchases of property, equipment
   and improvements                        (555,000)     (674,000)   (1,110,000)
  Capitalized software development costs (2,189,000)   (1,524,000)   (1,188,000)
  Business acquisition                   (5,294,000)      (33,000)   (3,643,000)
  Purchases of investments              (35,075,000)  (44,150,000) (100,031,000)
  Proceeds from sales of investments     36,775,000    42,956,000    88,375,000
  Proceeds from sale of investment in
   unconsolidated company                 2,087,000       250,000
  Investment in unconsolidated company                               (1,500,000)
  Notes receivable from unconsolidated
   companies                             (1,650,000)                 (1,000,000)
                                        ------------  ------------- ------------
       Net cash used by investing
        activities                       (5,901,000)   (3,175,000)  (20,097,000)
                                        ------------  ------------- ------------

Cash flows from financing activities:
  Exercise of stock options               3,014,000     2,121,000       250,000
  Purchase of treasury stock                             (194,000)     (119,000)
                                        ------------  ------------- ------------
       Net cash provided by financing
        activities                        3,014,000     1,927,000       131,000
                                        ------------  ------------- ------------

       Net (decrease) increase in cash
        and cash equivalents             (2,278,000)    4,312,000   (14,486,000)
Cash and cash equivalents at beginning
 of year                                 12,639,000     8,327,000    22,813,000
                                        ------------  ------------- ------------
Cash and cash equivalents at end of
 year                                   $10,361,000   $12,639,000   $ 8,327,000
                                        ============  ============= ============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid, net of (refunds)     $ 3,084,000   $   161,000   $(1,050,000)
Non-cash financing activity:
Exercise of stock options using 4,881
 shares of common stock                 $    93,000

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


<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 is a supplier of platforms, components and
software solutions for the embedded systems marketplace that can be used in a
broad range of applications and end markets.

Segment Data, Geographic Information and Significant Customers: The Company
operates in one industry segment. Export sales to customers outside North
America represented 31%, 21% and 25% of total sales for the years ended December
31, 2004, 2003 and 2002, respectively.

For 2004, 2003, and 2002, four customers accounted for approximately 38%, 48%,
and 28%, respectively, of sales. For 2004, the Company had two customers who
comprised greater than 10% of sales. These companies were Lucent Technologies,
Inc. and UT Starcom, Inc., who accounted for 13% and 11% of 2004 sales,
respectively. In 2003, the Company had two customers who comprised greater than
10% of sales. These customers were Andrew Corporation and UT Starcom, Inc., who
comprised 17% and 16% of 2003 sales, respectively. For 2002, no single customer
represented greater than 10% of sales.

Principles of Consolidation: The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. Investments in which
the Company owns 20% to 50% of the voting stock and exercises significant
influence over operating and financial policies are accounted for using the
equity method of accounting. In addition, the consolidated financial statements
include the operating results of Ziatech Corporation and Mapletree Networks,
Inc. from their respective dates of acquisition (Note B). All significant
inter-company transactions have been eliminated.

Change in Classifications: In connection with the preparation of this report,
the Company concluded that it was appropriate to classify auction rate municipal
securities as investments. Previously, such investments were classified as cash
equivalents. Accordingly, the Company revised the classification to report these
securities as investments on the accompanying Consolidated Balance Sheets as of
December 31, 2003. The Company has also recorded corresponding adjustments to
the accompanying Consolidated Statements of Cash Flows for the years ended
December 31, 2003 and 2002, to reflect the gross purchases and sales of these
securities as investing activities. This change in classification does not
affect previously reported cash flows from operations or from financing
activities or previously reported net income for any period.

At December 31, 2003, $16,950,000 of auction rate municipal securities were
classified as cash equivalents. For the years ended December 31, 2003 and 2002,
net cash used by investing activities related to these investments totaled
$3,200,000 and $9,650,000, respectively, which was previously included in cash
and cash equivalents in the Company's Consolidated Statements of Cash Flows.

Reclassifications were also made to stockholders' equity in 2002 related to the
issuance of common stock from treasury.

Foreign Currency Translation: The US dollar is the functional currency of the
Company's Canadian subsidiary. Monetary assets and liabilities are remeasured at
year-end exchange rates. Non-monetary assets and liabilities are remeasured at
historical rates. Revenues, expenses, gains and losses are remeasured using the
rates on which those elements were recognized during the period.

Use of Estimates: The preparation of the consolidated financial statements in
conformity with accounting principles generally accepted in the United States
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 that potentially expose the
Company to significant concentrations of credit risk consist principally of bank
deposits, investments, and accounts receivable. Investments consist of high
quality, interest bearing financial instruments. The Company performs ongoing
credit evaluations of its customers' financial condition and maintains an
allowance for uncollectible accounts receivable based upon the expected
collectability of all accounts receivable. As of December 31, 2004, Lucent
Technologies, Inc., comprised 31% of net accounts receivable. As of December 31,
2003, Andrew Corporation comprised 17% of net accounts receivable. As of
December 31, 2002, UT Starcom, Inc., represented 23% of net accounts receivable.

Fair Value of Financial Instruments: The carrying amounts of the Company's
financial instruments, including investments, accounts receivable and accounts
payable approximate fair values at December 31, 2004 and 2003, 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.

Investments: Investments consist of auction rate municipal debt securities
classified as available-for-sale. These investments are recorded at cost, which
approximates fair market value due to their variable interest rates. These
investments typically reset on approximately a monthly basis, and, despite the
long-term nature of their stated contractual maturities, the Company has the
ability to quickly liquidate these securities. All income generated from these
investments was recorded as interest income. These investments are on deposit
with major financial institutions.

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 recognizes revenue in accordance with the SEC
Staff Accounting Bulletin (SAB) No. 104, "Revenue Recognition". Revenue is
recognized upon receipt of a signed purchase order or contract, product
shipment, provided the sales price is fixed or determinable, and collectability
is reasonably assured. 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. At the time of sale, the Company
provides for future expected sales returns and warranty costs. These estimates
are based upon historical experience. These estimates have not varied
significantly from actual returns and warranty costs incurred.

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

Repairs and maintenance costs are expensed as incurred. Asset betterments are
capitalized.

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. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets."

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

Shipping and Handling Costs: Amounts charged to customers and costs incurred by
the Company related to shipping and handling are included in net sales and cost
of goods sold, respectively, in accordance with EITF Issue No. 00-10,
"Accounting for Shipping and Handling Fees and Costs."

Advertising: Advertising costs are expensed as incurred and recorded in "Selling
and marketing" in the Consolidated Statements of Income. Advertising expense
amounted to $66,000, $173,000 and $69,000 for 2004, 2003 and 2002, 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 its estimated remaining economic life, generally
three years, or using the ratio of current revenues to current and anticipated
revenues from such software, whichever provides greater amortization.

Income Taxes: The Company accounts for income taxes using the asset and
liability approach, which requires recognition of deferred tax liabilities and
assets for the expected future tax consequences of temporary differences between
the carrying amounts and the tax basis of such assets and liabilities. This
method utilizes enacted statutory tax rates in effect for the year in which the
temporary differences are expected to reverse and gives immediate effect to
changes in income tax rates upon enactment. Deferred tax assets are recognized,
net of any valuation allowance, for deductible temporary differences and tax
credit 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 unvested restricted stock,
applying the treasury stock method. Dilutive earnings per share calculations
exclude the effect of approximately 1,305,000, 660,000 and 1,740,000 options for
2004, 2003 and 2002, respectively, since such options have an exercise price in
excess of the average market price of the Company's common stock.

Stock-Based Employee Compensation: At December 31, 2004, the Company had stock
options outstanding from three stock-based employee compensation plans. The
Company accounts for stock-based compensation under the recognition and
measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Accordingly, no stock-based employee
compensation cost has been recognized in net income for the stock options
granted. Had compensation cost for the stock options granted been determined
based on the fair value recognition provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company's net income (loss) and earnings (loss)
per share would have been as follows:

                                                 Year Ended December 31,
                                             2004          2003         2002
                                         ------------  ------------ ------------

Net income, as reported                  $ 2,780,000   $ 3,050,000  $   326,000
Add: Restricted stock compensation
 expense                                      32,000        67,000

Deduct: Total stock-based employee
 compensation expense determined under
 fair value based method for all awards,
 net of related tax effects               (2,757,000)   (1,457,000)  (2,285,000)
                                         ------------  ------------ ------------
Pro forma net income (loss)              $    55,000   $ 1,660,000  $(1,959,000)
                                         ============  ============ ============
Earnings (loss) per share:
Basic - as reported                      $       .22   $       .25  $       .03
                                         ============  ============ ============
Basic - pro forma                        $       .00   $       .14  $      (.16)
                                         ============  ============ ============

Diluted - as reported                    $       .21   $       .24  $       .03
                                         ============  ============ ============
Diluted - pro forma                      $       .00   $       .13  $      (.16)
                                         ============  ============ ============


The assumptions regarding the annual vesting of stock options were generally 33%
for options granted in 2004 and 2003 and 25% per year for options granted in
2002. 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 2004, 2003 and 2002: Dividend yield of 0%;
expected volatility of 68% to 69%, 67% and 68%; risk-free interest rates of 2.1%
to 3.5%, 2.0% and 3.7%; and expected lives of three years in 2004 and 2003 and
four years in 2002. The weighted average fair value of options granted during
2004, 2003 and 2002 was $7.57, $1.96 and $4.17, respectively.

Recent Accounting Pronouncements: In December 2004, SFAS No. 123 "Accounting for
Stock-Based Compensation (Revised 2004)" was issued. This statement establishes
standards for the accounting for transactions in which an entity exchanges its
equity instruments for goods or services. This statement requires an entity to
measure the cost of employee services received in exchange for an award of
equity instruments, based on the fair value of the award at the grant date. That
cost will be recognized over the period during which an employee is required to
provide service in exchange for the award. This new pronouncement is effective
for the Company in the third quarter 2005. As of the required effective date,
all entities that used the fair-value-based method for either recognition or
disclosure under SFAS No. 123 may apply this statement using a modified version
of prospective application. Under this method, compensation cost is recognized
for the portion of outstanding stock-based awards for which the requisite
service has not yet been rendered. The Company is currently assessing the impact
this statement will have on its financial statements.

In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - An Amendment
of ARB No. 43, Chapter 4". SFAS No. 151 states that abnormal amounts of idle
facility expense, freight, handling costs, and wasted material (spoilage) should
be recognized as current-period charges. Additionally, SFAS No. 151 requires
that allocation of fixed production overheads to the costs of conversion be
based on the normal capacity of the production facilities. The Company is
required to adopt SFAS No. 151 effective January 1, 2006. The Company does not
expect the adoption of SFAS No. 151 will have a material impact on its
consolidated results of operations and financial condition.

In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets
- An Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions".
SFAS No. 153 is based on the principle that nonmonetary asset exchanges should
be recorded and measured at the fair value of the assets exchanged, with certain
exceptions. This standard requires exchanges of productive assets to be
accounted for at fair value, rather than at carryover basis, unless (1) neither
the asset received nor the asset surrendered has a fair value that is
determinable within reasonable limits or (2) the transactions lack commercial
substance. SFAS No. 153 specifies that a nonmonetary exchange has commercial
substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. The Company is required to adopt SFAS
No. 153 effective for its fiscal period beginning after June 15, 2005, and does
not expect the adoption of SFAS No. 153 will have a material impact on its
consolidated results of operations and financial condition.

Note B - Acquisitions
---------------------

On October 2, 2002, the Company acquired a portion of Intel Corporation's
Communications Platform Group (Ziatech Corporation). The acquisition of all the
outstanding shares of Ziatech Corporation (Ziatech) was completed at a cash
purchase price of $2,967,000. The results of Ziatech have been included in the
consolidated financial statements from the date of acquisition. The Ziatech
platform and single board computer products have enabled the Company to provide
a more complete solution to its customers.

The purchase price allocation was prepared in accordance with the application of
SFAS No. 141, "Business Combinations." Accordingly, the purchase price was
allocated to the respective assets and liabilities based upon their estimated
fair values at the acquisition date. Following is a summary of the fair values
of the assets acquired and liabilities assumed as of the date of the
acquisition:

Inventories, net                                        $ 1,670,000
All other current assets                                  1,343,000
Property, equipment and improvements                        554,000
Acquired in-process research and development                366,000
                                                       -------------
 Total assets acquired                                    3,933,000
                                                       -------------

Current liabilities                                         290,000
Acquisition costs incurred                                  676,000
                                                       -------------
 Total liabilities acquired and acquisition costs           966,000
                                                       -------------

   Purchase price                                       $ 2,967,000
                                                       =============

The value of $366,000 assigned to acquired in-process research and development
(IPR&D) was expensed upon acquisition because the technological feasibility of
all projects under development had not been established and had no alternative
future use. The IPR&D relates to certain single board computer and chassis
products for use in embedded systems.

On January 23, 2004, the Company acquired substantially all of the assets and
assumed certain liabilities of Mapletree Networks, Inc., a company that provided
voice, data and fax processing technology to original equipment manufacturers.
In accordance with the purchase agreement, the Company paid $6,625,000 at
closing and incurred $418,000 of other acquisition related costs. The Company
accounted for the acquisition under the provisions of SFAS No. 141, "Business
Combinations." Acquired in-process research and development (IPR&D), which was
related to certain voice processing products, amounted to $218,000 and was
charged to operations during the first quarter 2004. As a component of the
acquisition, the Company acquired certain software development costs. The excess
of the purchase price over the fair value of the net assets acquired, which
totaled $4,143,000, is included in goodwill on the accompanying Consolidated
Balance Sheet and is deductible for tax purposes. Operating results of the
acquired group have been included in the Consolidated Statement of Income from
the date of acquisition. The products acquired in this acquisition broaden the
Company's product offering to its customers.

In connection with the acquisition, the Company agreed to pay an additional
$1,625,000 if the operations of the acquired group (operated by the Company on a
stand-alone basis) achieved certain milestones ("earn-out"). Based upon the
operating results of the acquired group in the second quarter of 2004, the
earn-out was terminated. During the fourth quarter of 2004, the Company resolved
certain matters related to the acquisition resulting in a payment to the Company
of $1,749,000, which represented a partial return of purchase price.

Note C - Investments
--------------------

At December 31, 2004 and 2003, investments consisted of high grade, auction rate
municipal securities which the Company has classified as available-for-sale. The
following table summarizes the contractual maturities of the available-for-sale
securities at December 31, 2004:

         Due in 2 to 5 years                          $ 2,200,000
         Due after 5 years                             13,050,000
                                                     -------------
               Total                                  $15,250,000
                                                     =============

These investments are recorded at cost, which approximates fair market value due
to their variable interest rates. These investments typically reset on
approximately a monthly basis, and, despite the long-term nature of their stated
contractual maturities, the Company has the ability to quickly liquidate these
securities. All income generated from these investments was recorded as interest
income.

Note D - Accounts Receivable, net
---------------------------------

Accounts receivable consisted of the
 following:                                               At December 31,
                                                         2004          2003
                                                    -------------  -------------
Accounts receivable                                  $10,611,000    $ 8,236,000
Less:  allowance for doubtful accounts                  (426,000)      (379,000)
                                                    -------------  -------------
      Net                                            $10,185,000    $ 7,857,000
                                                    =============  =============
<PAGE>

Note E - Inventories, net
-------------------------

Inventories consisted of the following:                   At December 31,
                                                         2004          2003
                                                    -------------  -------------
Purchased parts and components                       $ 3,638,000    $ 3,836,000
Work in process                                        3,947,000      3,434,000
Finished goods                                         2,487,000      1,969,000
                                                    -------------  -------------
                                                      10,072,000      9,239,000
Less:  reserve for inventory obsolescence             (3,499,000)    (3,796,000)
                                                    -------------  -------------
      Net                                            $ 6,573,000    $ 5,443,000
                                                    =============  =============

Note F - Property, Equipment and Improvements, net
--------------------------------------------------

Property, equipment and improvements consisted of
 the following:                                           At December 31,
                                                         2004          2003
                                                    -------------  -------------
Land                                                 $   407,000    $   407,000
Engineering equipment and software                     4,815,000      4,487,000
Manufacturing equipment                                2,117,000      2,097,000
Furniture and equipment                                1,627,000      1,572,000
Leasehold improvements                                   341,000        326,000
                                                    -------------  -------------
                                                       9,307,000      8,889,000
Less:  accumulated depreciation and amortization      (7,121,000)    (6,457,000)
                                                    -------------  -------------
      Net                                            $ 2,186,000    $ 2,432,000
                                                    =============  =============

Total depreciation and amortization expense for equipment and improvements for
2004, 2003 and 2002 was $927,000, $1,272,000 and $1,070,000, respectively.

Note G - Investments in Unconsolidated Companies
------------------------------------------------

In September 2002, the Company completed an agreement to invest $1,500,000 for a
47% ownership interest in Momentum Computer, Inc. (Momentum), a developer of
specialized single board computer products for the data communications, telecom,
military and aerospace markets. The investment was accounted for under the
equity method. Accordingly, the Company recorded its investment in Momentum on
the Consolidated Balance Sheets as "Investment in unconsolidated company" and
its share of Momentum's earnings or loss as "Equity in income (loss) of
unconsolidated company" on the Consolidated Statements of Income. The Company
also invested $1,000,000 in Momentum in the form of a note receivable. As of
December 31, 2003, the interest rate on this loan was 4%.

During 2003, the Company reduced its ownership in Momentum from 47% to 30% when
the Company sold a portion of its investment back to the majority stockholder of
Momentum for $250,000. Based upon the Company's expectations of Momentum's
performance at the time of the investment and its business prospects late in
2003, the Company concluded that an other than temporary impairment of this
investment occurred. Based upon this conclusion, the Company recorded an
impairment charge of $392,000 on its investment and reduced the carrying value
of the investment to the Company's estimate of fair value at December 31, 2003.

During the third quarter 2004, the Company completed the sale of its minority
investment in Momentum for $2,087,000 and realized a gain of $1,169,000, after
taxes of $335,000. Cash received in the fourth quarter 2004 from the sale
amounted to $3,087,000, including the collection of the $1,000,000 note
receivable.

Momentum's financial position and results of operations were as follows:

                       For the period
                       from January 1,                       For the period
                      2004 to the date      For the year     from investment
                      of sale(September    ended December  (September 20, 2002
                         30, 2004)            31, 2003     to December 31, 2002)
                      -----------------  ----------------- ---------------------
Statements of Income:
   Net sales             $6,735,000          $3,350,000        $  558,000
   Gross profit           2,409,000           1,377,000           279,000
   Net income (loss)        572,000            (654,000)         (314,000)
   Company's equity in
     income (loss)       $  182,000            (309,000)       $  (95,000)
   Impairment of
    investment                               $ (392,000)

                                        As of September 30,   As of December 31,
                                               2004                 2003
                                         ----------------- --------------------
Balance Sheet:
   Current assets                            $3,338,000        $1,562,000
   Noncurrent assets                            319,000           324,000
   Current liabilities                        1,057,000           414,000
   Long term borrowings                       1,530,000         1,000,000
   Equity                                    $1,069,000        $  472,000

On February 18, 2004, the Company entered into an agreement to invest up to
$3,000,000 in InSciTek Microsystems, Inc. (InSciTek), an unrelated company, in
the form of an interest bearing convertible note. During 2004, the Company
invested $3,000,000 in conjunction with this agreement (including committed
funding of $350,000 in January 2005, see Note I). As of December 31, 2004,
InSciTek had not raised sufficient outside capital to assure its future as a
going concern. Therefore, during the fourth quarter 2004, the Company recorded a
valuation charge related to this note receivable in the amount of $3,000,000 as
collection of this note is doubtful. The Company has the option to acquire
ownership of InSciTek during a future specified period. The note bears interest
at 10% annually and is convertible into shares of common stock of InSciTek. All
unpaid accrued interest and all outstanding principal on the note is payable in
full to the Company on December 31, 2008.

Note H - Goodwill
-----------------

Goodwill is the excess of cost of an acquired entity over the amounts assigned
to assets acquired and liabilities assumed in a business combination. Goodwill
is tested for impairment at least annually in the fourth quarter and will be
tested for impairment between annual tests if an event occurs or circumstances
change that more likely than not would indicate the carrying amount may be
impaired. An impairment loss generally would be recognized when the carrying
amount of the goodwill exceeds its implied fair value. The Company utilizes a
combination of quoted market prices and discounted cash flow analysis for its
impairment tests. See Note B for further discussion.

Note I - Accrued Expenses
-------------------------

Accrued expenses consisted of the following:          At December 31,
                                                  2004             2003
                                             --------------   ---------------
Accrued compensation and related              $ 1,790,000       $ 2,213,000
Accrued professional services                     227,000           379,000
Deferred revenue                                1,019,000           857,000
Accrued restructuring charges                                       146,000
Accrued warranty obligations                      288,000           233,000
InSciTek committed investment                     350,000
Other accrued expenses                            242,000           191,000
                                             --------------   ---------------
      Total                                   $ 3,916,000       $ 4,019,000
                                             ==============   ===============

The Company has warranty obligations in connection with the sale of certain of
its products. The warranty period for its products is generally one year. The
costs incurred to provide for these warranty obligations are estimated and
recorded as an accrued liability at the time of sale. The Company estimates its
future warranty costs based on product-based historical performance rates and
related costs to repair. The changes in the Company's accrued warranty
obligations for 2004 and 2003 were as follows:


Accrued warranty obligations at December 31, 2002                82,000
Actual warranty experience                                     (231,000)
Warranty provisions                                             382,000
                                                              ---------
Accrued warranty obligations at December 31, 2003               233,000
Actual warranty experience                                     (345,000)
Warranty provisions                                             400,000
                                                              ---------
Accrued warranty obligations at December 31, 2004             $ 288,000
                                                              =========

Note J - Commitments
--------------------

The Company leases facilities under operating leases. Under the terms of the
facility lease in Rochester, New York, which expires in March 2012, the Company
agreed to pay an annual rental of $740,000 in the first full year, with
pre-established adjustments for each year thereafter. Under the terms of the
facility lease in San Luis Obispo, California, which expires in December 2008,
the Company agreed to pay an annual rental of $422,000 with an annual adjustment
based on the Consumer Price Index. 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 through 2007.
<PAGE>

Future minimum payments for all operating leases having a remaining term in
excess of one year at December 31, 2004 are as follows:

                                            Operating Leases
                                            ----------------
          2005                                $ 1,558,000
          2006                                  1,445,000
          2007                                  1,389,000
          2008                                  1,329,000
          2009                                    768,000
          Thereafter                            1,757,000
                                              ------------
          Total                               $ 8,246,000
                                              ============

Rental expense amounted to $1,752,000, $1,730,000 and $1,218,000 for 2004, 2003
and 2002, respectively.

Note K - Stockholders' Equity
-----------------------------

In August 2002, the Board of Directors authorized the repurchase of one million
shares of the Company's common stock. The Company repurchased 56,350 shares at a
total cost of $194,000 and 34,511 shares at a total cost of $119,000 under this
program in 2003 and 2002, respectively. This program expired in April 2003.

Note L - Stock Option Plan
--------------------------
In 1986, the Company established the 1986 Incentive Stock Option Plan. As of
January 1, 2001, the stockholders had authorized 3,200,000 shares to be issued
pursuant to this Plan. In May 2001, the stockholders approved the 2001 Stock
Option Plan pursuant to which 1,500,000 shares of common stock were reserved for
grant. The 2001 Stock Option Plan replaced the 1986 plan which expired on
December 31, 2001. A total of 276,000 options available for issuance under the
1986 plan were cancelled upon adoption of the 2001 plan. In June 2003, the
stockholders approved the 2003 Omnibus Incentive Plan pursuant to which
1,500,000 shares of common stock were reserved for future grants. Awards under
the plan may include stock options, stock appreciation rights, restricted stock
and other stock performance awards as determined by the Board of Directors.

Stock 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 or four years.

With respect to non-qualified options and incentive stock options that are
exercised and held for less than one year, 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 on the exercise date.
Tax benefits related to such stock option exercises are credited to additional
paid-in capital.

The following table summarizes stock option activity under the plans:

                                     Number      Weighted-Average     Option
                                   of Options     Exercise Price    Price Range
                                   ----------    ---------------- --------------
Outstanding at January 1, 2002     1,818,830         $11.54       $4.83 - $28.75
Granted                              615,250          $7.72       $3.40 -  $8.60
Exercised                            (45,362)         $5.51       $4.83 -  $9.88
Expired                             (242,038)        $12.55       $7.82 - $28.75
                                   ----------
Outstanding at December 31, 2002   2,146,680         $10.46       $3.40 - $28.75
Granted                              630,167          $4.28       $3.44 - $11.40
Exercised                           (258,997)         $8.19       $3.88 - $13.94
Expired                             (268,226)        $10.96       $3.83 - $18.75
                                   ----------
Outstanding at December 31, 2003   2,249,624          $8.93       $3.40 - $28.75
Granted                              589,250         $16.59       $7.25 - $18.13
Exercised                           (322,729)         $9.50       $3.40 - $18.75
Expired                             (116,386)        $15.21       $3.83 - $28.75
                                   ----------
Outstanding at December 31, 2004   2,399,759         $10.39       $3.40 - $28.75
                                   ==========

The following table summarizes information about stock options at December 31,
2004:

                         Options outstanding             Options exercisable
                   -------------------------------------------------------------
                                Weighted   Weighted                  Weighted
                                 average   average                   average
     Range of                  remaining   exercise                  exercise
  exercise price     Options   life (yrs)   price       Options       price
------------------ ----------- ---------- ----------  ----------- --------------
  $3.40 to $5.94      911,805     2.77      $ 4.36       595,729      $ 4.61
  $5.95 to $9.00      393,577     3.22      $ 8.27       221,923      $ 8.11
  $9.01 to $11.40     113,349     2.62      $10.11        94,558      $10.06
 $11.41 to $14.24     321,628     2.05      $13.75       268,510      $13.72
 $14.25 to $28.75     659,400     3.15      $18.40       196,313      $20.49
------------------ ----------- ---------- ----------  ----------- --------------
                    2,399,759     2.84      $10.39     1,377,073      $ 9.59

At December 31, 2004, 1,270,004 options were available for future grant under
the two stock option plans.

During 2003, the Board of Directors granted 17,720 shares of restricted stock at
prices ranging from $6.89 to $12.54. During 2003, 1,740 shares of restricted
stock were terminated, without vesting. In January 2004, 10,524 shares vested
and were issued. The remaining shares vest in November 2006. The value of
restricted stock is charged to compensation expense over the vesting period of
the grant.

Note M - 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 N - Income Taxes
---------------------

Pre-tax earnings and the (benefit) provision for income taxes consisted of the
following for the years ended December 31, 2004, 2003 and 2002:

                                    2004              2003             2002
                               --------------   ---------------   --------------
Pre-tax earnings (loss):
   United States                 $   946,000       $ 4,583,000      $(1,125,000)
   Outside United States             396,000           507,000          727,000
                               --------------   ---------------   --------------
   Total pre-tax earnings(loss)  $ 1,342,000       $ 5,090,000      $  (398,000)
                               ==============   ===============   ==============

The (benefits) provisions for
 income taxes were as follows:
                                    2004              2003             2002
                               --------------   ---------------   --------------
Current income tax (benefit)
 provision:
   Federal                       $   879,000       $ 1,252,000      $  (827,000)
   State                             146,000           242,000         (102,000)
   Foreign                          (238,000)           41,000           76,000
                               --------------   ---------------   --------------
                                     787,000         1,535,000         (853,000)
Deferred (benefit) provision        (874,000)         (196,000)          34,000
                               --------------   ---------------   --------------
   Total (benefit) provision     $   (87,000)      $ 1,339,000      $  (819,000)
                               ==============   ===============   ==============

Reconciliation of the statutory U.S. federal income tax rate to effective rates
 is as follows:
                                    2004              2003             2002
                                    ----              ----             ----
Federal income tax at statutory
 rate                               34.0%             34.0%           (34.0)%
State tax provision, net of
 federal benefit                    (3.2)              2.6            (17.0)
Valuation allowance                 10.4
Tax exempt interest                 (5.1)              (.3)           (13.4)
Tax credits                        (14.9)             (2.9)           (90.9)
Foreign sales exemption            (13.6)             (4.0)           (46.8)
Acquired in-process research
 and development                                                       31.3
Resolution of prior year tax
 uncertainties                                        (3.9)           (61.6)
Foreign exchange items             (13.4)
Other                                (.7)               .8             26.6
                                   -------           -------        ---------
   Effective tax rate               (6.5)%            26.3%          (205.8)%
                                   =======           =======        =========

The deferred income tax assets and liabilities consist of the following:

                                                  At December 31,
Assets:                                      2004                 2003
-------                                      ----                 ----
Current:
    Accrued vacation, payroll and
     other accrued expenses             $   336,000          $   349,000
    Inventory obsolescence reserve
     and other inventory related items    1,524,000            1,468,000
    Bad debt and note receivable
     valuation allowances                 1,302,000              133,000
    Other                                   199,000               22,000

Non-current:
    Investment in unconsolidated
     company                                                     297,000
                                       --------------      ----------------
     Total gross deferred tax assets      3,361,000            2,269,000
     Valuation allowance                   (139,000)            (297,000)
                                       --------------      ----------------
     Total net deferred tax assets      $ 3,222,000          $ 1,972,000
                                       --------------      ----------------

Liabilities (non-current)
------------------------
    Capitalized software development
     costs, net                         $(1,169,000)         $  (905,000)
    Investment tax credit                   (51,000)             (51,000)
    Other                                  (112,000)
                                       --------------      ----------------
     Total deferred tax liabilities     $(1,332,000)         $  (956,000)
                                       --------------      ----------------
     Net deferred tax asset             $ 1,890,000          $ 1,016,000
                                       ==============      ================

The total deferred tax assets and liabilities as presented in the accompanying
Consolidated Balance Sheets are as follows:
                                             2004                 2003
                                       --------------      ----------------
Net current deferred tax assets         $ 3,088,000          $ 1,714,000
Net long-term deferred tax liabilities  $ 1,198,000          $   698,000

For 2002, the Company recorded its "Equity in income (loss) of unconsolidated
company" net of deferred taxes. No valuation allowance was recorded in 2002. For
2003, the Company recorded an impairment charge related to this investment. The
deferred tax asset on the cumulative losses and impairment charge related to
this investment equaled $297,000 as of December 31, 2003, which amount was fully
offset by the establishment of a valuation allowance of $297,000 in 2003. This
investment was sold in 2004 and the valuation allowance was reversed.

In 2004, the Company generated a net operating loss for state income taxes,
which expires in 2009. The deferred tax benefit associated with the net
operating loss is $139,000, which amount was fully offset by the establishment
of a valuation allowance of $139,000 in 2004, as it is more likely than not that
the tax benefit of this loss will not be realized. The net decrease in the
total valuation allowance in 2004 was $158,000.

As of December 31, 2004, income considered to be permanently reinvested in the
Company's Canadian subsidiary amounted to $5,832,000. No deferred taxes have
been provided on this income, 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.

The American Jobs Creation Act of 2004 (the "Act") was signed into law on
October 22, 2004. The Act creates a temporary incentive for U.S. corporations to
repatriate accumulated income of controlled foreign corporations by providing an
85% dividends received deduction, subject to certain limitations. The Company is
currently evaluating the impact of this provision and is not yet in a position
to decide whether, and to what extent, the Company might repatriate foreign
earnings. A range of possible amounts to be repatriated and the related income
tax effects cannot be reasonably estimated.

The Act also provides for the repeal of the extraterritorial income tax (through
reduced benefits in 2005 and 2006, with full repeal effective for 2007) and
allows a deduction for qualified domestic production activities (phased in over
the years 2005 to 2009 and fully effective in 2010). Pursuant to FASB guidance
with respect to the deduction for qualified domestic production activities, the
deduction will be treated as a "special deduction" as described in SFAS No. 109
"Accounting for Income Taxes". As such, the special deduction has no effect on
deferred tax assets and liabilities existing at the enactment date. Rather, the
impact of this deduction will be reported in the period in which the deduction
is claimed on the Company's tax return.
<PAGE>

Note O - Research and Software Development Costs
------------------------------------------------

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

                                        2004            2003          2002
                                    -------------  -------------  ------------
Gross expenditures for engineering
 and software development           $ 12,432,000   $ 11,027,000   $  8,102,000
Less:  amounts capitalized            (2,189,000)    (1,534,000)    (1,188,000)
                                    -------------  -------------  ------------
   Net charged to operating
    expenses                        $ 10,243,000   $  9,493,000   $  6,914,000
                                    =============  =============  ==============

Software development costs consisted of the following:
                                                          At December 31,
                                                         2004          2003
                                                     ------------  ------------
Capitalized software development costs               $  8,468,000  $  5,701,000
Less:  accumulated amortization                        (4,815,000)   (3,104,000)
                                                     ------------  ------------
   Net                                               $  3,653,000  $  2,597,000
                                                     ============  ============

Amortization of software development costs included in cost of goods sold was
$1,711,000, $1,005,000 and $1,068,000 for 2004, 2003 and 2002, respectively.

Note P - Employee Benefit Plans
-------------------------------

For the Company's operations in the United States, the Company's Retirement
Savings Plans qualify under Section 401(k) of the Internal Revenue Code.
Discretionary matching contributions by the Company to the plans were $25,000,
$0 and $15,000 for 2004, 2003 and 2002, respectively. In conjunction with its
Flexible Benefits plans, the Company made additional discretionary qualified
contributions to employee accounts which vest immediately amounting to $34,000,
$69,000 and $82,000 for 2004, 2003 and 2002, respectively.

For its operations in Canada, contributions were made in 2004 and 2002 to a
Registered Retirement Savings Plan (RRSP) that is administered by the Canadian
government. Discretionary matching contributions to the Plan amounted to $7,000
and $28,000 for 2004 and 2002, respectively. The Company did not make any
matching contributions in 2003.

Note Q - Litigation
-------------------

Following the Company's announcement in May 2000 regarding its preliminary
results of operations for the second quarter, several class action lawsuits were
filed in the United States District Court for the Western District of New York
against the Company, as well as several of its officers and directors, alleging
violations of federal securities laws. In September 2002, the Company announced
it had signed a Memorandum of Understanding for the settlement of the class
action litigation. The Company recorded a charge of $143,000 in the third
quarter of 2002 in connection with the litigation. During 2003, the settlement
agreement was accepted and approved by the Court and the settlement was paid by
the Company.

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 R - Transactions with Related Parties
------------------------------------------

Prior to the Company relocating to its current corporate headquarters and
manufacturing facility in April 2002, the Company leased its primary facility in
Rochester, New York from an entity controlled by two directors of the Company.
During 2002, the Company paid rent of $117,000 for the use of this location.
This lease expired in April 2002.

Note S - Restructuring Programs
-------------------------------

During 2002, the Company recorded restructuring charges of $573,000 as the
Company improved its cost structure primarily through reductions of the
Company's staff and by consolidating the engineering operations of its Raleigh,
North Carolina facility into its Ottawa, Canada Signaling Group. The
restructuring charges were comprised of $341,000 for employee severance and
related costs, $177,000 related to lease commitments for the closure of the
Raleigh, North Carolina facility and $55,000 for the disposal of equipment and
leasehold improvements. The severance charges were for 40 employees and were
initiated throughout the organization. Substantially all actions under these
programs were completed in 2002.

The initial restructuring charge recorded in 2002 for lease commitments included
certain estimates for expected future sublease receipts. Due to market
conditions in the Raleigh, North Carolina area, the Company recorded an
incremental restructuring charge of $118,000 in 2003, which related to a revised
estimate of the sublease receipts expected through the remaining term of this
lease. During 2004, the Company paid its remaining lease obligation and the
lease was terminated. A summary of the activity with respect to the
restructuring charges is as follows:

                                 Severance
                                and related        Leasehold
                                   costs          commitments        Total
                               -------------     -------------    -----------
Balance at January 1, 2003       $  9,000          $ 154,000       $ 163,000
2003 utilization                   (9,000)          (126,000)       (135,000)
2003 incremental charge                              118,000         118,000
                               -------------     -------------    -----------
Balance at December 31, 2003                         146,000         146,000
2004 utilization                                    (146,000)       (146,000)
                               -------------     -------------    -----------
Balance at December 31, 2004
                               =============     =============    ===========

During 2004, the Company began formulating actions and taking steps to reduce
annualized expenses by approximately $2.0 million. These steps include the
integration of the Voice Technology Group sales and administrative groups into
other corporate operations. During 2004, the Company incurred $217,000 of
expense related to these actions. All of these expenses were paid as of December
31, 2004. See Note V for further discussion.

Note T - Product Revenue
------------------------

The following table represents the Company's total sales for 2004, 2003 and 2002
classified by product category:

                                  2004               2003               2002
                             -------------      --------------     -------------

Communications products       $24,461,000         $26,081,000       $18,826,000
Computing products             18,063,000          18,306,000         5,024,000
IPnexus switching products     10,254,000           4,997,000         2,383,000
Other products                    711,000             608,000           781,000
                             -------------      --------------     -------------
   Total                      $53,489,000         $49,992,000       $27,014,000
                             =============      ==============     =============

During 2004, Lucent Technologies, Inc. purchased IPnexus switching products and
UT Starcom, Inc. purchased computing products.

During 2003, Andrew Corporation purchased communications products and IPnexus
switching products and UT Starcom, Inc. purchased computing products.

Note U - Quarterly Results (unaudited)
--------------------------------------

The following is a summary of unaudited quarterly results of operations for the
years ended December 31, 2004 and 2003:


                               -------------------------------------------------
                                                   2004
                               -------------------------------------------------
                                      (in thousands, except per share data)
                                 Mar. 31     Jun. 30      Sep. 30      Dec. 31
                               ----------- -----------  -----------  -----------
Sales                           $ 15,566    $ 13,273     $ 11,560     $ 13,089
Gross profit                       7,978       6,620        4,952        5,911
In-process research and
 development                        (218)
Restructuring charge                                          (12)        (205)
Income (loss) from operations      2,198       1,228          (19)         188
Gain on sale of investment                                  1,169
Note receivable valuation charge                                         (3,000)
Net income (loss)                  1,557       1,031        1,371        (1,179)

Basic earnings (loss) per share $    .12    $    .08     $    .11     $    (.09)
                               =========== ===========  ===========  ===========
Diluted earnings (loss) per
 share                          $    .11    $    .08     $    .11     $    (.09)
                               =========== ===========  ===========  ===========

                               -------------------------------------------------
                                                   2003
                               -------------------------------------------------
                                      (in thousands, except per share data)
                                 Mar. 31     Jun. 30      Sep. 30       Dec. 31
                               ----------  -----------  -----------  -----------
Sales                           $ 11,039    $ 12,636     $ 13,060     $  13,257
Gross profit                       5,003       6,126        6,544         7,026
Restructuring charge                                                       (118)
Income from operations               271       1,010        1,349         1,938
Impairment of investment                                                   (392)
Net income                           257         704          955         1,134

Basic earnings per share        $    .02    $    .06     $    .08     $     .09
                               =========== ===========  ===========  ===========
Diluted earnings per share      $    .02    $    .06     $    .07     $     .09
                               =========== ===========  ===========  ===========

Earnings per share is calculated as a discrete period and the sum of the four
quarters may not equal the full year amount.

Note V - Subsequent Event
-------------------------

On February 7, 2005, the Company finalized its plan to relocate the
manufacturing of products from its facility in San Luis Obispo, California, to
its corporate headquarters in Rochester, New York. In connection with this plan,
the Company expects to incur severance and personnel related costs in the range
of $50,000 to $350,000 during 2005. This transition is expected to be completed
by September 30, 2005. The Company does not expect to incur any material costs
related to this relocation subsequent to September 30, 2005.


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

None.

ITEM 9A - Controls and Procedures

   a.    Evaluation of Disclosure Controls and Procedures

         The Company's Chief Executive Officer and its Chief Financial Officer
         have evaluated the Company's disclosure controls and procedures (as
         defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of
         the period covered by this annual report. Based on this evaluation, the
         Chief Executive Officer and Chief Financial Officer concluded that the
         Company's disclosure controls and procedures were effective as of such
         date.

   b.    Internal Control Over Financial Reporting

         a.   Management's Report on Internal Control Over Financial Reporting

              Management is responsible for establishing and maintaining
              adequate internal control over financial reporting for the Company
              and for its assessment of the effectiveness of internal control
              over financial reporting. The Company's internal control over
              financial reporting is a process designed to provide reasonable
              assurance regarding the reliability of financial reporting and the
              preparation of financial statements for external purposes in
              accordance with accounting principles generally accepted in the
              United States of America. The Company's internal control over
              financial reporting includes those policies and procedures that
              (i) pertain to the maintenance of records that, in reasonable
              detail, accurately and fairly reflect the transactions and
              dispositions of the Company's assets; (ii) provide reasonable
              assurance that transactions are recorded as necessary to permit
              preparation of financial statements in accordance with accounting
              principles generally accepted in the United States of America, and
              that the Company's receipts and expenditures are being made only
              in accordance with authorizations of the Company's management and
              directors; and (iii) provide reasonable assurance regarding
              prevention or timely detection of unauthorized acquisition, use,
              or disposition of the Company's assets that could have a material
              effect on the financial statements.

              Because of its inherent limitations, internal control over
              financial reporting may not prevent or detect misstatements. Also,
              projections of any evaluation of effectiveness to future periods
              are subject to the risk that controls may become inadequate
              because of changes in conditions, or that the degree of compliance
              with the policies and procedures may deteriorate.

              Management conducted an evaluation of the effectiveness of the
              Company's internal control over financial reporting based on the
              framework in Internal Control-Integrated Framework issued by the
              Committee of Sponsoring Organizations of the Treadway Commission.
              Based on this evaluation, management concluded that the Company's
              internal control over financial reporting was effective as of
              December 31, 2004. Management's assessment of the effectiveness of
              the Company's internal control over financial reporting has been
              audited by PricewaterhouseCoopers LLP, an independent registered
              public accounting firm, as stated in their report which is
              included in Item 8.


   c.    Changes in Internal Control Over Financial Reporting

         There has been no change in the Company's internal control over
         financial reporting that occurred during the fourth quarter that has
         materially affected, or is reasonably likely to materially affect, the
         Company's internal control over financial reporting.

ITEM 9B - Other Information

On February 7, 2005, the Company finalized its plan to relocate the
manufacturing of products from its facility in San Luis Obispo, California, to
its corporate headquarters in Rochester, New York. In connection with this plan,
the Company expects to incur severance and personnel related costs in the range
of $50,000 to $350,000 during 2005. This transition is expected to be completed
by September 30, 2005. The Company does not expect to incur any material costs
related to this relocation subsequent to September 30, 2005.

PART III

Except as provided in Item 12 below, the information required by Part III, Items
10 - 14, 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 2, 2005, which
information included therein is incorporated herein by reference.

ITEM 10 - Directors and Executive Officers of the Registrant

The sections entitled "Election of Directors" and "Executive Officers" appearing
in the Company's proxy statement for the Annual Meeting of Stockholders to be
held on June 2, 2005, set 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 2, 2005,
sets forth certain information with respect to the compensation of management of
the Company and is incorporated herein by reference.

ITEM 12 - Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters

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 2, 2005, sets forth certain information with
respect to the ownership of the Company's common stock and is incorporated
herein by reference.

Equity Plan Information

In 1986, the Company established the 1986 Incentive Stock Option Plan. In May
2001, the stockholders approved the 2001 Stock Option Plan. The 2001 Stock
Option Plan replaced the 1986 plan which expired on December 31, 2001. In June
2003, the stockholders approved the 2003 Omnibus Incentive Plan.


The table below provides certain information regarding the Company's equity
compensation plan:

                                  Equity Compensation Plan Information
                                  (a)              (b)                (c)
                               Number of
                            securities to be
                               issued upon    Weighted average     Number of
                              exercise of     exercise price of    securities
                              outstanding        outstanding        remaining
                              options and        options and      available for
      Plan Category        restricted shares  restricted shares  future issuance
                           -----------------  -----------------  ---------------
Equity compensation plans
   approved by security
   holders                     2,405,215           $10.39           1,270,004

Equity compensation plans
   not approved by security
   holders
                           -----------------  -----------------  ---------------
     Total                     2,405,215           $10.39           1,270,004
                           =================  =================  ===============

The Company has no equity compensation plans that have not been approved by its
stockholders.

ITEM 13 - Certain Relationships and Related Transactions

The section entitled "Certain Relationships and Transactions" appearing in the
Company's proxy statement for the Annual Meeting of Stockholders to be held on
June 2, 2005, 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.

ITEM 14 - Principal Accountant Fees and Services

The section entitled "Principal Accountant Fees and Services" appearing in the
Company's proxy statement for the Annual Meeting of Stockholders to be held on
June 2, 2005, sets forth certain information with respect to fees and services
between the Company and its principal accountant and is incorporated herein by
reference.


<PAGE>


PART IV

ITEM 15 - Exhibits and Financial Statement Schedule

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

(2)      Financial Statement Schedule

         Schedule II - Valuation and Qualifying Accounts

         Allowance for Doubtful Accounts


                                             Additions   Deductions
                               Balance at   ----------   ----------   Balance at
                               beginning    charged to     amounts     end of
                               of period     earnings    written off   period
                               ----------- ------------ ------------- ---------
Year Ended December 31, 2004
Deducted in the Consolidated
 Balance Sheet from Accounts
 Receivable

Allowance for doubtful accounts $379,000     $ 52,000     $  5,000     $426,000
                               =========== ============ ============= ==========

Year Ended December 31, 2003
Deducted in the Consolidated
 Balance Sheet from Accounts
 Receivable

Allowance for doubtful accounts $301,000     $ 87,000     $  9,000     $379,000
                               =========== ============ ============= ==========

Year Ended December 31, 2002
Deducted in the Consolidated
 Balance Sheet from Accounts
 Receivable

Allowance for doubtful accounts $284,000     $200,000     $183,000     $301,000
                               =========== ============ ============= ==========


         Valuation Allowance for Note Receivable


                                             Additions   Deductions
                               Balance at   ----------   -----------  Balance at
                               beginning    charged to     amounts      end of
                               of period     earnings    written off    period
                               ----------- ------------ ------------- ----------
Year Ended December 31, 2004
Deducted in the Consolidated
 Balance Sheet from Note
 Receivable
Valuation Allowance for Note
 Receivable                    $3,000,000                $3,000,000
                               =========== ============ ============= ==========






<PAGE>


         Reserve for Inventory Obsolescence

                                         Additions       Deductions
                         Balance at -------------------  -----------  Balance at
                         beginning  charged to            amounts      end of
                         of period   earnings  other (1) written off    period
                         ---------- ---------- --------- -----------  ----------

Year ended December 31,
 2004 Deducted in the
 Consolidated Balance
 Sheet from Inventories

   Reserve for inventory
    obsolescence         $3,796,000 $  921,000 $          $1,218,000  $3,499,000
                         ========== ========== ========== =========== ==========
Year ended December 31,
 2003 Deducted in the
 Consolidated Balance
 Sheet from Inventories

   Reserve for inventory
    obsolescence         $3,551,000 $1,275,000 $          $1,030,000  $3,796,000
                         ========== ========== ========== =========== ==========

Year ended December 31,
 2002 Deducted in the
 Consolidated Balance
 Sheet from Inventories

   Reserve for inventory
    obsolescence         $  819,000 $  980,000 $2,916,000 $1,164,000  $3,551,000
                         ========== ========== ========== =========== ==========


(1) The value assigned to the reserve for inventory obsolescence at October 2,
    2002 for the inventory associated with the Ziatech acquisition.

There were no other 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.



<PAGE>


(3)      Exhibits
Exhibit        Ref.
Number         Number        Description
--------------------------------------------------------------------------------
2.1            (8)           Stock Purchase Agreement between Intel Corporation
                                and the Registrant, dated as of September 12,
                                2002
2.2            (10)          Asset  Purchase  Agreement  by  and  among
                                Mapletree  Networks,  Inc.,  Performance
                                Technologies, Incorporated and PTI Massachusetts
                                Corporation, dated as of January 12, 2004
3.1            (1)           Restated Certificate of Incorporation
3.2            (3)           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            (4)           February 2000 Amendment to Amended and Restated
                                1986 Incentive Stock Option Plan
4.5            (5)           Rights Agreement
4.6            (6)           2001 Incentive Stock Option Plan
4.7            (9)           2003 Omnibus Incentive Plan
10             (1)           Material Contracts
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
10.32          (2)           Share Acquisition  Agreement between  Registrant
                                and MicroLegend  Telecom Systems,  Inc. as of
                                December 2, 1999
10.33          (2)           Amendment to Share Acquisition  Agreement between
                                Registrant and MicroLegend Telecom Systems, Inc.
                                as of December 10, 1999
10.33a         (7)           Lease Agreement dated as of May 19, 2001 between
                                the Registrant and Christa PT, LLC
10.33b         (7)           First Amendment to Lease dated as of July 19, 2001
                                between the Registrant and Christa PT, LLC
10.33c         (7)           Second Amendment to Lease dated as of July 31, 2001
                                between the Registrant and Christa PT, LLC
21             (*)           Subsidiaries
23.1           (*)           Consent of PricewaterhouseCoopers LLP
31.1           (*)           Certification of Chief Executive Officer
31.2           (*)           Certification of Chief Financial Officer
32.1           (*)           Section 1350 Certification
--------------------------------------------------------------------------------
(1)    Incorporated by reference to the Registrant's Registration Statement
       on Form S-1 filed November 22, 1995 (Registration  No. 33-99684).
(2)    Incorporated by reference to the Registrant's Registration Statement
       on Form S-3 filed January 28, 2000 (Registration  No. 333-94371).
(3)    Incorporated by reference to the Annual Report on Form 10-K filed on
       March 30, 2000.
(4)    Incorporated by reference to the Registrant's Registration Statement
       on Form S-8 filed June 21, 2000 (Registration  No. 333-39834).
(5)    Incorporated  by reference to the Registrant's Registration Statement
       on Form 8-A filed November 8, 2000 (Registration  No. 000-27460).
(6)    Incorporated by reference to the Registrant's Registration Statement on
       Form S-8 filed June 3, 2002 (Registration  No. 333-89636).
(7)    Incorporated by reference to the Quarterly Report on Form 10-Q filed on
       August 14, 2001.
(8)    Incorporated by reference to the Current Report on Form 8-K filed
       October 17, 2002.
(9)    Incorporated by reference to the Registrant's Registration Statement on
       Form S-8 filed March 5, 2004 (Registration  No. 333-113330).
(10)   Incorporated by reference to the Current Report on Form 8-K/A filed
       February 3, 2004.
(*)    Filed with this Form 10-K.



<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 16, 2005                       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 16, 2005
------------------
John M. Slusser

/s/DONALD L. TURRELL           President, Chief Executive         March 16, 2005
--------------------           Officer and Director
Donald L. Turrell

/s/DORRANCE W. LAMB            Chief Financial Officer and        March 16, 2005
-------------------            Vice President of Finance
Dorrance W. Lamb

/s/BERNARD KOZEL               Director                           March 16, 2005
----------------
Bernard Kozel

/s/CHARLES E. MAGINNESS        Director                           March 16, 2005
-----------------------
Charles E. Maginness

/s/STUART B. MEISENZAHL        Director                           March 16, 2005
-----------------------
Stuart B. Meisenzahl

/s/ROBERT L. TILLMAN           Director                           March 16, 2005
--------------------
Robert L. Tillman

/s/E. MARK RAJKOWSKI           Director                           March 16, 2005
--------------------
E. Mark Rajkowski

<PAGE>

                                                                      Exhibit 21

                                  Subsidiaries

3688283 Canada, Inc., a Canada Corporation wholly owned by Performance
Technologies, Incorporated

PerfTech (PTI) Canada Corporation (formerly MicroLegend Telecom Systems, Inc.),
a Canadian corporation wholly owned by 3688283 Canada, Inc.

PTI California Corporation (formerly Ziatech Corporation), a California
Corporation wholly owned by Performance Technologies, Incorporated

PTI Massachusetts Corporation, a Delaware Corporation wholly owned by
Performance Technologies, Incorporated



<PAGE>

                                                                    Exhibit 23.1


            CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (Nos. 333-32421, 333-39834, 333-89636 and 333-113330) of
Performance Technologies, Inc. of our report dated March 16, 2005 relating to
the financial statements, financial statement schedule, management's assessment
of the effectiveness of internal control over financial reporting and the
effectiveness of internal control over financial reporting, which appears in
this Form 10-K.

/s/ PricewaterhouseCoopers LLP

Rochester, New York
March 16, 2005


<PAGE>


                                                                    Exhibit 31.1
                    Certification of Chief Executive Officer

I, Donald L. Turrell certify that:

         1. I have reviewed this annual report on Form 10-K of Performance
            Technologies, Incorporated;

         2. Based on my knowledge, this report does not contain any untrue
            statement of a material fact or omit to state a material fact
            necessary to make the statements made, in light of the circumstances
            under which such statements were made, not misleading with respect
            to the period covered by this report;

         3. Based on my knowledge, the financial statements, and other financial
            information included in this report, fairly present in all material
            respects the financial condition, results of operations and cash
            flows of the registrant as of, and for, the periods presented in
            this report;

         4. The registrant's other certifying officer and I are responsible for
            establishing and maintaining disclosure controls and procedures (as
            defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
            control over financial reporting (as defined in Exchange Act Rules
            13a-15(f) and 15d-15(f)) for the registrant and have:

               a.     Designed such disclosure controls and procedures, or
                      caused such disclosure controls and procedures to be
                      designed under our supervision, to ensure that material
                      information relating to the registrant, including its
                      consolidated subsidiaries, is made known to us by others
                      within those entities, particularly during the period in
                      which this report is being prepared;

               b.     Designed such internal control over financial reporting,
                      or caused such internal control over financial reporting
                      to be designed under our supervision, to provide
                      reasonable assurance regarding the reliability of
                      financial reporting and the preparation of financial
                      statements for external purposes in accordance with
                      generally accepted accounting principles;

               c.     Evaluated the effectiveness of the registrant's disclosure
                      controls and procedures and presented in this report our
                      conclusions about the effectiveness of the disclosure
                      controls and procedures, as of the end of the period
                      covered by this report based on such evaluation; and

               d.     Disclosed in this report any change in the registrant's
                      internal control over financial reporting that occurred
                      during the registrant's most recent fiscal quarter (the
                      registrant's fourth fiscal quarter in the case of an
                      annual report) that has materially affected, or is
                      reasonably likely to materially affect, the registrant's
                      internal control over financial reporting; and

         5. The registrant's other certifying officer and I have disclosed,
            based on our most recent evaluation of internal control over
            financial reporting, to the registrant's auditors and the audit
            committee of the registrant's board of directors (or persons
            performing the equivalent functions):

               a.     All significant deficiencies and material weaknesses in
                      the design or operation of internal control over financial
                      reporting which are reasonably likely to adversely affect
                      the registrant's ability to record, process, summarize and
                      report financial information; and
               b.     Any fraud, whether or not material, that involves
                      management or other employees who have a significant role
                      in the registrant's internal control over financial
                      reporting.



Date: March 16, 2005                         By:/s/   Donald L. Turrell
                                             --------------------------------
                                                      Donald L. Turrell
                                                      Chief Executive Officer


<PAGE>


                                                                    Exhibit 31.2
                    Certification of Chief Financial Officer

I, Dorrance W. Lamb, certify that:

         1. I have reviewed this annual report on Form 10-K of Performance
            Technologies, Incorporated;

         2. Based on my knowledge, this report does not contain any untrue
            statement of a material fact or omit to state a material fact
            necessary to make the statements made, in light of the circumstances
            under which such statements were made, not misleading with respect
            to the period covered by this report;

         3. Based on my knowledge, the financial statements, and other financial
            information included in this report, fairly present in all material
            respects the financial condition, results of operations and cash
            flows of the registrant as of, and for, the periods presented in
            this report;

         4. The registrant's other certifying officer and I are responsible for
            establishing and maintaining disclosure controls and procedures (as
            defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
            control over financial reporting (as defined in Exchange Act Rules
            13a-15(f) and 15d-15(f)) for the registrant and have:

               a.     Designed such disclosure controls and procedures, or
                      caused such disclosure controls and procedures to be
                      designed under our supervision, to ensure that material
                      information relating to the registrant, including its
                      consolidated subsidiaries, is made known to us by others
                      within those entities, particularly during the period in
                      which this report is being prepared;

               b.     Designed such internal control over financial reporting,
                      or caused such internal control over financial reporting
                      to be designed under our supervision, to provide
                      reasonable assurance regarding the reliability of
                      financial reporting and the preparation of financial
                      statements for external purposes in accordance with
                      generally accepted accounting principles;

               c.     Evaluated the effectiveness of the registrant's disclosure
                      controls and procedures and presented in this report our
                      conclusions about the effectiveness of the disclosure
                      controls and procedures, as of the end of the period
                      covered by this report based on such evaluation; and

               d.     Disclosed in this report any change in the registrant's
                      internal control over financial reporting that occurred
                      during the registrant's most recent fiscal quarter (the
                      registrant's fourth fiscal quarter in the case of an
                      annual report) that has materially affected, or is
                      reasonably likely to materially affect, the registrant's
                      internal control over financial reporting; and

         5. The registrant's other certifying officer and I have disclosed,
            based on our most recent evaluation of internal control over
            financial reporting, to the registrant's auditors and the audit
            committee of the registrant's board of directors (or persons
            performing the equivalent functions):

               a.     All significant deficiencies and material weaknesses in
                      the design or operation of internal control over financial
                      reporting which are reasonably likely to adversely affect
                      the registrant's ability to record, process, summarize and
                      report financial information; and
               b.     Any fraud, whether or not material, that involves
                      management or other employees who have a significant role
                      in the registrant's internal control over financial
                      reporting.


Date: March 16, 2005                         By:/s/   Dorrance W. Lamb
                                             -----------------------------
                                                      Dorrance W. Lamb
                                                      Chief Financial Officer



<PAGE>

                                                                    Exhibit 32.1



                           Section 1350 Certification

Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 ("Section 906"), Donald L. Turrell and Dorrance W.
Lamb, the Chief Executive Officer and Chief Financial Officer, respectively, of
Performance Technologies, Incorporated, certify that (i) the Annual Report on
Form 10-K for the year ended December 31, 2004 fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934
and (ii) the information contained in such report fairly presents, in all
material respects, the financial condition and results of operations of
Performance Technologies, Incorporated.

A signed original of this written statement required by Section 906 has been
provided to Performance Technologies, Incorporated and will be retained by
Performance Technologies, Incorporated and furnished to the Securities and
Exchange Commission or its staff upon request.

Date:  March 16, 2005                    By:/s/   Donald L. Turrell
                                         ------------------------------
                                                  Donald L. Turrell
                                                  President and Chief
                                                  Executive Officer

Date:  March 16, 2005                    By:/s/   Dorrance W. Lamb
                                         ------------------------------
                                                  Dorrance W. Lamb
                                                  Chief Financial Officer and
                                                  Vice President of Finance