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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                              Washington, DC 20549
                                 --------------

                                    FORM 10-K
                                 --------------
             [ 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, 2005

                                       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

           Incorporated pursuant to the Laws of the State of Delaware

        Internal Revenue Service - Employer Identification No. 16-1158413

                205 Indigo Creek Drive, Rochester, New York 14626

                                 (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

Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.  Yes [  ] No [ X ]

Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.  Yes [  ] No [ X ]

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 the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]

Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. Large accelerated filer [  ]
Accelerated filer [ X ] Non-accelerated filer [  ]

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

The aggregate market value of the voting stock held by non-affiliates of the
registrant as of the close of business on June 30, 2005 was approximately
$63,198,000.

The number of shares outstanding of the registrant's Common Stock, $.01 par
value, was 13,098,659 as of March 2, 2006.

                       Documents Incorporated by Reference
The information called for by Items 10-14 of Part III, except for the equity
plan information required by Item 12, which is set forth herein, is incorporated
by reference from the definitive Proxy Statement for the Annual Meeting of
Stockholders of the Company to be held on May 25, 2006, which will be filed with
the Securities and Exchange Commission not later than 120 days after
December 31, 2005.

<PAGE>

                     Performance Technologies, Incorporated
                       Index to Annual Report on Form 10-K
                                                                          Page
PART I                                                                    ----
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Item 1    Business                                                           4

Item 1A   Risk Factors                                                      15

Item 1B   Unresolved Staff Comments                                         19

Item 2    Properties                                                        19

Item 3    Legal Proceedings                                                 19

Item 4    Submission of Matters to a Vote of Security Holders               19


PART II
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Item 5    Market for the Registrant's Common Equity, Related
          Stockholder Matters and Issuer Purchases of Equity Securities     20

Item 6    Selected Financial Data                                           20

Item 7    Management's Discussion and Analysis of Financial Condition
          and Results of Operations                                         21

Item 7A   Quantitative and Qualitative Disclosures About Market Risk        40

Item 8    Financial Statements and Supplementary Data                       40

Item 9    Changes in and Disagreements with Accountants on Accounting
          and Financial Disclosure                                          63

Item 9A   Controls and Procedures                                           64

Item 9B   Other Information                                                 65

PART III
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Item 10   Directors and Executive Officers of the Registrant                65

Item 11   Executive Compensation                                            65

Item 12   Security Ownership of Certain Beneficial Owners and Management
          and Related Stockholder Matters                                   65

Item 13   Certain Relationships and Related Transactions                    66

Item 14   Principal Accountant Fees and Services                            66

PART IV
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Item 15   Exhibits and Financial Statement Schedule                         67

<PAGE>

ITEM 1 - Business
         --------
Overview

Performance Technologies, Incorporated (the "Company") is a leading developer of
communications platforms and systems for the embedded systems marketplace, which
are used in a broad range of applications and end markets.

Since its founding in 1981, the Company has consistently designed innovative,
standards-based embedded products and component solutions that focus on
attributes such as reduced time-to-market, enhanced performance, high
availability and cost advantages for communications equipment manufacturers that
serve the telecommunications, defense and homeland security, and commercial
markets. The Company has a history of successfully adapting its products and
services to a constantly changing, technology-driven marketplace. During its
twenty-five year history, the Company has successfully grown and prospered by
pursuing this business model through the course of several business cycles.

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 risk factors described in ITEM 1A of this Form 10-K. 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 and obtaining orders
as a result, fluctuations in quarterly and annual results, the reliance on a
limited number of third party suppliers, limitations of the Company's
manufacturing capacity and arrangements, the protection of the Company's
proprietary technology, the dependence on key personnel, changes in critical
accounting estimates, potential impairments related to investments and foreign
regulations. 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 100 F Street, N.E. Washington, D.C. 20549 or by calling
1-800-SEC-0330.

Year 2005 Highlights

During 2005, the Company noted the following significant events and occurrences:

   o The Board of Directors appointed Michael Skarzynski as President and CEO on
     November 3, 2005, succeeding Donald Turrell.

   o The Company achieved 25 new design wins in 2005, including eight
     new design wins in the fourth quarter.

   o In our Advanced Managed Platform(TM) product line, the Company added
     several new blade products, improved interoperability and enhanced value-
     added support services. Overall, the Company continued to strengthen its
     position as an integrated platform supplier.

   o During most of 2005, an overall increase in activity was seen in our three
     main vertical markets - telecommunications, defense and homeland security,
     and commercial - with platforms serving as the activity driver.

   o The telecommunications market, our largest served, remains dependent on
     carriers spending for network infrastructure build-out to the next-
     generation equipment. In 2005, the carriers increased spending on both
     infrastructure build-outs and upgrades, but carrier spending was still
     moderate with spending targeted at specific expansion opportunities.

   o The Company completed its plan, announced in October 2004, to centralize
     its multi-location operations and to streamline the organization. This plan
     involved centralizing sales, marketing, accounting and manufacturing
     functions, and reduced expense levels by approximately $2.0 million
     annually.

As the Company entered 2005, management identified several areas to strengthen
and promote our platform products and business.

These initiatives included:

1) Continued expansion of our Advanced Managed Platform Product line:

Critical to our growth is the ongoing development and expansion of the Company's
portfolio of fully managed, packet-based platforms. The Advanced Managed
Platform offering allows equipment manufacturers of next-generation equipment 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 in 2003, the Company realized more than 30 new
design wins for its integrated platform products.

2) Expansion of IP Products:

The Company developed and introduced a significant number of new products in
2005 directed at IP/packet-based communication applications including:

              Switch Products: The Company's focus in 2005 was the enhancement
              of its Gigabit Ethernet switch products with carrier-grade network
              routing and security capabilities. With the introduction of our
              Gigabit class products, the Company's family of embedded Ethernet
              switching products has become more than 25% of the Company's
              business.

              Access Products: During 2005, the Company continued to enhance its
              network access products for connectivity to the global telecom
              infrastructure. This 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 Products: The Company continued to expand its line of
              network processing engines, voice processing products and single
              board computers for embedded applications during 2005. These new
              products are designed to utilize the advancing capability of
              memory and microprocessor technologies, including new dual-core
              processor architectures which can greatly expand system
              capabilities.

3) New Signaling Products:

Market launch of the SEGway(TM) 6300 Compact-STP Signaling Products: During
2005, the Company introduced a new Compact Signaling Transfer Point, or
Compact-STP, targeted at the small to mid-sized carrier market. Signaling
revenue grew by over 100% in 2005, from 2004, and management believes the SEGway
6300 has significant market potential.

4) NexusWare(TM):

The Company's software products and expertise continue to be a key
differentiating factor for Performance Technologies' products. The Company bases
its software environment, tools and application interfaces on the popular and
rapidly growing Linux operating system and sells these products under the trade
name of NexusWare. Performance Technologies released major enhancements to its
NexusWare software during 2005 and NexusWare won the INTERNET TELEPHONY(R)
Magazine Product of the Year award. Management believes that the NexusWare
software suite provides distinct advantages unmatched by competitive offerings
and is an important enabler for our customers.

5) Consolidation of Manufacturing:

In 2004, the Company conducted manufacturing in Rochester, New York and San Luis
Obispo, California. To gain efficiencies and reduce operating costs, the Company
consolidated manufacturing into its Rochester, New York facility. This
consolidation was completed in the third quarter 2005 and expected benefits in
both savings and efficiencies are being realized.

Industry Overview

The Company is a supplier of communications platforms and systems that are based
on open standards. These platform solutions can be specifically configured using
various blade components, often from one or more suppliers, to meet a variety of
end applications found in markets such as telecommunications infrastructure,
data communications infrastructure, defense and homeland security communications
and commercial.

The Company's customers are primarily equipment manufacturers in the
telecommunications, data communications, defense and homeland security and
commercial markets. Throughout 2005, our customers focused their efforts and
spending on new product development, but are operating with scaled down business
models caused by the market contraction in recent years.

Industry market research organizations are estimating the worldwide embedded
systems market amounted to $40 billion in size in 2005. Traditionally, the
largest segment of this market has used "proprietary," purpose-built embedded
systems and products. Embedded systems built on open standards comprise about
10%, or $4 billion of this market. While proprietary systems are expected to
continue to dominate this market, a growing share of embedded systems being
implemented, especially in the more limited markets served by the Company, are
expected to use open standards-based products.

There are two driving factors behind this changing paradigm: First, systems are
becoming increasingly integrated and more complex, requiring larger investments
and longer lead times to design. Second, customers have downsized engineering
staffs over the past several years and are increasingly relying on outsourced
development partners to assist in new product development. Relying on
development partners, such as Performance Technologies, allows customers to meet
the competitive pressures of "time-to-market" found in most technology
businesses.

Due to these changes, telecom and data communications equipment manufacturers
appear to be increasing their reliance on companies such as Performance
Technologies to provide application ready platforms. This allows these suppliers
to concentrate their efforts and expertise on their "value-add applications and
services," which typically includes software and additional hardware elements
directed toward specific applications.

The Company continues to enhance its ability to supply embedded communications
platforms based on the use of Ethernet technology as a fundamental element of
the system design. During 2005, the Company's Advanced Managed Platform design
wins were based on this standard, showing ongoing acceptance by equipment
manufacturers who incorporated this standard into their next-generation
products. Central to this architectural concept is the use of embedded Ethernet
switches and Ethernet technology for connectivity between the blades in a system
and the introduction of System Management blades to provide much greater levels
of control and reliability for carrier-grade communications systems. Our
engineering strengths and expertise continue to place the Company in a favorable
position to participate in 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 noteworthy revenue growth in
2005. Management believes that the Company is the leading supplier of
carrier-grade 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 notable growth as a
stand-alone component sold for third party integration into their customers'
embedded platforms.

The Company's principal customers are equipment manufacturers serving the
telecommunications market and these customers are highly dependent on the
capital spending by carriers directed at upgrading their network infrastructure
to next-generation equipment. Domestic carrier spending during 2005 did not meet
market expectations. However, in the European and Asia-Pacific regions,
telecommunications continued to demonstrate important growth. During 2005,
Company sales in the European region continued to expand with significant
customers in the United Kingdom and in France. Based on the Company's IP network
focus, these geographic areas are expected to continue to represent important
market opportunities for 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.

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 communications marketplace. Throughout 2005, the
Company continued to focus its operating efforts on this strategy. This line of
platform solutions specifically addresses equipment manufacturers' requirements
for an increased level of system integration and services from suppliers, thus
allowing them to focus on their value-added stages of product development, which
in most cases is application software. The Company's strategy also enables
customers to replace proprietary or legacy platforms with the latest generation
of fully managed system functionality.

Through its acquisitions and internal investments over the past several years,
management believes this strategy has moved the Company 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
2005.

The Company's goal is to drive sustained and profitable revenue growth. The
Company expects to achieve this objective through a combination of organic
growth and acquisitions. To move forward into 2006 and establish a foundation
upon which the Company can reach its aggressive growth goals, a company-wide
transformation is underway. The transformation will move the Company from its
traditional engineering and technology focus, to a new emphasis on sales and
marketing. Management's energies and the Company's resources are being refocused
on these objectives.

The Company's transformation activities identified for 2006 are as follows:

         Continue Emphasis on Platform and Product Innovation: The Company funds
         its engineering organization with more than 20% of every revenue
         dollar. During 2006, management expects to continue to drive the
         development of new platforms and products in an effort to offer our
         customers critical advances in new form factors, hardware functions,
         software and architectural technologies. In addition, the Company is
         taking a fresh look at prioritizing its research and development
         programs with a view toward focusing efforts on strategic areas.

         Increase Emphasis on Sales and Marketing: For 25 years, Performance
         Technologies has been a leader in the industry in product innovation.
         To properly penetrate its target markets and achieve its aggressive
         growth goals, the Company expects to take on a stronger sales and
         marketing orientation by increasing staffing and resources to
         facilitate this penetration.

         Establish Growth in Target Countries: In 2006, by adding direct sales
         people to focus on these countries, the Company will focus on its ten
         top country markets including (in alphabetical order) Canada, China,
         France, Germany, Italy, Israel, Japan, Korea, United Kingdom and the
         United States.

         M&A Activities: The Company is seeking opportunities to accelerate
         growth through mergers, acquisition and licensing transactions. These
         efforts are targeted at adding products to the Advanced Managed
         Platform and SEGway signaling product line as well as application areas
         which can add value in addressing customer requirements.

Certainly, there are identifiable risks associated with carrying out the
Company's profitable growth strategies in the current uncertain economic
climate. Many of the Company's end markets are forecasted to show only modest
growth in 2006. In order to realize growth in this environment, the Company will
have to gain market share from competitors. 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 Company as
an important strategic partner with many of its customers, thereby increasing
their utilization of the Company's broadened product capabilities. If the
business cycle starts to show improvement, it is further expected that these
ongoing 2006 initiatives can yield significant rewards through accelerated
revenue and profitable growth.

Management expects to place greater emphasis on sales and marketing to achieve
its revenue objective and expects to decrease other operating expense levels
during the year. In an improving business environment and with revenue
expansion, the Company should move toward higher levels of profitability.

Products

Performance Technologies is a supplier of communications platforms and systems
for the embedded systems marketplace which are used in a broad range of
communications applications including telecommunications, defense and homeland
security, and commercial.

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

The Advanced Managed Platforms 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 IP packet-based integrated
platforms.

Throughout 2005, the Company continued to sell and further commercialize various
platform configurations allowing customers to select the appropriate platform,
blade 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 2003, the Company introduced a new line of
application-ready platforms marketed under the trade name Advanced Managed
Platform. 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 blade-based products. This
platform line is based on an architecture referred to as PICMG(R), which is an
embedded technology developed by the Company and adopted as an industry
standard. The Company is participating in the development of a new family of
PICMG standards known as Advanced Telecommunications Computing Architecture, or
AdvancedTCA(R) (aTCA), or PICMG 3.x. 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 30 design wins of varying sizes for its integrated platform
products.

Key elements of the Company's Advanced Managed Platforms include Ethernet
switching elements which operate as the "nexus" of its IP packet switching
functionality, and the Intelligent Shelf Management which offers the ability to
effectively manage the operation of all products within the platform.

Compute Products: Traditional single board computers continue to play a
significant role in embedded platforms. The Company introduced new compute
products in 2005 and will continue product introductions in 2006 based on
higher-performance dual-core processors and higher capacity memory products.
These new products will be especially applicable to IP packet-based systems.

Network Access and Communications Products: The Company's network access and
communications products function in a broad range of telecommunications and data
communications 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 product family has significant
synergies with our NexusWare core software and our complete line of
communications protocols. Several new products began shipping in 2005 and new
products are on the road map for 2006 and 2007. 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.

Software and Middleware: NexusWare, the central element of our entire software
offering, is a key differentiating factor in the embedded platform marketplace
and we are happy to report that it was awarded the INTERNET TELEPHONY Magazine
Product of the Year award. NexusWare includes a comprehensive Linux-based
development environment that can be supplied either as part of an Advanced
Managed Platform, or with the Company's individual blade products. 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, air
traffic control, and military communications applications.

Embedded Products Customers. Announced customers for our embedded products
include: ADLINK Technology, Inc., Agilent Technologies, Alcatel, APW/Electronic
Solutions, AudioCodes, Data Connection, General Dynamics, Hewlett Packard,
Lucent, Motorola, Nortel, Northrup Grumman, Polycom, Raytheon, Siemens, Stratus
and Walkersun.

AdvancedTCA (aTCA): The Company is participating in developing a new open
standard known as PICMG 3.x, or AdvancedTCA, or aTCA. This large,
telecommunications-centric architecture is gaining industry following and is
expected to be a complementary alternative to the PICMG 2.16 standard that the
Company has developed for its current products. Development for PICMG 3.x
products began in 2004 for a new managed platform. Evaluation products were
released in mid-2005 utilizing this emerging standard and PICMG 3.x products are
expected to become an important part of the Company's product offering as this
technology gains greater market acceptance.

Voice Technology Products: The 2004 acquisition of technology from Mapletree
Networks, Inc., brought the Company several 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. In January 2006, the Company announced that
it is closing its Norwood, Massachusetts engineering center and transitioning
the voice and fax processing products and customer support to other Company
engineering centers.

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 and also enable the transport of signaling
messages over IP networks. 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 class 4
and class 5 PSTN switches.

Performance Technologies offers a unique suite of signaling solutions in
stand-alone or embedded platform models suitable for telephony equipment
manufacturers, telephony service providers and new or existing carriers.
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 their high growth SS7 networks.

2005 saw the market launch of the Company's latest Signaling Transfer Point,
the SEGway 6300 Compact-STP. The new Compact-STP provides advantages in both
size and economics for the tier 2 and tier 3 carrier market. In an era of fiscal
responsibility and managed growth within the carriers, management believes the
SEGway 6300 has significant potential in today's buying climate.

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.

Announced customers for the SEGway Signaling products include: Alcatel, Comfone,
Ericsson, GeoLink, Lucent, Nortel, Rural Cellular, Siemens, Swisscom, 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. The majority 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 customer engineers who assist prospective customers
in determining if the Company's products will meet their requirements.

At the end of 2005, 32 sales, marketing and sales support personnel were located
in the Company's offices in: Rochester, New York, San Diego and San Luis Obispo,
California, Ottawa, Ontario (Canada) and the United Kingdom. To properly
penetrate its target markets and achieve its aggressive growth goals in 2006,
the Company expects to take on a stronger sales and marketing orientation by
increasing staffing and resources to facilitate this penetration. In addition,
independent sales representatives and agents cover selected geographic areas and
are located in the United States and internationally. 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 trade shows, web-based activities,
technology seminars, direct mail and email campaigns, 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 the United States represented 43%, 34% and 28% of
the Company's revenue in 2005, 2004 and 2003, 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.

Customers

The Company has more than 300 active customers worldwide, primarily in the
telecommunications, defense and homeland security, and commercial markets. Many
of the Company's major customers are Fortune 1000 companies in the United States
or companies of similar stature in Europe, Israel, South America and Asia. In
2005, the Company's two largest customers, Lucent and Data Connection,
represented 21% and 12% of sales, respectively. In 2005, the Company's four
largest customers (Lucent, Data Connection, Siemens, and Alcatel) represented
43% of the Company's sales.

At December 31, 2005, approximately 75% of the Company's customers are in the
telecommunications industry. A breakdown of the telecommunications applications
that utilize the Company's products is as follows: Voice-over-IP (VoIP)
represents approximately 40%, wireless infrastructure represents 40%, and the
remaining 20% is spread across IP multimedia systems and other applications. The
Company's other customers represent a range of industries utilizing
open-architecture embedded communications centric platforms and systems in the
defense and homeland security, and commercial markets.

Backlog

The scheduled backlog of orders amounted to $8.1 million and $10.0 million at
January 27, 2006 and January 30, 2005, 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.
Forward-looking visibility on customer orders continues to be very limited
beyond 90 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
business is frequently slower 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 complies with U.S. federal, state and local laws relating to the
protection of the environment and believes that environmental matters do not
have any material effect on its capital expenditures, earnings or competitive
position. Further, the Company complies with national laws relating to the
protection of the environment in all end country markets served by export sales.

Competition

Embedded, purpose-built computer systems are either based on proprietary
technology or are based on open standards. The Company's products are based on
open standards, which is the smaller, but, management believes, is the faster
growing portion of this market.

The embedded communications 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 the Company's Advanced Managed Platforms, competitors include Motorola,
Intel, Radisys, and Kontron. 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 compete in certain standards-based embedded
markets, specifically CompactPCI 2.16 and PICMG 3.x, or AdvancedTCA. Today,
there are several competitors offering products or technology in this
marketplace. Current competitors include Motorola, Intel, Ramix division of GE
Fanuc Embedded Systems, SBS Technologies and Zynx Networks. The size of Ethernet
switching in the telecom market is small compared to the enterprise switch
market, and larger competitors in the enterprise market are not expected to
enter the telecom market segment due to the significant differences in
requirements and the 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 software. The Company's products compete with products
from companies including Adax Incorporated, Artesyn Technologies and Interphase
Corporation.

For its Voice Technology 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. Major competitors include
AudioCodes, Intel and Motorola.

For its SEGway signaling products, the Company 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. Several large competitors
including Lucent, Nortel, and Tekelec have SS7 technology and products that are
not focused primarily on the tier two and tier three carrier market, which is
the Company's market focus.

Research and Development

The Company's research and development expenses were approximately $10.4
million, $10.2 million and $9.5 million for 2005, 2004 and 2003, respectively,
and were net of capitalized software development costs of $2.5 million, $2.2
million and $1.5 million, 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 communications and
computing platforms, carrier-grade Ethernet switching and signaling. The Company
also has significant software expertise that it applies to communications
centric 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, product life cycles extend for two to
four years and 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 does
not have a large total procurement budget in relation to the total market and it
is challenging for the Company to obtain adequate supplies of components, even
compared to a number 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 has
become a challenging factor in several cases. 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 operates printed circuit board (PCB) manufacturing and system
integration in Rochester, New York where it manufactures its products. In a plan
announced in February 2005 and executed throughout the year, management
transitioned manufacturing from its San Luis Obispo, California facility to its
Rochester, New York facility.

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 reduced risks inherent in utilizing PCB
contract manufacturing. These risks typically include a contract manufacturer's
inability to meet dynamic shifts in manufacturing requirements and related
changes in inventory. Use of in-house manufacturing enables the Company to meet
rapid and shifting changes to fulfill customer orders. The Company has very
limited contract manufacturing capabilities through third parties to fulfill
customer orders. 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 2006, 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 2005, management completed its plan to centralize its multi-location
operations and to streamline the organization including integrating accounting
and manufacturing operations of the Voice Technology Group and the Computing
Products Group into the Rochester, New York headquarters.

As of December 31, 2005, the Company had 225 full-time employees, eleven
part-time and contract employees, and three engineering cooperative students.
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                    111
             Sales and Marketing                          32
             Manufacturing                                57
             General and Administrative                   25
                                                     -----------
                                                         225

In January 2006, the Company announced its intention to close its engineering
facility in Norwood, Massachusetts and to transition its products and customer
support to other Company facilities. There were fifteen full time employees in
this location at December 31, 2005 and this facility is expected to be closed by
June 30, 2006.

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

ITEM 1A - 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. Additionally, the
embedded platform market targeting 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 meet customer requirements and comply with 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, 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 targeting 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
we do to deploy on promotion, advertising, research and product development. In
addition, 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 depend 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 global telecommunications industry is experiencing 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.

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 fulfill orders for customers in the most optimal manner for a volume
and mix of business, we manufacture our network access, switch, signaling and
single board computer products at our Rochester, New York facility. Our 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 networking industry
and the rapid rate of new patents granted or new standards or new technology
developed, we may have to obtain 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 depend on 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.

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 of
operations.

We will be subject to certain foreign regulations in 2006 that restrict the
distribution of products containing certain substances. Failure to comply with
these foreign regulations would harm our operating results.

On July 1, 2006, the Restriction of Certain Hazardous Substances Directive
("RoHS") issued by the European Union will become effective. This directive
restricts the distribution of products within the EU that exceed very low
maximum concentration values of certain substances, including lead. We expect
that we will not be able to sell non-RoHS compliant product to certain customers
who intend to sell their finished goods into the EU after the effective date. At
the present time, the majority of our inventory contains substances prohibited
by the RoHS directive. Upon effectiveness of the RoHS legislation, a portion of
our inventory may become obsolete and unsaleable and, as a result, would have to
be written off. Such a write-off would adversely impact our operating results.

The Company is currently developing products that will be compliant with the
RoHS directive. Customers may need to evaluate and test these new products prior
to purchasing for sale into the EU after June 30, 2006. There can be no
assurance that the Company will have RoHS compliant products available to
customers in sufficient time for customers to complete their evaluation and
testing. Upon effectiveness of the RoHS legislation, delays by the Company in
the availability of RoHS compliant products or in the placement of customer
orders for RoHS compliant product, would adversely impact our operating results.

The European Union also issued a directive on Waste Electrical and Electronic
Equipment (WEEE). The WEEE directive requires manufacturers of electronic
equipment to facilitate the repair, upgrading, re-use or disassembly and
recycling of products once at end of life. Our compliance with this directive
could result in future costs to repair, upgrade, or disassemble and recycle sold
products. We may also be required to accept the return of certain products in
the future based upon this directive. Our compliance with this directive in the
future may have an adverse impact on our operating results.

ITEM 1B - Unresolved Staff Comments
          -------------------------
None.

ITEM 2 - Properties
         ----------
The Company's corporate headquarters is 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
includes the executive offices, along with sales, marketing, engineering and
manufacturing operations. There is sufficient room for growth in this facility
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
facility is primarily an engineering center and this lease expires in 2008.
Approximately 14,000 square feet of this facility is currently sublet to a
tenant. The Company intends to vacate this location in 2006 and move its
operations to a new facility in the San Luis Obispo area. In connection with
this relocation, the Company will seek other tenants to sublet the remaining
available space in the building.

The Company's Voice Technology Group is located in 9,000 square feet of office
space leased in Norwood, Massachusetts. In January 2006, the Company announced
its intention to close this facility in 2006. In connection with this
announcement, the Company exercised its 12 month termination right under the
lease. Once this property is vacated, the Company will seek to sublet this space
for the remaining term of the lease.

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, Ontario (Canada). The office lease agreements in this building
expire in May 2006. The Company does not intend to renew these leases and
expects to move its operations to a suburban location in the Ottawa area in
2006.

The Company also leases sales and engineering office space 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 2005.

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.

             2005                         High                   Low
      ----------------------------------------------------------------------
        First Quarter                   $  9.72               $  6.60
        Second Quarter                     6.78                  5.05
        Third Quarter                      7.27                  4.89
        Fourth Quarter                  $  9.75               $  7.05

             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

As of March 2, 2006, there were 185 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 Year Ended December 31:    2005      2004      2003      2002      2001
--------------------------------------------------------------------------------
Sales                            $49,633   $53,489   $49,992   $27,014   $36,517
Net income                         3,045     2,780     3,050       326     5,186
Basic earnings per share:
  Net income                     $  0.24   $  0.22   $  0.25   $  0.03   $  0.42
  Weighted average common shares  12,885    12,720    12,259    12,263    12,282
Diluted earnings per share:
  Net income                     $  0.23   $  0.21   $  0.24   $  0.03   $  0.41
  Weight average common and
    common equivalent shares      13,167    13,219    12,692    12,373    12,708


Excluding non-recurring items (4)  2005      2004(1)   2003(2)   2002(3)   2001
                                 -----------------------------------------------
Net income, GAAP basis           $ 3,045   $ 2,780   $ 3,050   $   326   $ 5,186
  Total of non-recurring items               1,714       392       509
  Tax impact of non-recurring
    items                                     (824)                (44)
                                 -----------------------------------------------
Net income, Non-GAAP basis       $ 3,045   $ 3,670   $ 3,442   $   791   $ 5,186
Basic earnings per share         $  0.24   $  0.29   $  0.28   $  0.06   $  0.42
Diluted earnings per share       $  0.23   $  0.28   $  0.27   $  0.06   $  0.41


At December 31:                    2005      2004      2003      2002      2001
--------------------------------------------------------------------------------
Working capital                  $46,848   $41,637   $38,219   $32,130   $34,728
Total assets                     $62,943   $57,011   $51,660   $45,204   $42,954
Total stockholders' equity       $55,287   $50,421   $43,952   $38,809   $38,342

All per share amounts described below are presented on a diluted basis.
Management believes that the Company's results, excluding non-recurring items,
provide investors with another measure of its operations, as non-recurring items
result from facts and circumstances that vary in frequency, amounts and cause.
See "Financial Overview" of Management's Discussion and Analysis of Financial
Condition and Results of Operations for additional information.

(1) In 2004, using applicable tax rates, amounts exclude non-recurring items
amounting to $.9 million, or $.07 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, or $.09 per share; in-process research and development expense of
$.2 million, or $.01 per share; and a valuation charge on a note receivable from
an unaffiliated company amounting to $3.0 million, or $.15 per share.

(2) In 2003, amounts exclude a non-recurring minority investment impairment
charge amounting to $.4 million, or $.03 per share.

(3) In 2002, using applicable tax rates, amounts exclude non-recurring expenses
amounting to $.5 million, or $.03 per share. These non-recurring charges in 2002
include in-process research and development expense of $.4 million, or $.03 per
share; and class action settlement costs of $.1 million, or $.00 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 risk factors described in ITEM 1A of this Form 10-K. 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 and obtaining orders
as a result, fluctuations in quarterly and annual results, the reliance on a
limited number of third party suppliers, limitations of the Company's
manufacturing capacity and arrangements, the protection of the Company's
proprietary technology, the dependence on key personnel, changes in critical
accounting estimates, potential impairments related to investments and foreign
regulations. 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

The following contains forward-looking statements within the meaning of the
Securities Act of 1933 and Securities Exchange Act of 1934 and are subject to
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995.

The Company is a leading developer of communications platforms and systems for
the embedded communications marketplace. It targets three vertical markets:
telecommunications, defense and homeland security, and commercial. Of the three
vertical markets served, telecommunications is the largest. A breakdown of the
telecommunications applications that utilize the Company's products is as
follows: Voice-over-IP (VoIP) represents approximately 40%, wireless
infrastructure represents 40%, and the remaining 20% is spread across IP
multimedia systems and other applications.

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 products are based on open standards and are
sold as fully integrated, purpose built, application ready platforms, or as
individual blade components for the embedded communications marketplace. When
sold as platforms, known as the Company's Advanced Managed Platform products,
customers can quickly move to the enhanced value steps of their products while
realizing distinct cost advantages, increased overall system reliability and
performance, and improved time-to-market. Since its introduction in 2003, the
Advanced Managed Platform product line has realized more than 30 new design
wins. If successfully implemented by our customers, each is expected to generate
greater than $0.5 million of annualized revenue when reaching production
volumes. In addition, the Company realized more than 33 new design wins for
components solutions in the same time period. Not all design wins are expected
to result in production orders.

Throughout 2005, the Company continued to develop, sell and further
commercialize various platform configurations allowing customers to select the
appropriate platform, blade components and software to fit system and
application requirements with full confidence that all elements have been
designed to work together.

In July 2005, the Board of Directors authorized the Company to repurchase shares
of its common stock for an aggregate amount not to exceed $10.0 million. To
date, there have been no repurchases of shares under this program.

During the third quarter 2005, the Company completed its plan to centralize its
multi-location operations and to streamline the organization. Management
announced this plan in October 2004. The annualized savings generated by
centralizing sales, marketing and accounting functions into corporate operations
is expected to be approximately $1.3 million, and the annualized savings
generated by centralizing manufacturing functions into the Rochester
manufacturing operation is expected to be approximately $.7 million. Management
expects a portion of the savings realized under this plan will be reinvested to
stimulate future growth.

On November 3, 2005, Michael Skarzynski joined the Company as president and
chief executive officer, succeeding Donald Turrell. Since joining, Mr.
Skarzynski has spent time meeting with employees, customers, partners and
investors around the world to develop a broad understanding of the Company's
value proposition. In the process, Mr. Skarzynski assessed the Company's
strengths and capabilities, and developed strategic objectives focused on market
leadership and profitable growth. The goal of this strategy is to drive
sustained and profitable revenue growth. The Company expects to achieve this
objective through a combination of organic growth and acquisitions.

To move forward into 2006 and to establish a foundation upon which the Company
can reach its aggressive growth goals, a company-wide transformation is
underway. The transformation will move the Company from its traditional
engineering and technology focus, to a new emphasis on sales and marketing.
Management's energies and the Company's resources will be refocused on these
objectives. Management is also sharpening its focus on its platform strategy to
capitalize on additional market opportunities. While in an early stage of this
transformation, the Company has made several leadership changes that are
expected to strengthen the Company and enable it to meet these growth
objectives.

During the first half of 2006, management expects to hire additional sales
people to accelerate the Company's revenue growth. At the same time, management
is committed to taking actions that are necessary to achieve profitable growth.
These actions could include workforce reductions, facilities closures,
outsourcings or other actions.

On January 4, 2006, the Company announced its plan to close its engineering
center in Norwood, Massachusetts and transfer product development and customer
support for the voice technology products to other Company engineering centers.
During the first half of 2006, management is also relocating its San Luis Obispo
engineering group to more cost-effective office space in the San Luis Obispo
area and its Ottawa operations to a suburban location in the Ottawa area.
Management expects that the preponderance of these actions will be completed
during the first half of 2006.

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 cannot make estimates until preliminary results for a financial
quarter are known and analyzed. The Company believes, given current facts and
circumstances, that 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 Inventories
        o  Income Taxes
        o  Product Warranty
        o  Carrying Value of Goodwill

Revenue Recognition: The Company recognizes revenue from product sales in
accordance with the SEC Staff Accounting Bulletin No. 104, "Revenue
Recognition." Product sales represent the majority of the Company's revenue and
include hardware products and hardware products with embedded software. The
Company recognizes revenue from these product sales 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 occurs when all factors are met,
including transfer of title and risk of loss, which typically occurs upon
shipment by the Company. If these conditions are not met, the Company will defer
revenue recognition until such time these conditions have been satisfied.

Revenue earned from arrangements for software is accounted for under the
provisions of Statement of Position 97-2, "Software Revenue Recognition" and
EITF Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." Revenue
from software requiring significant production, modification, or customization
is recognized using the percentage of completion method of accounting. Any
anticipated losses on contracts are charged to operations as soon as such losses
are determined. If all conditions of revenue recognition are not met, the
Company defers revenue recognition and will recognize revenue when the Company
has fulfilled its obligations under the arrangement. Revenue from software
maintenance contracts is recognized ratably over the contractual period.

Revenue from consulting and other services is recognized at the time the
services are rendered. The Company also sells certain products through
distributors who are granted limited rights of return. Potential returns are
accounted for at the time of sale.

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 cost 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 records
provisions 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, product support and foreign
regulations governing hazardous materials (see LIQUIDITY AND CAPITAL RESOURCES
for further information on foreign regulations). 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, and 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.

Carrying Value of Goodwill: The Company conducts tests for impairments of
goodwill annually, at year end, 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 the goodwill'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.

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 communications marketplace. Throughout 2005, the
Company continued to focus its operating efforts on this strategy. This line of
platform solutions specifically addresses equipment manufacturers' requirements
for an increased level of system integration and services from suppliers, thus
allowing them to focus on their value-added stages of product development, which
in most cases is application software. The Company's strategy also enables
customers to replace proprietary or legacy platforms with the latest generation
of fully managed system functionality.

Through its acquisitions and internal investments over the past several years,
management believes this strategy has moved the Company 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
2005.

The Company's goal is to drive sustained and profitable revenue. The Company
expects to achieve these objectives through a combination of organic growth and
acquisitions. To move forward into 2006 and establish a foundation upon which
the Company can reach its aggressive growth goals, a company-wide transformation
is underway. The transformation will move the Company from its traditional
engineering and technology focus, to a new emphasis on sales and marketing.
Management's energies and the Company's resources will be refocused on these
objectives. Management is also sharpening its focus on its platform strategy to
capitalize on additional market opportunities.

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 computing products. In January
2004, the Company acquired certain assets of Mapletree Networks, Inc., for its
voice processing technology.

There are identifiable risks associated with carrying out the Company's growth
strategy in the current uncertain economic climate. Many of the Company's end
markets are forecasted to show only modest growth in the near term. In order to
realize growth in this environment, the Company will have to gain market share
from competitors, many of whom are larger, more established companies with
greater resources than the Company. Management believes that the Company's
strategy to hire additional sales people while continuing to invest in new
product development will enable the Company to compete in this economic
environment.

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 communications platforms and systems 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 successfully implemented
by our customers, 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 2005, the Company was notified of 25 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) (9), and
individual component design wins for communications (12) and switch (4)
products. 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 2004 design wins were for the
Company's integrated platform solutions (with multiple products) (13), and
individual component design wins for communications (7) and switch (2) products.
Not all design wins are expected to result in production orders. The Company
believes that the growth in the number of design wins from 2004 to 2005 reflects
increasing customer demand for the Company's products.

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.
Shipments to customers in 2005 amounted to $49.6 million, compared to $53.5
million in 2004. Revenue in 2005 was negatively impacted by two large customers
who purchased $10.3 million of product in 2004, but stopped buying product from
the Company in 2004, primarily due to demand issues in their markets for their
specific products. This loss of revenue was partially offset by increased sales
to new and existing customers in 2005.

Industry Overview

The Company's customers are primarily equipment manufacturers in the
telecommunications, data communications, defense and homeland security and
commercial markets. Throughout 2005, the Company's customers focused their
efforts and spending on new product development, but are operating with scaled
down business models caused by the market contraction in recent years. While
many new smaller communications suppliers are reappearing, it is a common trend
that across the technology sector, many organizations continued with lean staffs
and tightened cost controls. This includes many of the Company's customers and
suppliers.

Industry market research organizations are estimating the total available market
for worldwide, embedded systems to be valued at $40 billion in size in 2005.
Traditionally, the largest segment of this market uses "proprietary,"
purpose-built embedded systems and products. Embedded systems built on open
standards comprise about 10%, or $4 billion representing the Company's served
available market. 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 markets served by the Company, is
expected to use open standards based products. The driving factors behind this
changing paradigm are twofold. First, systems are becoming increasingly
integrated and 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 appear to be 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 Overview

Revenue:
--------
Revenue for 2005 amounted to $49.6 million, compared to $53.5 million in 2004.
The decrease in revenue of $3.9 million was primarily the result of two
significant customers that ceased purchasing product from the Company in 2004.
In 2004, these two customers, Andrew Corporation and UTStarcom, together
represented $10.3 million of total 2004 revenue, compared to zero revenue in
2005. The decrease in sales to these two customers was partially offset by
increases in sales to new and existing customers in 2005.

Shipments to customers outside of the United States represented 43% and 34% of
sales in 2005 and 2004, respectively. This increase was due to the Company's
continued sales efforts in foreign markets, including a significant customer in
the United Kingdom. In 2005, shipments to the United Kingdom represented 14% of
revenue. In 2004, shipments to the UK were less than 10% of revenue.

Earnings:
---------
GAAP information
----------------
Net income in 2005 amounted to $3.0 million, or $.23 per diluted share based on
13.2 million shares outstanding. Net income in 2004 amounted to $2.8 million, or
$.21 per diluted share based on 13.2 million shares outstanding.

Non-GAAP information
--------------------
Upon the recording of certain non-recurring items, the Company will calculate
and report its results excluding these items from its GAAP net income to arrive
at a non-GAAP measure of net income. Management believes that the presentation
and disclosure of this non-GAAP net income measure provides another view of the
operations and financial condition of the Company on the basis in which
management operates the Company and the Board of Directors reviews its results.
This non-GAAP net income measure is calculated by adjusting net income reported
on a GAAP basis for items that the Company deems to be non-recurring and unusual
or infrequent in their nature. The Company adjusts for these non-recurring items
as these items are excluded from the Company's operational analysis, budgeting
and forecasting functions. The use of this non-GAAP measure by the Company could
result in potential limitations related to possible bank lending covenant
violations, where certain covenants may be measured on GAAP results. The Company
compensates for this potential limitation by attempting to enter into lending
agreements under which covenants are calculated utilizing the Company's non-GAAP
net income measure. On December 30, 2005, the Company entered into a $5 million
senior revolving credit facility with a bank. Under the terms of the credit
agreement, the Company is subject to certain financial covenants that will be
calculated utilizing the Company's non-GAAP measure described above. In the
future, there can be no assurance that the Company will be successful in its
efforts to obtain additional lending arrangements under which certain covenants
are calculated utilizing the non-GAAP net income measure described above.

2005:
-----
There was no difference between GAAP net income and non-GAAP net income for
2005.

2004:
-----
Non-GAAP net income in 2004 amounted to $3.7 million, or $.28 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
           Networks, Inc. acquisition ($.2 million, or $.01 per diluted share);
        o  Gain from the sale of an investment in Momentum Computer, Inc. ($1.2
           million, or $.09 per diluted share); and
        o  Valuation charge related to a note receivable from InSciTek
           Microsystems, Inc. ($3.0 million, or $.15 per diluted share).

A reconciliation of GAAP net income to non-GAAP net income for 2004 is as
follows:

                                                             2004
                                                   ------------------------
        Net income, GAAP basis                            $  2,780
        Non-recurring items:
         In-process research and development                   218
         Gain on sale of investment                         (1,504)
         Note receivable valuation charge                    3,000
                                                   ------------------------
        Total non-recurring items                            1,714
                                                   ------------------------
        Net income excluding non-recurring items
         before tax effect of non-recurring items            4,494
        Tax effect of non-recurring items                     (824)
                                                   ------------------------
        Net income, non-GAAP basis                        $  3,670
                                                   ========================

Cash:
-----
Cash, cash equivalents and investments amounted to $33.0 million and $25.6
million at December 31, 2005 and 2004, respectively, and no long-term debt
existed at either date.

Cash generated from operating activities amounted to $9.1 million in 2005 and
$.6 million in 2004. The year-over-year improvement in cash generated from
operating activities amounted to $8.5 million and is primarily attributable to
changes in working capital.

Acquisitions, Equity Investments and Notes Receivable:
------------------------------------------------------
Mapletree Networks, Inc. (subsequently, the Voice Technology Group, or VTG)

In January 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. 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. The Company's revenue and expenses reflect the operations of VTG
from the date of acquisition. In January 2006, the Company announced its plan to
close the VTG engineering center and transfer product development and customer
support for the voice technology products to other Company engineering centers.

Momentum Computer, Inc. (Momentum)

Momentum is a developer of specialized single board computer products. The
Company initially acquired a 47% ownership interest in Momentum in 2002. During
2003, the Company reduced its ownership in Momentum to 30%. 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)

In February 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
receivable. During 2004, the Company invested $3.0 million in conjunction with
this agreement (including 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 was doubtful. The note bore
interest at 10% annually and was convertible into shares of common stock of
InSciTek. During the third quarter 2005, InSciTek received an investment from an
outside party through the sale of series A preferred stock. In connection with
that investment, the Company and InSciTek renegotiated the terms of the note and
all unpaid interest due to the Company at the date of the investment, amounting
to $.2 million, was paid in the form of series A preferred stock of InSciTek.
The note is now convertible into series 2 preferred stock of InSciTek. A full
reserve of this note remained recorded at December 31, 2005.

Centralization Cost Savings Activities:
---------------------------------------
In October 2004, the Company announced a plan 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. By the end of the first quarter 2005,
the Company completed the centralization of sales, marketing and accounting
functions into corporate operations resulting in anticipated savings of $1.3
million per year. During the third quarter 2005, the transition of the
manufacturing functions into the Rochester manufacturing operation was
completed, resulting in anticipated savings of $.7 million per year. During 2005
and 2004, the Company incurred charges of $.4 million and $.2 million,
respectively, related to these restructuring efforts. Management expects a
portion of the savings realized under this plan will be reinvested to stimulate
future growth.

On January 4, 2006, the Company announced a plan to close its engineering center
in Norwood, Massachusetts and transfer product development and customer support
for the voice technology products to other Company engineering centers. In
connection with the assessment of the voice technology product's software
development, the Company recorded a charge in the fourth quarter 2005 to write
off software development costs that were capitalized for new voice technology
products which had not reached commercial general release and were discontinued.
This intangible asset write-off amounted to $1.4 million.

During the first half of 2006, management expects to relocate its San Luis
Obispo engineering group to more cost-effective office space in the San Luis
Obispo area and its Ottawa operations to a suburban location in the Ottawa area.
Management expects that the preponderance of these actions will be completed
during the first half of 2006.

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.

                                                 Year Ended December 31,
                                               2005        2004        2003
                                            ----------  ----------  ----------
Sales                                         100.0%      100.0%      100.0%
Cost of goods sold                             50.8%       52.4%       50.6%
                                            ----------  ----------  ----------
Gross profit                                   49.2%       47.6%       49.4%

Operating expenses:
   Selling and marketing                       11.9%       12.0%       11.8%
   Research and development                    20.9%       19.2%       19.0%
   General and administrative                   9.4%        8.9%        9.3%
   Restructuring charges                        0.7%        0.4%        0.2%
   Intangible asset write-off                   2.7%
   In-process research and development                      0.4%
                                            ----------  ----------  ----------
          Total operating expenses             45.6%       40.9%       40.3%
                                            ----------  ----------  ----------
Income from operations                          3.6%        6.7%        9.1%

Note receivable valuation charge                           (5.6%)
Other income, net                               2.6%        1.4%        1.0%
                                            ----------  ----------  ----------
Income before income taxes, equity in
 income (loss) of unconsolidated company,
 gain on sale of investment and impairment
 of minority interest investment                6.2%        2.5%       10.1%

Income tax provision (benefit)                  0.1%       (0.2%)       2.6%
                                            ----------  ----------  ----------
Income before equity in income (loss) of
  unconsolidated company, gain on sale of
  investment and impairment of minority
  interest investment                           6.1%        2.7%        7.5%

Equity in income (loss) of unconsolidated
 company                                                    0.3%       (0.6%)
Gain on sale of investment in
 unconsolidated company, net of tax                         2.2%

Impairment of minority interest investment                             (0.8%)
                                            ----------  ----------  ----------
     Net income                                 6.1%        5.2%        6.1%
                                            ==========  ==========  ==========

Excluding non-recurring items (3)              2005        2004(1)     2003(2)
                                            ----------  ----------  ----------

Income before income taxes, equity in income
 (loss) of unconsolidated company, gain
 on sale of investment and impairment of
 minority interest investment                   6.2%        8.5%       10.1%

Income tax provision                            0.1%        1.9%        2.6%
                                            ----------  ----------  ----------
Income before equity in income (loss) of
 unconsolidated company, gain on sale of
 investment and impairment of minority
 interest investment                            6.1%        6.6%        7.5%

Equity in income (loss) of unconsolidated
 company                                                    0.3%       (0.6%)
                                            ----------  ----------  ----------
     Net income                                 6.1%        6.9%        6.9%
                                            ==========  ==========  ==========

All per share amounts described below are presented on a diluted basis.
Management believes that the Company's results excluding non-recurring items
provide investors with another measure of its operations, as non-recurring items
result from facts and circumstances that vary in frequency, amounts and cause.
See "Financial Overview" of Managements's Discussion and Analysis of Financial
Condition and Results of Operations for additional information.

(1) In 2004, using applicable tax rates, amounts exclude non-recurring items
amounting to $.9 million, or $.07 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, or $.09 per share; in-process research and development expense of
$.2 million, or $.01 per share; and a valuation charge on a note receivable from
an unaffiliated company amounting to $3.0 million, or $.15 per share.

(2) In 2003, amounts exclude a non-recurring minority investment impairment
charge amounting to $.4 million, or $.03 per share.

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

Year Ended December 31, 2005 compared with the Year Ended December 31, 2004

Sales. Total revenue for 2005 amounted to $49.6 million, compared to $53.5
million in 2004. 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, Switching products and Other products. Revenue from each product
category is expressed as a percentage of sales for 2005 and 2004 as follows:

                                      2005                    2004
                               ------------------     -------------------
        Communications                 48%                     46%
        Computing                      25%                     34%
        Switching                      26%                     19%
        Other                           1%                      1%
                               ------------------     -------------------
           Total                      100%                    100%
                               ==================     ===================

Communications products:

Communications products are comprised of network access, SEGway signaling and
Voice Technology products. Network 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 includes a complete line of
communications protocols. Many of the Company's signaling products provide a
signaling bridge between traditional telephone networks and the growing IP
packet-switched network, and enable the transport of signaling messages over IP
networks. Voice Technology products enable voice, data and fax processing for
communications applications.

Communications product revenue for 2005 totaled $24.0 million, which represented
a decrease of $.5 million, or 2%, from $24.5 million in 2004. This decrease in
revenue in 2005 reflects one major customer representing $4.6 million in 2004
that, due to industry consolidation activity, unexpectedly ceased product
requirements in the second quarter 2004. This decrease was partially offset by
shipments to several new and existing customers in 2005.

Computing products:

Computing products include integrated platform solutions, a range of single
board computers, a variety of embedded system chassis and associated chassis
management products.

Computing products revenue in 2005 totaled $12.3 million, compared to $18.1
million in 2004. The decrease in revenue of $5.8 million, or 32%, reflects two
major customers representing $8.3 million in 2004, that due to market
conditions, ceased purchasing product by the end of 2004. In 2005, several
customers partially offset the lack of shipments to the two 2004 customers.

Switching products:

The Company's Ethernet switch components operate as the "nexus" of the IP packet
switching functionality of the Advanced Managed Platforms.

In 2005, switching products revenue amounted to $12.8 million, compared to $10.3
million in 2004. The increase in revenue of $2.5 million, or 24%, was
attributable to increased sales to a variety of switch customers.

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.

Gross profit. Gross profit consists of sales, less cost of goods sold including
material costs, manufacturing expenses, depreciation, amortization of software
development costs, and expenses associated with engineering contracts and the
technical support function. Gross margin was 49.2% and 47.6% of sales for 2005
and 2004, respectively. The increase in gross margin was a result of a change in
product mix from lower margin products (Computing products) to higher margin
products (Communications and Switching products), and cost reductions related to
the consolidation of the Company's manufacturing operations. Lower production
volumes in 2005 resulted in fixed manufacturing costs being spread over fewer
units which negatively impacted the gross margin improvements noted above.
Included in cost of goods sold is the amortization of software development costs
which totaled $1.6 million and $1.7 million in 2005 and 2004, respectively.

Total Operating Expenses. Total operating expenses for 2005 amounted to $22.7
million, compared to $21.9 million in 2004. The operating expenses of the Voice
Technology Group (VTG) are included from the date of acquisition of January 23,
2004. Operating expenses in 2005 included the write off of software development
costs amounting to $1.4 million. Operating expenses in 2005 and 2004 also
include restructuring expenses of $.4 million and $.2 million, respectively.
These costs are related to the Company centralizing its multi-location
operations and streamlining the organization. This plan began in October 2004
and was completed during the third quarter 2005.

Selling and marketing expenses were $5.9 million and $6.4 million for 2005 and
2004, respectively. The decrease in selling and marketing expenses of $.5
million, or 8%, from 2004 to 2005 is primarily the result of staff reductions in
the marketing organization.

Research and development expenses were $10.4 million and $10.2 million in 2005
and 2004, respectively. The Company capitalizes certain software development
costs, which reduces the amount of software development charged to operating
expenses. Amounts capitalized were $2.5 million and $2.2 million during 2005 and
2004, respectively. Gross expenditures for engineering and software development
were $12.9 million in 2005 and $12.4 million in 2004. For the comparative
periods, the increase in gross expenditures for engineering and software
development reflect increases in personnel related costs as well as product
certification and prototype costs.

General and administrative expenses were $4.7 million in 2005, compared to $4.8
million in 2004. The decrease in costs from 2004 to 2005 is a result of costs
savings realized from the Company's centralization plan, offset by increased
corporate governance expense including Sarbanes-Oxley compliance.

Restructuring charges amounted to $.4 million in 2005 and $.2 million in 2004.
Restructuring charges relate primarily to severance payments associated with the
Company's centralization activities. These expenses were recorded as they were
incurred during the respective periods.

An intangible asset write-off amounted to $1.4 million in 2005. The Company
recorded a charge to write off software development costs that were capitalized
for new voice technology products which had not reached commercial general
release and were discontinued.

An in-process research and development expense amounted to $.2 million in 2004.
The Company recorded in-process research and development associated with the
Mapletree Networks acquisition that was 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." This charge relates
to research and development projects that had not reached technological
feasibility at the time of the acquisition.

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 was doubtful. In 2005 and 2006, InSciTek raised additional outside capital
to fund its business.

Other Income, net. Other income consists primarily of interest income. The
Company's funds are primarily invested in high quality auction rate municipal
securities. An increase in the funds available for investment as well as higher
interest rates in 2005 resulted in an increase in interest income from $.7
million in 2004 to $1.3 million in 2005. In 2005, an increase in the principal
amount of a note receivable from an unconsolidated company also contributed to
higher interest income in 2005 compared to 2004.

Income taxes. 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 the Company's international
operations, research activities, tax exempt interest and foreign sales. In 2005,
the Company recorded an income tax provision of $.04 million. In 2004, the
Company recorded an income tax benefit of $.1 million. The Company's income tax
rate for 2005 is less than the statutory rates due to the favorable impact of
research and development credits, Canadian tax credits, a foreign sales
exemption and tax exempt interest. The income tax benefit recorded in 2004 was
primarily the result of the benefits derived from Canadian tax credits and a
foreign sales exemption which exceeded the statutory tax amounts. Please refer
to Note O in the "Notes to the Consolidated Financial Statements," for further
information.

In October 2004, "The American Jobs Creation Act of 2004" was signed into law.
The Act includes a temporary incentive for U.S. companies to repatriate
accumulated income earned abroad by providing an 85% dividends-received
deduction for certain dividends from controlled foreign corporations. The
Company did not repatriate funds in 2005 or 2004.

Equity in Income (Loss) of Unconsolidated Company. In the third quarter 2004,
the Company sold its ownership interest in Momentum. During 2004, the Company's
share of Momentum's income amounted to $.2 million.

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

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,
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                     46%                     52%
        Computing                          34%                     37%
        Switching                          19%                     10%
        Other                               1%                      1%
                                   ------------------     -------------------
            Total                         100%                    100%
                                   ==================     ===================

Communications products:

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:

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.

Switching products:

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 (VTG) 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.

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 VTG 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 VTG 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 VTG 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 VTG 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 was 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 Canadian tax credits and a foreign sales exemption 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 future tax provisions.

Equity in Income (Loss) of Unconsolidated Company. In the third quarter 2004,
the Company sold its ownership interest in Momentum. During 2004, the Company's
share of Momentum's income totaled $.2 million. During 2003, the Company
recorded losses of $.3 million related to its share 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 and realized a
gain of $1.2 million, after tax of $.3 million.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2005, the Company's primary sources of liquidity included cash,
cash equivalents, and investments of $33.0 million, plus a line of credit
totaling $5.0 million available under a bank credit facility. The Company had
working capital of $46.8 million at December 31, 2005.

Cash generated by operating activities was $9.1 million for 2005. This amount
included net income of $3.0 million, non-cash adjustments of depreciation and
amortization of $2.4 million and an intangible asset write-off of $1.4 million.
Cash generated from operating activities included $.6 million of cash generated
from increased accounts receivable collections, an increase in income taxes
payable of $1.0 million from income tax refunds and increases in accounts
payable and accrued expenses of $.9 million due to the timing of payments. Cash
used in operating activities included an increase in inventory of $.6 million.
The increase in inventory is primarily related to acquiring inventory associated
with foreign regulations discussed below.

On July 1, 2006, the Restriction of Certain Hazardous Substances Directive
("RoHS") issued by the European Union will become effective. This directive
restricts the distribution of products within the EU that exceed very low
maximum concentration values of certain substances, including lead. It is
expected that the Company will not be able to sell non-RoHS compliant product to
certain customers who intend to sell their finished goods in the EU after the
effective date. At the present time, the majority of the Company's inventory
contains substances prohibited by the RoHS directive. Upon effectiveness of the
RoHS legislation, a portion of the Company's inventory may become obsolete and
unsaleable and, as a result, may have to be written off. In addition, prior to
the effectiveness, the Company expects that its overall inventory balances will
increase as it builds RoHS compliant product prior to the effective date. The
Company is working closely with its customers and suppliers to minimize this
impact. During 2005, the Company began production and shipment of RoHS compliant
products. In connection with this production and expected future needs under the
compliance program, the Company purchased additional inventory amounting to $.9
million in 2005. Management is closely monitoring inventory purchases, inventory
needs and sales efforts related to this compliance program. However, there can
be no assurance that the Company will be successful in fully reducing its
non-compliant inventory prior to the effective date and, in the future, the
Company may incur inventory obsolescence charges related to unsaleable
non-compliant products.

Cash used by investing activities during 2005 amounted to $9.0 million. The
largest use of cash in investing activities was the Company's investments in
auction rate municipal securities which resulted in a net use of cash of $5.9
million in 2005. Also contributing to the use of cash was the Company's
capitalized software development costs of $2.5 million and fixed asset
acquisitions of $.7 million.

Cash provided by financing activities totaled $1.4 million for 2005 from the
exercise of stock options.

On July 11, 2005, the Company announced that its Board of Directors authorized
the Company to repurchase shares of its common stock for an aggregate amount not
to exceed $10.0 million. To date, there have been no repurchases of shares under
this program.

Effective December 30, 2005, the Company executed a Credit Agreement with
JPMorgan Chase Bank, N.A. (the "Bank"). Under the terms of the Credit Agreement,
the Company may borrow, from time to time, up to an aggregate of $5.0 million
from the Bank. The borrowings bear interest at various rates based upon the type
of borrowing, as defined in the agreement. The Credit Agreement includes certain
financial and administrative covenants. The Credit Agreement terminates on
December 29, 2006 at which time any outstanding borrowings must be repaid. There
were no amounts outstanding under this facility at December 31, 2005.

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 leases facilities in its other operating locations in North America that
expire through 2007. In February 2006, the Company announced its intention to
relocate its San Luis Obispo operations to a new facility in the San Luis Obispo
area during 2006. Once vacated, the Company will attempt to sublet this office
space.

The Company enters into purchase commitments during the normal course of its
operations. Certain of the purchase commitments of the Company are
non-cancelable. At December 31, 2005, the Company's non-cancelable purchase
commitments expire through December 31, 2007. Included in the table below is the
total of non-cancelable purchase commitments outstanding as of December 31,
2005.

Future minimum payments for non-cancelable operating leases having a remaining
term in excess of one year and outstanding non-cancelable purchase commitments
at December 31, 2005 are as follows:

                                            Payments Due by Period(in thousands)
                                                             2007         2010
                                                           through      through
   Contractual Obligations         Total        2006         2009         2012
--------------------------------------------------------------------------------
Operating leases                  $6,626       $1,378       $3,491       $1,757
Purchase commitments               2,641        2,361          280
                                ----------   ----------   ----------   ---------
Total                             $9,267       $3,739       $3,771       $1,757
                                ==========   ==========   ==========   =========

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 and a line of credit available on a bank credit
facility, should be sufficient to meet the Company's anticipated cash
requirements, 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 strategic acquisition 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 (Revised 2004) "Share-Based Payment" 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 beginning January 1, 2006. 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. Upon adoption, the Company will
apply the modified version of prospective application. In 2006, under this
standard, the Company expects to record stock option compensation expense of
approximately $.2 million related to stock options outstanding at December 31,
2005. This amount excludes stock option compensation expense for any stock
options that may be granted in 2006. To date, the Company has not granted any
stock options in 2006.

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 May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections," which replaces APB Opinion No. 20, "Accounting Changes," and SFAS
No. 3, "Reporting Accounting Changes in Interim Financial Statements." SFAS No.
154 changes the requirements for the accounting and reporting of a change in
accounting principle. Upon the adoption of SFAS No. 154, beginning January 1,
2006, the Company will apply the standard's guidance to changes in accounting
methods, as required. The Company does not expect the adoption of SFAS No. 154
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                 41
   Consolidated Balance Sheets at December 31, 2005 and 2004               43
   Consolidated Statements of Income for the Years Ended
      December 31, 2005, 2004 and 2003                                     44
   Consolidated Statements of Changes in Stockholders' Equity
      for the Years Ended December 31, 2005, 2004 and 2003                 45
   Consolidated Statements of Cash Flows for the Years Ended
      December 31, 2005, 2004 and 2003                                     46
   Notes to Consolidated Financial Statements                              47

Index to Financial Statement Schedule:

Schedule II - Valuation and qualifying accounts
   Allowance for doubtful accounts                                         67
   Valuation allowance for note receivable                                 68

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 integrated audits of Performance Technologies, Incorporated's
2005 and 2004 consolidated financial statements and of its internal control over
financial reporting as of December 31, 2005 and an audit of its 2003
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, 2005
and December 31, 2004, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 2005 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 Annual
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, 2005 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, 2005, 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.


/s/ PricewaterhouseCoopers LLP
Rochester, New York
March 15, 2006

<PAGE>

             PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

                                     ASSETS
                                                       December 31,
                                          --------------------------------------
                                                 2005                2004
                                          -----------------   ------------------

Current assets:
   Cash and cash equivalents               $    11,803,000     $     10,361,000
   Investments                                  21,150,000           15,250,000
   Accounts receivable, net                      9,523,000           10,185,000
   Inventories                                   7,148,000            6,573,000
   Prepaid income taxes                                                 771,000
   Prepaid expenses and other assets               470,000              801,000
   Deferred taxes                                3,272,000            3,088,000
                                          -----------------   ------------------
          Total current assets                  53,366,000           47,029,000

Property, equipment and improvements, net        2,004,000            2,186,000
Software development costs, net                  3,182,000            3,653,000
Investment in unconsolidated company               248,000
Goodwill                                         4,143,000            4,143,000
                                          -----------------   ------------------
          Total assets                     $    62,943,000     $     57,011,000
                                          =================   ==================

                        LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable                        $     1,836,000     $      1,476,000
   Income taxes payable                            244,000
   Accrued expenses                              4,438,000            3,916,000
                                          -----------------   ------------------
          Total current liabilities              6,518,000            5,392,000

Deferred taxes                                   1,138,000            1,198,000
                                          -----------------   ------------------
          Total liabilities                      7,656,000            6,590,000
                                          -----------------   ------------------

Commitments and contingencies
  (Notes J and R)

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; 13,088,281
     and 12,777,357 shares outstanding,
     respectively                                  133,000              133,000
   Additional paid-in capital                   13,903,000           13,476,000
   Retained earnings                            42,601,000           41,978,000
   Treasury stock - at cost; 171,757 and
     482,681 shares held, respectively          (1,350,000)          (5,188,000)
   Accumulated other comprehensive income                                22,000
                                          -----------------   ------------------
          Total stockholders' equity            55,287,000           50,421,000
                                          -----------------   ------------------
          Total liabilities and
            stockholders' equity           $    62,943,000     $     57,011,000
                                          =================   ==================

       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,
                                      ------------------------------------------
                                          2005           2004          2003
                                      ------------   ------------   ------------

Sales                                 $49,633,000    $53,489,000    $49,992,000
Cost of goods sold                     25,191,000     28,027,000     25,293,000
                                      ------------   ------------   ------------
Gross profit                           24,442,000     25,462,000     24,699,000
                                      ------------   ------------   ------------
Operating expenses:
   Selling and marketing                5,894,000      6,403,000      5,881,000
   Research and development            10,367,000     10,243,000      9,493,000
   General and administrative           4,663,000      4,786,000      4,639,000
   Restructuring charges                  370,000        217,000        118,000
   Intangible asset write-off           1,360,000
   In-process research and development                   218,000
                                      ------------   ------------   ------------
          Total operating expenses     22,654,000     21,867,000     20,131,000
                                      ------------   ------------   ------------
Income from operations                  1,788,000      3,595,000      4,568,000

Note receivable valuation charge                      (3,000,000)
Other income, net                       1,296,000        747,000        522,000
                                      ------------   -------------  ------------
Income before income taxes, equity in
 income (loss) of unconsolidated
 company, gain on sale of investment
 and impairment of minority interest
 investment                             3,084,000      1,342,000      5,090,000

Income tax provision (benefit)             39,000        (87,000)     1,339,000
                                      ------------   -------------  ------------
Income before equity in income (loss)
 of unconsolidated company, gain on
 sale of investment and impairment of
 minority interest investment           3,045,000      1,429,000      3,751,000

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

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

Impairment of minority interest
 investment                                                            (392,000)
                                      ------------   -------------  ------------
          Net income                  $ 3,045,000    $ 2,780,000    $ 3,050,000
                                      ============   =============  ============

Basic earnings per share              $      0.24    $      0.22    $      0.25
                                      ============   =============  ============
Diluted earnings per share            $      0.23    $      0.21    $      0.24
                                      ============   =============  ============

Weighted average number of common
 shares used in basic earnings per
 share                                 12,885,072     12,720,301     12,258,575

Potential common shares                   281,605        498,604        433,624
                                      ------------   -------------  ------------
Weighted average number of common
 shares used in diluted earnings per
 share                                 13,166,677     13,218,905     12,692,199
                                      ============   =============  ============

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

<PAGE>
<TABLE>
<S><S>

                                       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, 2003        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
Comprehensive income:
    2005 net income                                                  3,045,000                                    3,045,000
    Other                                                                                            (22,000)       (22,000)
                                                                                                               -------------
Total comprehensive
   income                                                                                                         3,023,000
Exercise of 316,272
   options                                                          (2,422,000)     3,838,000                     1,416,000
Restricted stock
   compensation
   expense                                               23,000                                                      23,000
Tax benefit-option plan                                 404,000                                                     404,000
                     -------------  -------------  -------------  -------------  -------------  -------------  -------------
Balance -
   December 31, 2005   13,260,038       $133,000    $13,903,000    $42,601,000   $ (1,350,000)      $   -       $55,287,000
                     =============  =============  =============  =============  =============  =============  =============

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

             PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                               Year Ended December 31,
                                           2005          2004          2003
                                       ------------- ------------- -------------
Cash flows from operating activities:
  Net income                           $  3,045,000  $  2,780,000  $  3,050,000
  Non-cash adjustments:
     Depreciation and amortization        2,412,000     2,638,000     2,277,000
     Provision for bad debts                 45,000        52,000        87,000
     Note receivable valuation charge                   3,000,000
     Non-cash restructuring charges                                     118,000
     Non-cash intangible asset
      write-off                           1,360,000
     Restricted stock compensation
      expense                                23,000        32,000        67,000
     Deferred taxes                        (244,000)     (874,000)     (196,000)
     Gain on sale of investment in
      unconsolidated company                           (1,504,000)
     In-process research and
      development                                         218,000
     Equity in (income) loss of
      unconsolidated company                             (182,000)      309,000
     Impairment of minority interest
      investment                                                        392,000
     Tax benefit from stock option
      exercises                             404,000       581,000        71,000
  Changes in operating assets and
   liabilities, net of acquisition:
     Accounts receivable                    617,000    (1,899,000)   (1,322,000)
     Inventories                           (575,000)     (524,000)     (893,000)
     Prepaid expenses and other assets       83,000      (171,000)      316,000
     Accounts payable and accrued
      expenses                              882,000    (1,007,000)       26,000
     Income taxes payable and prepaid
      income taxes                        1,015,000    (2,531,000)    1,258,000
                                       ------------- ------------- -------------
        Net cash provided by operating
         activities                       9,067,000       609,000     5,560,000
                                       ------------- ------------- -------------
Cash flows from investing activities:
  Purchases of property, equipment and
   improvements                            (653,000)     (555,000)     (674,000)
  Capitalized software development
   costs                                 (2,488,000)   (2,189,000)   (1,524,000)
  Business acquisition                                 (5,294,000)      (33,000)
  Purchases of investments              (70,250,000)  (35,075,000)  (44,150,000)
  Proceeds from sales of investments     64,350,000    36,775,000    42,956,000
  Proceeds from sale of investment in
   unconsolidated company                               2,087,000       250,000
  Notes receivable from unconsolidated
   companies                                           (1,650,000)
                                       ------------- ------------- -------------
        Net cash used by investing
         activities                      (9,041,000)   (5,901,000)   (3,175,000)
                                       ------------- ------------- -------------
Cash flows from financing activities:
  Exercise of stock options               1,416,000     3,014,000     2,121,000
  Purchase of treasury stock                                           (194,000)
                                       ------------- ------------- -------------
        Net cash provided by financing
         activities                       1,416,000     3,014,000     1,927,000
                                       ------------- ------------- -------------
        Net increase (decrease) in cash
         and cash equivalents             1,442,000    (2,278,000)    4,312,000
Cash and cash equivalents at beginning
 of year                                 10,361,000    12,639,000     8,327,000
                                       ------------- ------------- -------------
Cash and cash equivalents at end of
 year                                  $ 11,803,000  $ 10,361,000  $ 12,639,000
                                       ============= ============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
 INFORMATION
Income taxes paid, net of (refunds)    $ (1,006,000) $  3,084,000  $    161,000
Non-cash financing activity:
Exercise of stock options using 5,348
 and 4,881 shares of common stock,
 respectively                          $     50,700  $     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 communications platforms
and systems for the embedded systems marketplace which are used in a broad range
of applications and end markets.

Segment Data, Geographic Information and Significant Customers: The Company is
not organized by market and is managed and operated as one business. A single
management team that reports to the chief operating decision maker
comprehensively manages the entire business. The Company does not operate any
material separate lines of business or separate business entities with respect
to its products or product development. Accordingly, the Company does not
accumulate discrete financial information, other than product revenue, with
respect to separate product lines and does not have separately reportable
segments as defined by Statement of Financial Accounting Standards (SFAS) No.
131, "Disclosures about Segments of an Enterprise and Related Information."
Shipments to customers outside of the United States represented 43%, 34%, and
28% of sales in 2005, 2004 and 2003. This increase was due to the Company's
continued efforts in foreign markets, including a significant customer in the
United Kingdom. In 2005, export shipments to the United Kingdom represented 14%
of sales. Total shipments to a single foreign country did not exceed 10% of
sales in 2004 or 2003. The Company does not maintain significant amounts of
long-lived assets outside of the United States.

For 2005, 2004, and 2003, four customers accounted for approximately 43%, 38%,
and 48% of sales respectively. In 2005, two customers, Lucent Technologies, Inc.
and Data Connection Limited, comprised 21% and 12% of sales, respectively. In
2004, two customers, Lucent Technologies, Inc. and UTStarcom, Inc., comprised
13% and 11% of sales, respectively. In 2003, two customers, Andrew Corporation
and UTStarcom, Inc., comprised 17% and 16% of sales, respectively. During these
years, Lucent Technologies, Inc. purchased switching products, Data Connection
Limited and UTStarcom, Inc. purchased computing products and Andrew Corporation
purchased communications and switching products.

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. The consolidated financial statements include the
operating results of Mapletree Networks, Inc., from its date of acquisition
(Note B). All significant inter-company transactions have been eliminated. In
February 2006, the Company established Performance Technologies, Inc. - Korea, a
subsidiary located in South Korea.

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, 2005, Lucent
Technologies, Inc. comprised 16% of net accounts receivable and Data Connection
Limited represented 10% of net accounts receivable. As of December 31, 2004,
Lucent Technologies, Inc. comprised 31% 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, 2005 and 2004, 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 records provisions 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 from product sales in
accordance with the SEC Staff Accounting Bulletin No. 104, "Revenue
Recognition." Product sales represent the majority of the Company's revenue and
include hardware products and hardware products with embedded software. The
Company recognizes revenue from these product sales 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 occurs when all factors are met,
including transfer of title and risk of loss, which typically occurs upon
shipment by the Company. If these conditions are not met, the Company will defer
revenue recognition until such time these conditions have been satisfied.

Revenue earned from arrangements for software is accounted for under the
provisions of Statement of Position 97-2, "Software Revenue Recognition" and
EITF Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." Revenue
from software requiring significant production, modification, or customization
is recognized using the percentage of completion method of accounting. Any
anticipated losses on contracts are charged to operations as soon as such losses
are determined. If all conditions of revenue recognition are not met, the
Company defers revenue recognition and will recognize revenue when the Company
has fulfilled its obligations under the arrangement. Revenue from software
maintenance contracts is recognized ratably over the contractual period.

Revenue from consulting and other services is recognized at the time the
services are rendered. The Company also sells certain products through
distributors who are granted limited rights of return. Potential returns are
accounted for at the time of sale.

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 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 $82,000, $66,000 and $173,000 for 2005, 2004 and 2003, 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 provision (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
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. Diluted earnings per share calculations
exclude the effect of approximately 1,098,000, 1,305,000 and 660,000 options in
2005, 2004 and 2003, 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, 2005, 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. On March 25, 2005, the Company accelerated the vesting of 408,285 stock
options whose exercise prices were greater than $15.11 to be fully vested on
that date. This acceleration resulted in $997,000 of pro forma compensation
expense, determined under the fair value method, being recorded in 2005 that
would have otherwise been recorded in 2006. As a result of the acceleration, the
Company expects to reduce its exposure to the effects of SFAS No. 123 (Revised),
"Share-Based Payment." 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 and earnings
per share would have been as follows:

                                                Year Ended December 31,
                                           2005           2004         2003
                                       ------------- ------------- -------------
Net income, as reported                $  3,045,000  $  2,780,000  $  3,050,000
Add: Restricted stock compensation
  expense, net of tax                        14,000        32,000        67,000
Deduct: Total stock-based
  compensation expense determined
  under fair value based method for
  all awards, net of related tax
  effects                                (2,609,000)   (2,757,000)   (1,457,000)
                                       ------------- ------------- -------------
Pro forma net income                   $    450,000  $     55,000  $  1,660,000
                                       ============= ============= =============

Earnings per share:
Basic - as reported                    $       0.24  $       0.22  $       0.25
                                       ============= ============= =============
Basic - pro forma                      $       0.03  $       0.00  $       0.14
                                       ============= ============= =============
Diluted - as reported                  $       0.23  $       0.21  $       0.24
                                       ============= ============= =============
Diluted - pro forma                    $       0.03  $       0.00  $       0.13
                                       ============= ============= =============

The assumptions regarding the annual vesting of stock options granted ranged
from one to six years in 2005, one to three years in 2004 and two to three years
in 2003. 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 2005, 2004 and 2003: Dividend yield of 0%;
expected volatility of 65% to 70%, 68% to 69%, and 67%; risk-free interest rates
of 3.3% to 4.6%, 2.1% to 3.5%, and 2.0%; and expected lives of ranging from one
to six years in 2005, one to three years in 2004, and two to three years in
2003. The weighted average fair value of options granted during 2005, 2004 and
2003 was $3.84, $7.57 and $1.96, respectively.

Recent Accounting Pronouncements: In December 2004, SFAS No. 123 (Revised 2004)
"Share-Based Payment" 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
beginning January 1, 2006. 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. Upon adoption, the Company will apply the modified version of
prospective application. In 2006, under this standard, the Company expects to
record stock option compensation expense of approximately $.2 million related to
stock options outstanding at December 31, 2005. This amount excludes stock
option compensation expense for any stock options that may be granted in 2006.
To date, the Company has not granted any stock options in 2006.

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 May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections," which replaces APB Opinion No. 20, "Accounting Changes," and SFAS
No. 3, "Reporting Accounting Changes in Interim Financial Statements." SFAS No.
154 changes the requirements for the accounting and reporting of a change in
accounting principle. Upon the adoption of SFAS No. 154, beginning January 1,
2006, the Company will apply the standard's guidance to changes in accounting
methods, as required. The Company does not expect the adoption of SFAS No. 154
will have a material impact on its consolidated results of operations and
financial condition.

Note B - Acquisition
         -----------
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.
The products acquired in this acquisition broaden the Company's product offering
to its customers.

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." As a component of the acquisition, the Company acquired certain
software development costs which amounted to $577,000 at the date of
acquisition. The Company also acquired certain net assets which amounted to
$574,000 and were comprised principally of accounts receivable, inventory,
accounts payable, accrued expenses and acquired in-process research and
development related to certain voice processing products that amounted to
$218,000 and was charged to operations during the first quarter 2004. 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 and was recorded as a reduction
of goodwill. 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 Sheets and is deductible for tax purposes.

Operating results of the acquired group have been included in the Consolidated
Statements of Income from the date of acquisition.

Note C - Investments
         -----------
At December 31, 2005 and 2004, investments consisted of high grade, auction rate
municipal securities which the Company has classified as available-for-sale. The
maturities of the investments held at December 31, 2005 all exceeded five years.

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
         ------------------------
                                                     At December 31,
                                                2005                 2004
                                         ------------------    -----------------
Accounts receivable                        $  9,966,000           $ 10,611,000
Less: allowance for doubtful accounts          (443,000)              (426,000)
                                         ------------------    -----------------
     Net                                   $  9,523,000           $ 10,185,000
                                         ==================    =================


Note E - Inventories
         -----------
Inventories consisted of the following:
                                                     At December 31,
                                                2005                  2004
                                         ------------------    -----------------
Purchased parts and components             $ 2,884,000            $  2,891,000
Work in process                              3,378,000               2,991,000
Finished goods                                 886,000                 691,000
                                         ------------------    -----------------
   Net                                     $ 7,148,000            $  6,573,000
                                         ==================    =================


Note F - Property, Equipment and Improvements, net
         -----------------------------------------
Property, equipment and improvements consisted of the following:

                                                     At December 31,
                                                2005                  2004
                                         ------------------    -----------------
Land                                       $   407,000            $    407,000
Engineering equipment and software           4,382,000               4,815,000
Manufacturing equipment                      2,713,000               2,117,000
Furniture and equipment                      1,418,000               1,627,000
Leasehold improvements                         361,000                 341,000
                                         ------------------    -----------------
                                             9,281,000               9,307,000
Less: accumulated depreciation and
 amortization                               (7,277,000)             (7,121,000)
                                         ------------------    -----------------
     Net                                   $ 2,004,000            $  2,186,000
                                         ==================    =================

Total depreciation and amortization expense for equipment and improvements for
2005, 2004 and 2003 was $827,000, $927,000 and $1,272,000, respectively.

Note G - Investments in Unconsolidated Companies
         ---------------------------------------
As of January 1, 2003, the Company had invested $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 as an 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. As of December 31, 2003, the Company also had a note receivable from
Momentum in the amount of $1,000,000.

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

                                       As of September 30,
                                              2004
                                     ------------------------
        Balance Sheet:
          Current assets                    $3,338,000
          Noncurrent assets                    319,000
          Current liabilities                1,057,000
          Long term borrowings               1,530,000
          Equity                            $1,069,000

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). 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 was doubtful. Under the original terms of the note, the Company had
the option to acquire ownership of InSciTek during a future specified period.
The note bore interest at 10% annually and was convertible into shares of common
stock of InSciTek. All unpaid accrued interest and all outstanding principal on
the note was payable in full to the Company on December 31, 2008.

During the third quarter 2005, InSciTek received an investment from an outside
party through the sale of series A preferred stock. In connection with that
investment, the Company and InSciTek renegotiated the terms of the note. Under
the amended terms, the Company forfeited the option to acquire ownership of
InSciTek during a future specified period. In addition, all unpaid interest due
to the Company at the date of the investment, amounting to $248,000, was paid in
the form of series A preferred stock of InSciTek. The note is now convertible
into series 2 preferred stock of InSciTek. The Company may call or convert the
note in the future upon the occurrence of certain events. As of December 31,
2005, the collectability of this note continued to be doubtful and a full
reserve remained recorded.

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,
                                                2005                  2004
                                          -----------------    -----------------
      Accrued compensation and related       $ 1,512,000          $ 1,790,000
      Accrued professional services              316,000              227,000
      Deferred revenue                         1,635,000            1,019,000
      Accrued warranty obligations               310,000              288,000
      InSciTek committed investment                                   350,000
      Other accrued expenses                     665,000              242,000
                                          -----------------    -----------------
           Total                             $ 4,438,000          $ 3,916,000
                                          =================    =================

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 2005, 2004 and 2003 were as follows:

        Accrued warranty obligations at January 1, 2003        $   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
        Actual warranty experience                                (83,000)
        Warranty provisions                                       105,000
                                                            -----------------
        Accrued warranty obligations at December 31, 2005      $  310,000
                                                            =================

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 leases facilities in its other operating locations in North America that
expire through 2007. In February 2006, the Company announced its intention to
relocate its San Luis Obispo operations to a new facility in the San Luis Obispo
area in 2006. Once vacated, the Company will attempt to sublet this office
space. The minimum lease payments under the remaining term of this lease are
included in the table below.

Future minimum payments for all operating leases having a remaining term in
excess of one year at December 31, 2005 are as follows:

                                         Operating Leases
                                      ---------------------
        2006                              $  1,378,000
        2007                                 1,394,000
        2008                                 1,329,000
        2009                                   768,000
        2010                                   779,000
        Thereafter                             978,000
                                      ---------------------
        Total                             $  6,626,000
                                      =====================

Rent expense amounted to $2,041,000, $1,752,000 and $1,730,000 for 2005, 2004
and 2003, respectively.

Note K - Revolving Credit Agreement
         --------------------------
On January 5, 2006, the Company executed a Credit Agreement with JPMorgan Chase
Bank, N.A. (the "Bank") effective December 30, 2005. Under the terms of the
Credit Agreement, the Company may borrow, from time to time, up to an aggregate
of $5,000,000 from the Bank. The borrowings bear interest at various rates based
upon the type of borrowing, as defined in the agreement. The Credit Agreement
includes certain financial and administrative covenants. The Credit Agreement
terminates on December 29, 2006 at which time any outstanding borrowings must be
repaid. There were no amounts outstanding under this facility at December 31,
2005.

Note L - 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 under this program in 2003. This program expired in April
2003.

On July 11, 2005, the Board of Directors authorized the Company to repurchase
shares of its common stock for an aggregate amount not to exceed $10,000,000.
Under this program, shares of the Company's common stock may be repurchased
through open market or private transactions, including block purchases, through
July 2006. Repurchased shares will be used for the Company's stock option plans,
potential acquisition initiatives and general corporate purposes. There have
been no repurchases of shares under this program.

Note M - Stock Option 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. 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 2003 Omnibus Incentive 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 between five and ten years
from the date of grant and vest in periods ranging from one to six 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:

                                                  Weighted         Exercise
                                    Number of      Average           Price
                                      Shares    Exercise Price       Range
                                 ------------------------------  --------------
Outstanding at January 1, 2003      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
Granted                               429,000        $7.05       $5.78 - $7.94
Exercised                            (316,272)       $4.63       $3.40 - $8.50
Expired                              (394,323)      $15.01       $3.83 - $28.75
                                 -------------
Outstanding at December 31, 2005    2,118,164        $9.71       $3.40 - $18.13
                                 =============

The following table summarizes information about stock options at December 31,
2005:

                              Options outstanding       Options exercisable
                            ----------------------------------------------------
                              Weighted    Weighted                 Weighted
                               average     average                  average
     Range of                 remaining   exercise                 exercise
  exercise price     Shares    life(yrs)    price       Shares       price
--------------------------------------------------------------------------------
  $3.40 to $5.94     661,354     3.08       $4.63       460,741      $4.36
  $5.95 to $8.60     650,572     4.41       $8.03       275,850      $8.23
  $8.61 to $11.40     65,500     3.18      $10.26        65,165     $10.27
 $11.41 to $14.24    302,513     1.05      $13.75       299,163     $13.75
 $14.25 to $18.13    438,225     3.01      $17.22       438,225     $17.22
--------------------------------------------------------------------------------
                   2,118,164     3.19       $9.75     1,539,144     $10.79

During 2005, the Company granted 225,000 options that are subject to accelerated
vesting based upon the achievement of certain Company milestones, as defined in
the option agreement.

At December 31, 2005, 1,019,383 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 forfeited, 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 N - 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 O - Income Taxes
         ------------
Pre-tax earnings and the provision (benefit) for income taxes consisted of the
following for the years ended December 31, 2005, 2004 and 2003:

                                           2005          2004          2003
                                       ------------  ------------  -------------
Pre-tax earnings:
   United States                       $ 2,555,000   $   946,000   $  4,583,000
   Outside United States                   529,000       396,000        507,000
                                       ------------  ------------  -------------
   Total pre-tax earnings              $ 3,084,000   $ 1,342,000   $  5,090,000
                                       ============  ============  =============

For the same periods, the provision (benefit) for income taxes was as follows:

                                           2005          2004          2003
                                       ------------  ------------  -------------
Current income tax provision (benefit):
   Federal                             $   248,000   $   879,000   $  1,252,000
   State                                    54,000       146,000        242,000
   Foreign                                 (19,000)     (238,000)        41,000
                                       ------------  ------------  -------------
                                           283,000       787,000      1,535,000
Deferred benefit                          (244,000)     (874,000)      (196,000)
                                       ------------  ------------  -------------
   Total  provision (benefit)          $    39,000   $   (87,000)  $  1,339,000
                                       ============  ============  =============

Reconciliation of the statutory U.S. federal income tax rate to the effective
rates is as follows:

                                           2005          2004          2003
                                       ------------  ------------  -------------
Federal income tax at statutory rate       34.0%         34.0%         34.0%
State tax provision, net of federal
 benefit                                    1.2          (3.2)          2.6
Valuation allowance                                      10.4
Tax exempt interest                        (3.8)         (5.1)          (.3)
Canadian tax credits                       (7.2)        (14.9)         (2.9)
Foreign sales exemption                    (7.5)        (13.6)         (4.0)
Research and development credits          (13.0)
Resolution of prior year tax
 uncertainties                             (2.6)                       (3.9)
Foreign exchange items                                  (13.4)
Other                                        .2           (.7)           .8
                                       ------------  ------------  -------------
   Effective tax rate                       1.3%         (6.5)%        26.3%
                                       ============  ============  =============

Canadian tax credits are generated primarily from research and development
efforts in Canada. The foreign sales exemption relates to the Company's
extraterritorial income exclusion recorded for tax purposes.

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

                                                     At December 31,
                                                  2005            2004
                                            ---------------  ----------------
Assets:
------
Current:
   Accrued vacation, payroll and other
    accrued expenses                         $    175,000     $    336,000
   Inventory and inventory related items        1,590,000        1,524,000
   Bad debt and note receivable reserves        1,313,000        1,302,000
   Other                                          330,000           60,000
Non-current:
   State net operating losses                     139,000          139,000
                                            ---------------  ----------------
     Total gross deferred tax assets            3,547,000        3,361,000
     Valuation allowance                         (139,000)        (139,000)
                                            ---------------  ----------------
     Total net deferred tax assets           $  3,408,000     $  3,222,000
                                            ---------------  ----------------

Liabilities (non-current)
   Capitalized software development costs,
    net                                      $   (989,000)    $ (1,169,000)
   Investment tax credit                          (48,000)         (51,000)
   Goodwill                                      (230,000)         (96,000)
   Other                                           (7,000)         (16,000)
                                            ---------------  ----------------
     Total deferred tax liabilities          $ (1,274,000)    $ (1,332,000)
                                            ---------------  ----------------
     Net deferred tax asset                  $  2,134,000     $  1,890,000
                                            ===============  ================

The total deferred tax assets and liabilities as presented in the accompanying
Consolidated Balance Sheets are as follows:

                                                  2005            2004
                                            ---------------  ----------------
Net current deferred tax assets              $  3,272,000     $  3,088,000
Net long-term deferred tax liabilities       $  1,138,000     $  1,198,000

In 2003, the Company recorded an impairment charge related to an investment in
an unaffiliated company. 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 established a deferred tax asset related to a note
receivable valuation charge that the Company recorded. In order to realize the
full benefit of this deferred tax asset in the future, the Company may have to
generate capital gains for income tax purposes. In the event that the Company is
unable to generate sufficient capital gains, a valuation allowance against this
deferred tax asset may be required in the future.

In 2004 and 2005, the Company generated net operating losses in certain states
for income tax purposes, which expire through 2010. The deferred tax asset
associated with the net operating losses is $139,000, which amount is fully
offset by a valuation allowance of $139,000, as it is more likely than not that
the tax benefit of these losses will not be realized. During 2005, there was no
change in the total valuation allowance. In 2004, the total valuation allowance
decreased by $158,000. This reflects an increase attributable to the
establishment of the valuation allowance for the state net operating losses of
$139,000 and the reversal of the valuation allowance attributable to the
Company's investment in an unaffiliated company of $297,000.

As of December 31, 2005, income considered to be permanently reinvested in the
Company's Canadian subsidiary amounted to $6,326,000. 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 U.S. 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 provides for the repeal of the extraterritorial income
exclusion (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 is 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 is reported in the period in which the
deduction is claimed on the Company's tax return. The Act also includes a
temporary incentive for U.S. companies to repatriate accumulated income earned
abroad. The Company did not repatriate funds in 2005 or 2004.

Note P - Research and Development
         ------------------------
The Corporation incurred research and development costs relating to the
development of new products as follows:

                                       2005            2004            2003
                                   ------------    ------------    ------------
Gross expenditures for engineering
 and software development          $ 12,855,000    $ 12,432,000    $ 11,027,000
Less: amounts capitalized            (2,488,000)     (2,189,000)     (1,534,000)
                                   ------------    ------------    ------------
     Net charged to operating
      expenses                     $ 10,367,000    $ 10,243,000    $ 9,493,000
                                   ============    ============    ============

Software development costs consisted of the following:

                                                         At December 31,
                                                       2005            2004
                                                   ------------    ------------
Capitalized software development costs             $  9,595,000    $  8,468,000
Less: accumulated amortization                       (6,413,000)     (4,815,000)
                                                   ------------    -------------
     Net                                           $  3,182,000    $  3,653,000
                                                   ============    ============

Amortization of software development costs included in cost of goods sold was
$1,598,000, $1,711,000 and $1,005,000 for 2005, 2004 and 2003, respectively. In
January 2006, the Company announced its intention to close its engineering
facility in Norwood, Massachusetts. In connection with that decision, in 2005,
the Company wrote off software development costs incurred at its Norwood
engineering center that were capitalized for new products that had not reached
commercial general release and were discontinued. This write-off totaled
$1,360,000.

Note Q - 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 $23,000,
$25,000 and $0 for 2005, 2004 and 2003, respectively. In conjunction with its
flexible benefits plans, the Company made additional discretionary qualified
contributions to employee accounts which vest immediately amounting to $36,000,
$34,000 and $69,000 for 2005, 2004 and 2003, respectively.

For its operations in Canada, contributions were made in 2005 and 2004 to a
Registered Retirement Savings Plan (RRSP) that is administered by the Canadian
government. Discretionary matching contributions to the Plan amounted to $5,000
and $7,000 for 2005 and 2004, respectively. The Company did not make any
matching contributions in 2003.

Note R - 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.

The Company issues indemnifications in the ordinary course of business with
certain customers, suppliers, services providers and business partners. Further,
the Company indemnifies its directors and officers who are, or were, serving at
the Company's request in such capacities.  The fair value of the
indemnifications that the Company issued during 2005 was not material to the
Company's financial position, results of operations or cash flow.

Note S - Restructuring Programs
         ----------------------
During 2002, the Company recorded restructuring charges related to the
consolidation of its operations in Raleigh, North Carolina. 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 the remaining lease obligation of $146,000 and the lease was
terminated. There were no outstanding obligations related to these charges at
December 31, 2004.

In October 2004, management announced a plan to centralize its multi-location
operations and to streamline the organization. By the end of the first quarter
2005, the Company completed centralization of sales, marketing and accounting
functions into corporate operations. During the third quarter 2005, the
transition of the manufacturing functions was completed. Total expenses incurred
and paid under this program were $320,000 and $217,000 in 2005 and 2004,
respectively.

In 2006, the Company announced its plans to close its engineering facility in
Norwood, Massachusetts and also to relocate its San Luis Obispo and Ottawa
operations to new locations in those local areas in 2006. Expenses related to
these actions will be expensed as incurred in 2006.

Note T - Product Revenue
         ---------------
The following table represents the Company's total sales for 2005, 2004 and 2003
classified by product category:

                                    2005             2004             2003
                               --------------   --------------   --------------
Communications products         $ 23,991,000     $ 24,461,000     $ 26,081,000
Computing products                12,299,000       18,063,000       18,306,000
Switching products                12,801,000       10,254,000        4,997,000
Other products                       542,000          711,000          608,000
                               --------------   --------------   --------------
    Total                       $ 49,633,000     $ 53,489,000     $ 49,992,000
                               ==============   ==============   ==============

Note U - Quarterly Results (unaudited)
         -----------------------------
The following is a summary of unaudited quarterly results of operations for the
years ended December 31, 2005 and 2004:
                                                    2005
                               ------------------------------------------------
                                     (in thousands, except per share data)
                                 Mar. 31     Jun. 30     Sep. 30      Dec. 31
                               ----------- ----------- -----------  -----------
       Sales                     $13,157     $10,802     $12,343      $13,331
       Gross profit                6,695       4,886       6,190        6,671
       Restructuring charges         (57)       (139)        (53)        (122)
       Intangible asset
        write-off                                                      (1,360)
       Income (loss) from
        operations                 1,183         (43)        987         (339)
       Net income                $ 1,049     $   204     $   937      $   855

       Basis earnings per
        share                    $  0.08     $  0.02     $  0.07      $  0.07
       Diluted earnings per
        share                    $  0.08     $  0.02     $  0.07      $  0.06

                                                    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 charges                                 (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)

       Basis earnings (loss)
        per share                $  0.12     $  0.08     $  0.11     $ (0.09)
       Diluted earnings (loss)
        per share                $  0.11     $  0.08     $  0.11     $ (0.09)

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 - Supplemental Cash Flow Information - Non-cash activity
         ------------------------------------------------------
During the third quarter 2005, the Company received preferred stock of InSciTek
in satisfaction of an interest payment of $248,000 due to the Company from
InSciTek.

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 evaluated the effectiveness of 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 Annual 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
              criteria set forth 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, 2005, according to the criteria.
              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

            During the first quarter 2005, the Company completed the integration
            of the ERP systems and accounting functions of the Company's Voice
            Technology Group and Computing Products Group into the corporate ERP
            system and accounting function in Rochester, New York. During the
            second quarter 2005, transition of manufacturing operations for VTG
            products was completed. During the third quarter 2005, the Company
            completed the transition of the manufacturing of the Computing
            products to Rochester. The Company's Chief Executive Officer and
            Chief Financial Officer evaluated these changes and concluded that
            the changes have not materially affected, or are not reasonably
            likely to materially affect, the Company's internal control over
            financial reporting. There were no changes in the Company's internal
            control over financial reporting that occurred during the fourth
            quarter 2005 that has materially affected, or is reasonably likely
            to materially affect, the Company's internal control over financial
            reporting.

ITEM 9B - Other Information
          -----------------
None.

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 May 25, 2006, 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 May 25, 2006, sets forth certain information with respect to the
directors and executive officers of the Company and is incorporated herein by
reference.

ITEM 11 - Executive Compensation
          ----------------------
The section entitled "Executive Compensation" appearing in the Company's proxy
statement for the Annual Meeting of Stockholders to be held on May 25, 2006,
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 May 25, 2006, 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 May 2001, the stockholders approved the 2001 Stock Option Plan. The 2001
Stock Option Plan replaced the 1986 Incentive Stock Option 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       Weighted
                                     to be          average
                                  issued upon      exercise        Number of
                                  exercise of      price of        securities
       Plan Category              outstanding     outstanding      remaining
                                  options and     options and    available for
                                   restricted      restricted        future
                                     shares          shares         issuance
                                 -------------   -------------   -------------
Equity compensation plans
 approved by security holders      2,123,620         $9.76         1,019,383

Equity compensation plans not
 approved by security holders
                                 -------------   -------------   -------------
     Total                         2,123,620         $9.76         1,019,383
                                 =============   =============   =============

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
May 25, 2006, 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
May 25, 2006, 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 End December 31, 2005
Deducted in the Consolidated
 Balance Sheet from Accounts
 Receivable
   Allowance for doubtful
    accounts                   $426,000     $ 45,000     $ 28,000     $443,000
                             ============ ============ ============ ============

Year End 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 End December 31, 2003
Deducted in the Consolidated
 Balance Sheet from Accounts
 Receivable
   Allowance for doubtful
    accounts                   $301,000     $ 87,000     $  9,000     $379,000
                             ============ ============ ============ ============

<PAGE>

         Valuation Allowance for Note Receivable

                                           Additions    Deductions
                              Balance at   ---------    ----------    Balance
                               beginning   Charged to    Amounts     at end of
                               of period    earnings    written off    period
                             ------------ ------------ ------------ ------------
Year End December 31, 2005
Deducted in the Consolidated
 Balance Sheet from Note
 Receivable
   Valuation Allowance for
    Note Receivable           $3,000,000                             $3,000,000
                             ============ ============ ============ ============

Year End December 31, 2004
Deducted in the Consolidated
 Balance Sheet from Note
 Receivable
   Valuation Allowance for
   Note Receivable                         $3,000,000                $3,000,000
                             ============ ============ ============ ============

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
10.34     (11)     Credit Agreement dated as of December 30, 2005 between the
                      Registrant and JPMorgan Chase Bank, N.A.
10.35     (*)      Employment Agreement dated November 3, 2005 between the
                      Registrant and Michael P. Skarzynski
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.
(11)   Incorporated by reference to the Current Report on Form 8-K filed
       January 11, 2006.
(*)    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, 2006                           By:/s/ Michael P. Skarzynski
                                                ----------------------------
                                                Michael P. Skarzynski
                                                President and
                                                Chief Executive Officer

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


        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, 2006
------------------
John M. Slusser

/s/Michael P. Skarzynski          President, Chief Executive      March 16, 2006
------------------------          Officer and Director
Michael P. Skarzynski

/s/Dorrance W. Lamb               Senior Vice President and       March 16, 2006
-------------------               Chief Fianacial Officer
Dorrance W. Lamb

/s/Bernard Kozel                  Director                        March 16, 2006
----------------
Bernard Kozel

/s/Charles E. Maginness           Director                        March 16, 2006
-----------------------
Charles E. Maginness

/s/Stuart B. Meisenzahl           Director                        March 16, 2006
-----------------------
Stuart B. Meisenzahl

/s/E. Mark Rajkowski              Director                        March 16, 2006
--------------------
E. Mark Rajkowski

/s/Robert L. Tillman              Director                        March 16, 2006
--------------------
Robert L. Tillman

<PAGE>

                                                                   Exhibit 10.35


                              EMPLOYMENT AGREEMENT

         The parties to this Employment Agreement (the "Agreement") are
Performance Technologies, Incorporated, a Delaware corporation having an office
at 205 Indigo Creek Drive, Rochester, New York 14626 (the "Company"), and
Michael P. Skarzynski, an individual residing at 21 Post Kunhardt Road,
Bernardsville, New Jersey 07924 (the "Executive").

                                   BACKGROUND

        A. The Company is engaged in the business of developing platforms,
components and software solutions for the communications, military and
commercial markets.

        B. The Company desires to employ the Executive, and the Executive
desires to accept such employment with the Company, in each case upon the terms
and conditions set forth below.

        C. The Executive represents and warrants that he is free to enter this
Agreement and has no pre-existing agreement with any other party that would
prevent him from entering and performing the duties under this Agreement with
the Company.

        D. During the course of the Executive's employment with the Company, the
Company will expend significant time, money, and effort to develop and maintain
substantial expertise, personnel, business, goodwill and relationships with
customers and potential customers, including providing the Executive with
considerable resources to develop, maintain and expand such goodwill and
relationships on behalf of the Company.

        E. During the course of the Executive's employment with the Company, the
Executive will acquire confidential knowledge and other information regarding
various aspects of the Company's business, including without limitation the
Company's accounts, customers, business methods, procedures, trade secrets and
development methods.

        In consideration of these recitals and the mutual covenants and
agreements contained in this Agreement, the Company and the Executive agree as
follows:

Employment; Term. Subject to the terms and conditions set forth in this
Agreement, the Company hereby agrees to employ the Executive as its President
and Chief Executive Officer, and the Executive hereby accepts such employment.
The Executive's employment shall begin on the date set forth in Section 2 and
shall continue thereafter, until terminated pursuant to Section 10 hereof (the
"Employment Period").

Effective Date. This Agreement shall become effective, and the Employment Period
shall commence, on November 3, 2005 (the "Effective Date").

Duties.

President and Chief Executive Officer. During the Employment Period, the
Executive shall be employed as the Company's President and Chief Executive
Officer. The President and Chief Executive Officer shall report to the Company's
Board of Directors. The President and Chief Executive Officer shall perform
those duties customarily associated with the role of the principal executive
officer of a public company, consistent with the overall objectives and
operating policies of the Company, including, but not limited to, working with
the Board of Directors and other senior executives to devise strategies and
formulate policies to ensure that the Company's objectives are met, implementing
the Company's strategies and policies on a day-to-day basis, managing the
Company's staff, including the authority to hire and dismiss employees,
overseeing with the Company's Chief Financial Officer the Company's financial
performance and reporting obligations under applicable standards and
regulations, and entering into agreements on behalf of the Company. The
Executive acknowledges that these duties and responsibilities will require the
Executive's full-time business efforts. The Executive agrees to perform his
duties and discharge his responsibilities in a diligent, efficient and faithful
manner and to the best of his ability, and to use his best efforts to promote
the interests of the Company. In the performance of his duties, the Executive
agrees to abide by the various policies, procedures, rules and practices
established by the Company as such policies currently exist or in the future may
be adopted, modified or terminated by the Company in its sole discretion.

Directorship. As soon as practicable after the Effective Date, the Company shall
hold a special meeting of its Board of Directors to appoint the Executive to
serve as a member of the Board of Directors until the next annual meeting of the
stockholders, and the Executive shall accept such appointment. Thereafter, the
Company shall nominate the Executive to be elected at the next annual meeting of
the stockholders to serve as a member of the Board of Directors. The obligations
of the Company to so appoint and nominate the Executive are subject to full
compliance by the Company and the Executive with the Company's corporate
governance policies and all applicable laws, rules, regulations and listing
standards.

Compensation and Benefits.

Base Salary. During the Employment Period, the Executive shall receive a base
salary (the "Base Salary"), which shall be earned and payable according to the
Company's regular payroll policies and practices. Initially, for the remainder
of fiscal year 2005 and all of fiscal year 2006, the amount of the Base Salary
shall be $300,000 per year.

Operating Bonus. In addition to the Base Salary, the Executive may receive a
performance bonus, which shall be earned and payable in accordance with the
Company's bonus policies for its executive officers (the "Operating Bonus").
Notwithstanding the foregoing, if the Executive remains employed with the
Company as its President and Chief Executive Officer from the Effective Date
through and including December 31, 2006, the Company shall pay the Executive an
Operating Bonus for fiscal year 2006 with a value of not less than $150,000,
which shall be paid in accordance with the Company's bonus policies for its
executive officers.

Stock Options. On the Effective Date, the Executive shall receive a
non-qualified stock option to purchase 225,000 shares of the Company's common
stock under the 2003 Omnibus Incentive Plan on the terms and conditions of the
stock option agreement between the Company and the Executive attached hereto as
Appendix A (the "Stock Option Agreement").

Vacation. During the Employment Period, the Executive shall be eligible to
receive paid vacation, which shall be earned and payable according to the
vacation policy adopted by the Company for its employees, as such policy may be
amended, modified and/or terminated by the Company in its sole discretion from
time to time.

Retirement Benefits. During the Employment Period, the Executive shall be
eligible to participate in and receive benefits to the extent provided by any
qualified retirement plan or plans adopted by the Company for its employees, as
such plan or plans may be amended, modified and/or terminated by the Company in
its sole discretion from time to time.

Health and Medical Insurance. During the Employment Period, the Executive shall
be eligible to participate in and shall be eligible to receive benefits to the
extent provided by any health and medical insurance plans and policies
maintained by the Company for its employees, as such plans and policies may be
amended, modified and/or terminated by the Company in its sole discretion from
time to time.

Expenses. During the Employment Period, the Company shall reimburse the
Executive for reasonable business expenses properly incurred by the Executive in
the performance of his duties on behalf of the Company, provided that such
expenses are in accordance with the Company's policies and that the Executive
delivers to the Company all appropriate documentation as required by applicable
rules and Company policies.

Automobile Allowance. During the Employment Period, the Company shall pay the
Executive a monthly automobile allowance in the amount of $500 per month. Such
allowance shall be paid in arrears in accordance with the Company's regular
payroll policies and practices.

Relocation Benefits. The Executive and the Company agree that the Executive
shall use his best efforts to permanently relocate from New Jersey to the
Rochester, New York area by July 31, 2006. In connection with such relocation,
during the Employment Period the Company shall provide the Executive with the
following relocation benefits (collectively, the "Relocation Benefits"):

House-Hunting Expenses. The Company shall reimburse the Executive for documented
reasonable travel and accommodation expenses actually incurred by the Executive
in connection with up to two trips by the Executive and his spouse and children
from New Jersey to Rochester, New York for the purpose of locating a home in the
Rochester, New York area.

Relocation and Moving Expenses. The Company shall reimburse the Executive for
(A) 100% of the first $100,000 of documented reasonable relocation expenses
actually incurred by the Executive in connection with selling his existing home
in New Jersey and purchasing a new home in the Rochester, New York area, and (B)
50% of any additional documented reasonable relocation expenses actually
incurred by the Executive beyond the first $100,000 of such expenses, up to an
aggregate maximum reimbursement amount of $150,000 for all such expenses, it
being understood that such expenses may include, but are not limited to, real
estate agent fees, legal fees and expenses, and moving expenses.

Temporary Housing and Travel Expenses. The Company shall reimburse the Executive
for reasonable documented travel expenses actually incurred by the Executive
between the Effective Date and July 31, 2006, in connection with commuting
between his current home in New Jersey and the Company's offices in Rochester,
New York. In addition, between the Effective Date and July 31, 2006, the Company
shall reimburse the Executive for reasonable documented accommodation expenses
(i.e., rent and utilities) in the Rochester, New York area. The obligations to
make the aforementioned reimbursements shall cease when the Executive
permanently relocates to Rochester, New York, but in no event shall they
continue beyond July 31, 2006.

Life and Disability Insurance. During the Employment Period, the Company shall
reimburse the Executive for the premium expenses actually incurred by him in
connection with his maintaining life and disability insurance coverage on
himself, up to a maximum reimbursement amount of $4,000 per year, provided that
the Executive furnishes the Company with reasonable documentation to
substantiate such premiums expenses each time he requests reimbursement.

Other Benefits. During the Employment Period, the Executive shall be eligible to
participate in and receive benefits to the extent provided by other fringe
benefit plans or policies, if any, maintained by the Company for its employees,
as such plans or policies may be amended, modified and/or terminated by the
Company in its sole discretion from time to time.

Withholding. The Company shall deduct or withhold from the Base Salary, any
Operating Bonus and from all other payments made to the Executive pursuant to
this Agreement, all amounts which may be required to be deducted or withheld
under any applicable law now in effect or which may become effective during the
term of this Agreement (including, but not limited to, Social Security
contributions and income tax withholdings). In addition, the Company shall
deduct from such payments any of the Executive's contributions to benefit plans
and/or policies as provided by the plans and policies described in this Section
4.

Limitations on Expenses. As between the Executive and the Company, the Executive
shall be responsible for all expenses (including, but not limited to, legal
fees) incurred by him or the Company that relate to or are incurred in
connection with any investigation of the Executive by local, state or federal
authorities as a result of the Executive's activities prior to the Effective
Date.

D&O Insurance. The Company shall maintain a policy or policies of directors' and
officers' liability insurance covering liabilities which may be incurred by the
Executive in the performance of his obligations to the Company or in his
capacity as a director and officer of the Company.

Indemnification. To the fullest extent permitted by law and in addition to any
other rights permitted or granted under the Company's certificate of
incorporation or by-laws or any agreement or policy of insurance, the Company
shall indemnify the Executive if the Executive is made a party, or threatened to
be made a party, to any threatened, pending or contemplated action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that the Executive is or was an employee, officer or director of the
Company, in which capacity the Executive is or was serving at the Company's
request, against any and all costs, losses, damages, judgments, liabilities and
expenses (including reasonable attorneys' fees) which may be incurred by him in
connection with any such action, suit or proceeding; provided, however, that
there shall be no indemnification with respect to matters as to which the
Executive is adjudged to have been guilty of fraud or bad faith or as a result
of the Executive's breach of this Agreement.

Tax Gross-Up. If it is determined that any payment or distribution of any type
to the Executive or for his benefit by the Company, any of its affiliates, any
person who acquires ownership or effective control of the Company or ownership
of a substantial portion of the Company's assets (within the meaning of section
280G of the Internal Revenue Code of 1986, as amended (the "Code"), and the
regulations thereunder) or any affiliate of such person, whether paid or payable
or distributed or distributable pursuant to the terms of this Agreement, the
Stock Option Agreement or otherwise (the "Total Payments"), would be subject to
the excise tax imposed by section 4999 of the Code or any interest or penalties
with respect to such excise tax (such excise tax and any such interest or
penalties are collectively referred to as the "Excise Tax"), then the Executive
shall be entitled to receive an additional payment (a "Gross-Up Payment") in an
amount calculated to ensure that after the Executive pays all taxes (and any
interest or penalties imposed with respect to such taxes), including any Excise
Tax, imposed upon the Gross-Up Payment, the Executive retains an amount of the
Gross-Up Payment equal to the Excise Tax imposed upon the Total Payments. All
determinations and calculations required to be made under this Section 4(p)
shall be made by an independent accounting firm selected by the Company (the
"Accounting Firm"). The Accounting Firm shall provide its determination (the
"Determination"), together with detailed supporting calculations regarding the
amount of any Gross-Up Payment and any other relevant matter, to the Executive
and the Company within five (5) days after the Executive or the Company made a
request (if the Executive reasonably believes that any of the Total Payments may
be subject to the Excise Tax). If the Accounting Firm determines that no Excise
Tax is payable by the Executive, it shall furnish the Executive with a written
statement that it has concluded that no Excise Tax is payable (including the
reasons therefor) and that the Executive has substantial authority not to report
any Excise Tax on his federal income tax return. If a Gross-Up Payment is
determined to be payable, it shall be paid to the Executive within five (5) days
after the Determination has been delivered to him or the Company. Any
determination by the Accounting Firm shall be binding upon the Company and the
Executive, absent manifest error.

Confidential and Proprietary Information; Ownership of Discoveries and
Inventions.

Confidentiality and Non-Disclosure. The Executive agrees that he will not, at
any time during or after his employment by the Company, without the prior
written authorization of the Company, disclose to any person: any designs,
algorithms, or technical information; any financial reports, analysis, or
information; any product, marketing, or sales plans; or any know-how or matters
of confidential nature relating to the Company or its business as long as they
remain of a secret or confidential nature. It is expressly understood that the
provision of this paragraph shall include any information received by the
Company from a third party that the Company has agreed to treat as confidential
information. It is further expressly understood that the provisions of this
paragraph shall not include any information that is publicly known or is generic
information or information known to a person reasonably skilled in the
Executive's profession or trade.

Ownership of Discoveries and Inventions. (i) The Executive agrees that all
inventions, discoveries, and improvements made by Executive during the term of
the Executive's employment with the Company, whether or not patentable, which:
a) used equipment, supplies, facilities, or trade secrets of the Company; or b)
used time for which the Executive was compensated by the Company, shall be the
sole property of the Company and that the Company shall be the sole owner of all
patents and other rights in connection therewith. The Executive hereby assigns
to the Company any rights the Executive has or may acquire in any such
invention, discoveries, or improvements. The Executive agrees to assist the
Company in taking such steps as are reasonably necessary to perfect the
Company's ownership rights, and if the Executive is no longer an employee of the
Company at the time such assistance is reasonably necessary, the Company shall
reimburse the Executive for any reasonable out-of-pockets expenses that he
actually incurs in connection therewith. (ii) The Executive agrees to assist the
Company, at the Company's expense, to obtain and potentially enforce patents on
any inventions discoveries, and improvements as described in this paragraph. The
Executive further agrees that this obligation shall continue beyond the
termination of employment, but the Company shall compensate the Executive at a
reasonable rate for such assistance. (iii) The Executive acknowledges that any
assertion by Executive that an invention, discovery, or improvement made by
Executive during his employment at the Company should be exempt from the
provisions of this paragraph shall be supported with substantial documentation
showing that: a) no equipment, supplies, facilities, or trade secrets of the
Company; and, b) no time for which the Executive was compensated by the Company,
was used in the development of the invention, discovery, or improvement.

Company Property. All records, files, disks, data, employee information,
drawings, documents, models, equipment and the like relating to the businesses
of the Company, which the Executive will use, prepare or come in contact with
during his employment by the Company shall be and remain the sole property of
the Company. The Executive shall take appropriate steps to safeguard such
property and protect it against disclosure, misuse, espionage, loss and theft.
The Executive agrees that any Company property that he has in his possession,
and all copies thereof, will be returned to the Company immediately upon the
termination of the Employment Period, as provided in Section 10, below. If
requested by the Company, the Executive shall provide the Company with written
confirmation that all such materials have been delivered to the Company.

Non-Competition. In consideration of the various covenants and obligations of
the Company pursuant to this Agreement, during the Restrictive Period the
Executive shall not (either directly or indirectly as an employee, partner,
officer, consultant, shareholder or otherwise of any corporation, governmental
body, individual, partnership, limited liability company, trust or other entity)
own, manage, control, participate in, or in any manner engage in any business
activity that is directly competitive with any business conducted by the Company
or its Affiliates as of the termination of the Employment Period. The Executive
understands and agrees that in view of the Company's national business
interests, this limitation similarly applies throughout the entire United States
of America and that such nationwide limitation is reasonable and necessary.
Nothing herein shall prohibit the Executive from being a passive owner of not
more than five percent (5%) of the outstanding stock of any class of a
corporation that is publicly traded, so long as the Executive has no active
participation in the business of such corporation. For purposes of this
Agreement, the term "Restrictive Period" shall mean the period of time beginning
on the Effective Date and ending on the date 12 months after the end of the
Employment Period.

Non-Solicitation. The Executive agrees that during the Restrictive Period he
will not:

Solicit or in any manner encourage, either directly or indirectly, any employee
or consultant of the Company or its Affiliates to leave the Company or such
Affiliate for any reason; nor will he interfere in any other manner with the
employment or business relationships at the time existing between the Company
and its current employees or consultants; or

Hire directly or through another entity any person who was an employee of the
Company or any Affiliate at any time during the one-year period preceding the
termination of the Employment Period; or

Induce or attempt to induce any customer, supplier, distributor, licensee or
other business affiliate of the Company or any Affiliate to cease doing business
with the Company or such Affiliate or in any way interfere with the existing
business relationship between any customer, supplier, distributor, licensee or
other business affiliate and the Company or Affiliate.

Remedies. The Executive acknowledges that the duration of the Restrictive Period
and the geographical area of the imposed restrictions are fair and reasonable
and are reasonably required for the protection of the Company's business
interests, including its goodwill. The Executive (a) acknowledges that his
failure to comply with any requirement of Sections 5 through 8 of this Agreement
will cause the Company irreparable harm and that a remedy at law for such a
failure would be an inadequate remedy; and (b) consents to the Company's
obtaining, from a court having jurisdiction, specific performance, an
injunction, a restraining order or any other equitable relief in order to
enforce any such provision. The right to obtain such equitable relief shall be
in addition to, and not in lieu of, any other remedy to which the Company is
entitled under applicable law (including, but not limited to, monetary damages).
If any court of competent jurisdiction shall at any time deem the terms of this
Agreement or any particular provision set forth in Sections 7 or 8 too lengthy
or the territory too extensive, the other provisions of this Agreement shall
nevertheless stand, the Restrictive Period herein shall be deemed to be the
longest period permissible by law under the circumstances and the territory
herein shall be deemed to comprise the largest territory permissible by law
under the circumstances. The court in each case shall reduce the time period
and/or territory to the permissible duration or size, and the Executive shall be
bound by such reformed terms.

Termination.

Termination for Cause. The Company may terminate the Employment Period for Cause
at any time without prior notice to the Executive. If the Employment Period is
terminated by the Company for Cause, then:

The Company shall have no further obligations hereunder or otherwise with
respect to the Executive's employment except for the payment of: (A) any unpaid
Base Salary and unused vacation earned through the effective date of such
termination; and (B) un-reimbursed business expenses incurred by the Executive
pursuant to the Company's policies and practices;

The Company shall continue to have any other rights available to it hereunder
(including, without limitation, all rights under Sections 5 through 8 hereof) at
law or in equity; and

If the Executive is serving as a member of the Board of Directors of the Company
(and any committees thereof), the Executive shall resign from the Board of
Directors (and any committees thereof upon which he serves), effective as of the
date upon which the Executive's employment with the Company was terminated.

Termination without Cause. The Company may terminate the Employment Period
without Cause at any time with thirty (30) days prior written notice to the
Executive.

If the Employment Period is terminated by the Company without Cause at any time
within 12 months of the Effective Date then, provided the Executive executes and
does not revoke the general release of all claims attached hereto as Appendix B
at that time, the Executive shall be entitled to receive: (A) any unpaid Base
Salary and unused vacation earned through the effective date of such
termination; (B) un-reimbursed business expenses incurred by the Executive
pursuant to the Company's policies and practices; (C) continued payment of the
Executive's Base Salary for an additional 12 months ("Severance Period"),
payable in accordance with the Company's regular payroll schedule as in effect
from time to time or monthly, as elected by the Company in its sole discretion;
(D) continued health and medical insurance benefits for the Executive and, to
the extent applicable, his eligible dependents during the Severance Period,
provided that the Executive shall pay any share of the premium as well as any
co-payments, deductibles or other costs that he would pay if he were still an
employee of the Company at the time payment of such premium, co-payments,
deductibles or other costs is due) pursuant to the Company's standard programs
in effect from time to time; (E) a pro rata portion of the guaranteed minimum
Operating Bonus payable to the Executive for 2006 (subject to the Company's
bonus policies for its executive officers); and (F) immediate vesting and
exercisability of that portion, and only that portion, of the option issued in
accordance with Section 4(c) hereof sufficient to permit the Executive to
acquire, upon exercise, an aggregate of 75,000 shares (including any portions of
the option previously exercised up to that point). The Company shall continue to
have any other rights available to it hereunder (including, without limitation,
all rights under Sections 5 through 8 hereof) at law or in equity. In addition,
the Company shall have no obligation to provide any of the payments or benefits
set forth in Sections 10(b)(i)(C) and 10(b)(i)(D) if the Executive violates any
of his obligations under Sections 5 through 8 above in a material respect and
shall have the right to recover from the Executive any such payments or benefits
already provided to the Executive after the termination of his employment but
before any such violations. For purposes of the preceding sentence, the
Executive will not be deemed to have violated any of his obligations under
Sections 5 through 8 above unless the Company shall have first given him written
notice setting forth the exact nature of any alleged violation and the conduct
required to cure such violation. The Executive shall have five (5) business days
from the giving of such notice within which to cure the alleged violation. There
shall be no cure period with respect to a violation that the Company reasonably
determines to be incapable of cure by its nature.

If the Employment Period is terminated by the Company without Cause at any time
after the first anniversary of the Effective Date then, provided the Executive
executes and does not revoke the general release of all claims attached hereto
as Appendix B at that time, the Executive shall be entitled to receive: (A) any
unpaid Base Salary and unused vacation earned through the effective date of such
termination; (B) un-reimbursed business expenses incurred by the Executive
pursuant to the Company's policies and practices; (C) continued payment of the
Executive's Base Salary for the Severance Period, payable in accordance with the
Company's regular payroll schedule as in effect from time to time or monthly, as
elected by the Company in its sole discretion; (D) continued health and medical
insurance benefits for the Executive and, to the extent applicable, his eligible
dependents during the Severance Period, provided that the Executive shall pay
any share of the premium as well as any co-payments, deductibles or other costs
that he would pay if he were still an employee of the Company at the time
payment of such premium, co-payments, deductibles or other costs is due)
pursuant to the Company's standard programs in effect from time to time; (E) a
pro rata portion of any Operating Bonus for the applicable year to which the
Executive is entitled (subject to the Company's bonus policies for its executive
officers); and (F) immediate vesting and exercisability of that portion, and
only that portion, of the option issued in accordance with Section 4(c) hereof
that would have been vested and exercisable had the Executive continued to be
employed by the Company at the end of the Severance Period. The Company shall
continue to have any other rights available to it hereunder (including, without
limitation, all rights under Sections 5 through 8 hereof) at law or in equity.
In addition, the Company shall have no obligation to provide any of the payments
or benefits set forth in Sections 10(b)(ii)(C) and 10(b)(ii)(D) if the Executive
violates any of his obligations under Sections 5 through 8 above in a material
respect and shall have the right to recover from the Executive any such payments
or benefits already provided to the Executive after the termination of his
employment but before any such violations. For purposes of the preceding
sentence, the Executive will not be deemed to have violated any of his
obligations under Sections 5 through 8 above unless the Company shall have first
given him written notice setting forth the exact nature of any alleged violation
and the conduct required to cure such violation. The Executive shall have five
(5) business days from the giving of such notice within which to cure the
alleged violation. There shall be no cure period with respect to a violation
that the Company reasonably determines to be incapable of cure by its nature.

Termination due to the Executive's Death or Disability. The Employment Period
shall terminate upon either the Executive's Death or Disability. If the
Employment Period is terminated due to the Executive's Death or Disability,
then:

The Company shall have no further obligations hereunder or otherwise with
respect to the Executive's employment except for the payment of: (A) any unpaid
Base Salary and unused vacation earned through the effective date of such
termination; (B) un-reimbursed business expenses incurred by the Executive
pursuant to the Company's policies and practices; and (C) a pro rata portion of
any Operating Bonus for the applicable year to which the Executive is entitled
(subject to the Company's bonus policies for its executive officers); and

The Company shall continue to have any other rights available to it hereunder
(including, without limitation, all rights under Sections 5 through 8 hereof) at
law or in equity.

Resignation without Good Reason. The Executive may resign from his position and
terminate the Employment Period without Good Reason at any time with sixty (60)
days prior written notice to the Company. If the Employment Period is terminated
due to the Executive's resignation without Good Reason, then:

The Company shall have no further obligations hereunder or otherwise with
respect to the Executive's employment except for the payment of: (A) any unpaid
Base Salary and unused vacation earned through the effective date of such
termination; and (B) un-reimbursed business expenses incurred by the Executive
pursuant to the Company's policies and practices;

The Company shall continue to have any other rights available to it hereunder
(including, without limitation, all rights under Sections 5 through 8 hereof) at
law or in equity; and

If the Executive tenders notice of his intention to resign from the Company and
terminate the Employment Period without Good Reason at any time within 12 months
of the Effective Date, the Executive shall pay the Company an amount equal to
the value of the Relocation Benefits actually provided by the Company to the
Executive.

Resignation with Good Reason. The Executive may resign from his position and
terminate the Employment Period with Good Reason at any time upon thirty (30)
days prior written notice to the Company. If the Employment Period is terminated
due to the Executive's resignation with Good Reason, then the Executive shall be
entitled to the rights and benefits set forth in Section 10(b) as though the
Employment Period had been terminated by the Company without Cause.

Change of Control. Following any Change of Control of the Company, (i) if the
Executive is assigned any duties or responsibilities inconsistent in any
material respect with those duties set forth in Section 3 hereof, or any other
action is taken by the Company that results in a material diminution or other
material adverse change in the Executive's position, authority, duties or
responsibilities, other than any isolated, insubstantial and inadvertent action,
which is not taken in bad faith and is remedied by the Company promptly after
receipt of notice thereof from the Executive, or (ii) if the Company fails to
comply with any provision of Section 4 of this Agreement, other than any
isolated, insubstantial and inadvertent failure, which is not taken in bad faith
and is remedied by the Company promptly after receipt of notice thereof from the
Executive, or (iii) if the Company fails to comply with Section 21 (Binding
Effect) of this Agreement, then the Executive shall be entitled to resign from
the Company, terminate the Employment Period and receive from the Company those
benefits under Sections 10(b) hereof as if the Executive's employment with the
Company had been terminated without Cause.

Exclusivity. The benefits set forth in this Section 10 shall be in lieu of, and
not in addition to, any other benefits provided under any Company severance
plan, policy, practice or agreement. The Executive shall not be entitled to any
other benefits, compensation or other payments or rights upon termination of the
Employment Period except as expressly set forth in this Section and those
benefits required by law.

Definitions.

Affiliate. For purposes of this Agreement, the term "Affiliate" means the
Company and any of its subsidiaries.

Cause. For purposes of this Agreement, the term "Cause" means:

The Executive's failure to perform his regularly assigned duties or the specific
directives of the Company's Board of Directors (provided such directives are
lawful and consistent with the Executive's duties under this Agreement) that
continues for a period of at least ten (10) calendar days following delivery to
the Executive of a written notification from the Company's Board of Directors
informing the Executive of the duties and/or directives that the Executive has
failed to perform; or

The Executive's failure to follow a lawful written directive of the Company's
Board of Directors (provided such directive is consistent with the Executive's
duties under this Agreement); or

The Executive's violation of any material rule, regulation, or policy that may
be established from time to time for the conduct of the Company's business; or

The Executive's unlawful possession, use, sale or distribution of narcotics or
other controlled substances, or performing job duties while illegally used
controlled substances are present in the Executive's system; or

Any willful act or omission by the Executive in the scope of his employment by
the Company which was unauthorized by the Company's Board of Directors and (A)
results in the assessment of a civil or criminal penalty against the Executive
or the Company, or (B) in the reasonable judgment of the Company's Board of
Directors could result in a material violation of any material foreign or United
States federal, State, or local law or regulation having of the force of law; or

The Executive's conviction of, or plea of guilty or no contest to, any felony or
other crime of moral turpitude, or the assessment of any criminal or civil
penalty against the Executive as a result of or in connection with any
investigation undertaken by the U.S. Securities and Exchange Commission; or

Any misrepresentation by the Executive of a material fact to, or concealment by
the Executive of a material fact from, (1) the Company's Board of Directors or
(2) any other person or entity to whom the Executive has a reporting
relationship in any capacity; or

The Executive's material breach of any provision of this Agreement, which
breach, if capable of cure, continues for a period of at least ten (10) calendar
days following delivery to the Executive of a written notification from the
Company's Board of Directors informing the Executive of the breach and the
conduct required to cure such breach; or

The failure of the Executive to relocate permanently to the Rochester, New York
area by August 31, 2006.

Change of Control. For purposes of this Agreement, the term "Change of Control"
means (i) any "person" within the meaning of Section 14(d) of the Exchange Act,
other than the Company, a subsidiary, or any employee benefit plan(s) sponsored
by the Company or any subsidiary, is or has become the "beneficial owner," as
defined in Rule 13d-3 under the Exchange Act, directly or indirectly, of 51
percent or more of the combined voting power of the outstanding securities of
the Company ordinarily having the right to vote at the election of directors;
(ii) individuals who constitute the Board on the Date of Grant (the "Incumbent
Board") have ceased for any reason to constitute at least a majority thereof (or
a majority of the Board as then constituted), provided that any person becoming
a director subsequent to the Date of Grant whose election, or nomination for
election by the Company's stockholders, was approved by a vote of at least
three-quarters (3/4) of the directors comprising the Incumbent Board (either by
a specific vote or by approval of the proxy statement of the Company in which
such person is named as a nominee for director without objection to such
nomination) shall be considered as though such person were a member of the
Incumbent Board; (iii) the closing of a reorganization, merger or consolidation
of the Company, other than one with respect to which all or substantially all of
those persons who were the beneficial owners, immediately prior to such
reorganization, merger or consolidation, of outstanding securities of the
Company ordinarily having the right to vote in the election of directors own,
immediately after such transaction, more than three-quarters (3/4) of the
outstanding securities of the resulting corporation ordinarily having the right
to vote in the election of directors; (iv) the closing of a sale or other
disposition of all or substantially all of the assets of the Company, other than
to a subsidiary; or (v) the complete liquidation and dissolution of the Company.

Disability. For purposes of this Agreement, the term "Disability" means the
Executive's inability to perform the essential functions of his position that
continues for a total of more than twenty-six (26) weeks in any twelve (12)
month period.

Good Reason. For purposes of this Agreement, the Executive shall be deemed to
have "Good Reason" for terminating the Employment Period if any of the following
events occurs without the Executive's consent:

Relocation of the Executive's principal workplace to a location outside the
Rochester, New York area to an area that is unacceptable to the Executive; or

The Company's material breach of any provision of this Agreement, which breach,
if capable of cure, continues for a period of at least ten (10) calendar days
following delivery to the Company of a written notification from the Executive
informing the Company of the breach and the conduct required to cure such
breach.

"Person" means an individual, a corporation, a partnership, a limited liability
company, an association, a trust or any other entity or organization.

No Conflicts. The Executive agrees that in his individual capacity (as opposed
to his capacity as an executive of the Company) he will not, either directly or
indirectly, enter into any agreement, arrangement or understanding, whether
written or oral, with any supplier, contractor, distributor, wholesaler, sales
representative, representative group or customer, relating to the business of
the Company or any of its subsidiaries, without the express written consent of
the Board.

As long as the Executive is employed by the Company or any of its subsidiaries,
the Executive agrees that he will not, except with the express written consent
of the Board, become engaged in, render services for, or permit his name to be
used in connection with, any for-profit business other than the business of the
Company, any of its subsidiaries or any corporation or partnership in which the
Company or any of its subsidiaries have an equity interest.

Failure, Delay or Waiver. No course of action or failure to act by the Company
or the Executive shall constitute a waiver by the Company or the Executive, as
applicable, of any right or remedy under this Agreement, and no waiver by the
Company or the Executive of any right or remedy under this Agreement shall be
effective unless made in writing.

Partial Invalidity and Severability. The provisions of this Agreement will be
deemed severable and the invalidity or unenforceability of any provision will
not affect the validity or enforceability of the other provisions hereof. If any
provision of this Agreement, or the application thereof to any individual or any
circumstance, is invalid or unenforceable, then (a) a suitable and equitable
provision will be substituted therefor in order to carry out, so far as may be
valid and enforceable, the intent and purpose of such invalid or unenforceable
provision, and (b) the remainder of this Agreement and the application of such
provision to other individuals or circumstances will not be affected by such
invalidity or unenforceability, nor will such invalidity or unenforceability
affect the validity or enforceability of such provision, or the application
thereof, in any other jurisdiction.

Notices. Any notice provided for in this Agreement must be in writing and must
be personally delivered, mailed by registered or certified first class mail
(prepaid with return receipt requested), or sent by a nationally recognized
overnight courier service. Any notice must be sent to the recipient at the
address indicated below:


                  If to the Company:

                                    Performance Technologies, Incorporated
                                    205 Indigo Creek Drive
                                    Rochester, New York 14626
                                    Attention: Chairman of the Board

                           With a copy (which shall not constitute notice) to:

                                    Harter, Secrest & Emery LLP
                                    1600 Bausch & Lomb Place
                                    Rochester, New York 14604
                                    Attention: Jeffrey H. Bowen, Esq.

                  If to the Executive:

                                    Michael P. Skarzynski
                                    21 Post Kunhardt Road
                                    Bernardsville, New Jersey 07924

Either party may specify such other address or to the attention of such other
person as the recipient party shall have specified by prior written notice to
the sending party. Any notice under this Agreement will be deemed to have been
given (i) on the date such notice is personally delivered, (ii) three (3)
business days after the date of mailing if sent by certified or registered mail,
or (iii) the next succeeding business day after the date such notice is
delivered to the overnight courier service if sent by overnight courier.

Consent to Jurisdiction. The Executive hereby irrevocably submits to the
exclusive jurisdiction of the United States federal or New York State court
sitting in Monroe County, New York, in any action or proceeding arising out of
or relating to this Agreement. The Executive hereby irrevocably agrees that all
claims in respect of such action or proceeding may be heard and determined in
any such court and irrevocably waives any objection he may now or hereafter have
as to personal jurisdiction, the venue of any such action or proceeding brought
in such a court or the fact that such court is an inconvenient forum.

Executive irrevocably and unconditionally consents to the service of process by
the mailing of copies of such process to him, by certified mail, return receipt
requested at the address set forth in Section 15, above.

Waiver Of Jury Trial. THE EXECUTIVE AND THE COMPANY HEREBY WAIVE TRIAL BY JURY
IN ANY ACTION OR PROCEEDING INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER
(WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE), IN ANY WAY ARISING OUT OF,
RELATED TO, OR CONNECTED WITH THIS AGREEMENT.

Entire Agreement. There are no oral agreements in connection with this
Agreement. This Agreement (including its Appendices and, to the extent
applicable, the Company's 2003 Omnibus Incentive Plan) constitutes the entire
agreement of the parties hereto and supersedes any prior agreements or
understandings, whether oral or written, between the parties hereto with respect
to the subject matter hereof. In the event of a conflict between the terms of
this Agreement and the Company's 2003 Omnibus Incentive Plan, the terms of the
Company's 2003 Omnibus Incentive Plan (as in effect on the date of this
Agreement, except for such amendments, if any, that are made with the
Executive's consent or are not adverse to the Executive) shall control and be
determinative. This Agreement may not be terminated, modified or amended orally
or by any course of conduct. This Agreement may be modified or amended only by a
writing expressly referring to this Agreement and executed by both the Executive
and the Company.

Governing Law. This Agreement shall be construed in accordance with and governed
by the laws of the State of New York without regard to principles of conflicts
of laws.

Non-Assignability. This Agreement is personal to the Executive and may not be
assigned by him.

Binding Effect. This Agreement shall be binding upon and inure to the benefit of
the parties and their respective heirs, legal representatives, successors and,
if permitted, assigns.

Counterparts. This Agreement may be executed in counterparts, each of which
shall be deemed an original, but all of which together will constitute one and
the same instrument.

Paragraph Headings. The headings and subheadings herein are for convenience of
reference only and are not of substantive effect.

Survival. All of the covenants and agreements of the parties hereto that by
their terms survive the expiration of this Agreement shall so survive the
expiration of this Agreement in accordance with such terms.

Intending to be bound, the Company and the Executive have executed this
Employment Agreement as conclusive evidence of their acceptance of the terms and
conditions set forth herein.


                                          PERFORMANCE TECHNOLOGIES, INCORPORATED


                                          /s/ John M. Slusser
                                          -------------------
                                          John M. Slusser
                                          Chairman of the Board



                                          THE EXECUTIVE:


                                          /s/ Michael P. Skarzynsi
                                          ------------------------
                                          Michael P. Skarzynski

<PAGE>

                                   APPENDIX A
                                   ----------

                                  AWARD NOTICE

                      NOTICE OF NON-QUALIFIED STOCK OPTION
                             GRANTED PURSUANT TO THE
                     PERFORMANCE TECHNOLOGIES, INCORPORATED
                           2003 OMNIBUS INCENTIVE PLAN



                        Grantee: Michael P. Skarzynski
                                 ----------------------------------

               Number of Shares: 225,000
                                 ----------------------------------

                   Option Price: The closing price per share of the
                                 Common Stock on the date of grant.
                                 ----------------------------------

                  Date of Grant: November 3, 2005
                                 ----------------------------------


         1. Grant of Option. This Award Notice serves to notify you that the
Stock Option Committee (the "Committee") of the Board of Directors of
Performance Technologies, Incorporated (the "Company") has granted to you, under
the Company's 2003 Omnibus Incentive Plan (the "Plan"), a non-qualified stock
option (the "Option") to purchase, on the terms and conditions set forth in this
Award Notice and the Plan, up to the number of shares of its Common Stock, $.01
par value per share (the "Common Stock") and at the price per share set forth
above. The Plan is incorporated herein by reference and made a part of this
Award Notice. Capitalized terms not defined herein have the respective meanings
set forth in the Plan.

         2. Period of Option and Limitations on Right to Exercise. Unless the
Option is previously terminated pursuant to the terms of the Plan or this
Award Notice, the Option will expire at 5:00 p.m., Eastern Standard Time, on the
month and day that is eight (8) years from the Date of Grant (the "Expiration
Date").

         3. Exercise of Option.

         (a) Vesting Schedule. Subject to the terms of the Plan and this Award
Notice, provided you are still a full-time employee of the Company at that time,
the Option will vest and become exercisable pro rata with respect to 37,500 of
the shares subject to the Option on each of the first, second, third, fourth,
fifth and sixth anniversaries of the Date of Grant. For example, provided you
remain employed by the company at the time, 37,500 of the total number of shares
of Common Stock subject to the Option will be vested one year after the Date of
Grant, 75,000 of the total number of shares of Common Stock subject to the
Option will be vested two years after the Date of Grant, 112,500 of the total
number of shares of Common Stock subject to the Option will be vested three
years after the Date of Grant, and so on, such that all of the shares of Common
Stock subject to the Option will be vested six years after the Date of Grant.
The option may be exercised with respect to any vested shares, in whole or in
part, with a minimum exercise of 100 shares or the total exercisable number of
shares if less than 100 shares, by you providing a notice of exercise to the
Company and payment in accordance with the forms and procedures established by
the Committee and in effect on the date of exercise.

         (b) Accelerated Vesting if EPS Equals or Exceeds $0.75/Share. If the
Company's audited after tax earnings per share for the fiscal year ended (i)
December 31, 2006, (ii) December 31, 2007 or (iii) December 31, 2008, are equal
to or exceed $0.75 per share (as adjusted to reflect any stock splits,
recapitalizations or the like following the date hereof), then, notwithstanding
the vesting schedule in Section 3(a) of this Award Notice, but otherwise subject
to the terms of the Plan and this Award Notice, as of the date such earnings per
share are first disclosed to the public, 50% of the as yet unvested shares
subject to the Option shall immediately vest and become exercisable, provided
you are still a full-time employee of the Company at that time. The balance of
the unvested shares subject to the Option shall continue to be subject to the
vesting schedule in Section 3(a) of this Award Notice.

         (c) Accelerated Vesting if EPS Equals or Exceeds $1.20/Share. If the
Company's audited after tax earnings per share for the fiscal year ended (i)
December 31, 2006, (ii) December 31, 2007, (iii) December 31, 2008, (iv)
December 31, 2009, (v) December 31, 2010, or (vi) December 31, 2011, are equal
to or exceed $1.20 per share (as adjusted to reflect any stock splits,
recapitalizations or the like following the date hereof), then, notwithstanding
the vesting schedule in Section 3(a) of this Award Notice or the provisions of
Section 3(b) of this Award Notice, but otherwise subject to the terms of the
Plan and this Award Notice, as of the date such earnings per share are first
disclosed to the public, 100% of the as yet unvested shares subject to the
Option shall immediately vest and become exercisable, provided you are still a
full-time employee of the Company at that time.

         4. Effect of Certain Events.

         (a) Death. In the event of your death prior to the complete exercise of
the Option, your designated beneficiary or, in the absence of such beneficiary,
your duly qualified personal representative may exercise the Option to purchase
any vested shares available under the Option until the earlier of the Expiration
Date or one year after your death. Upon your death, the Option shall terminate
with respect to any unvested shares under the Option.

         (b) Disability. In the event of your Disability prior to the complete
exercise of the Option, you may exercise the Option to purchase any vested
shares available under the Option until the earlier of the Expiration Date or
one year after the date of your Disability. Upon the date of your Disability,
the Option shall terminate with respect to any unvested shares under the Option.

         (c) Retirement or Approved Reason. Upon your Retirement or in the event
of termination for an Approved Reason, you may exercise the Option to purchase
any vested shares available under the Option until the earlier of the Expiration
Date or one year after the date of your Retirement or termination for an
Approved Reason. Upon your Retirement or termination for an Approved Reason, the
Option shall terminate with respect to any unvested shares under the Option.

         (d) Other Termination. Upon your termination from the Company for any
reason other than your death, Disability, Retirement or termination for an
Approved Reason, you may exercise the Option to purchase any vested shares
available under the Option until the earlier of the Expiration Date or 30 days
after the date of your termination. Upon your termination, the Option shall
terminate with respect to any unvested shares under the Option.

         (e) Change of Control. Notwithstanding the vesting schedule set forth
in Section 3 of this Award Notice, upon a "Change of Control," the Option shall
become fully vested and immediately exercisable for the total number of shares
available under the Option. For purposes of this Award Notice, "Change of
Control" means (i) any "person" within the meaning of Section 14(d) of the
Exchange Act, other than the Company, a subsidiary, or any employee benefit
plan(s) sponsored by the Company or any subsidiary, is or has become the
"beneficial owner," as defined in Rule 13d-3 under the Exchange Act, directly or
indirectly, of 51 percent or more of the combined voting power of the
outstanding securities of the Company ordinarily having the right to vote at the
election of directors; (ii) individuals who constitute the Board on the Date of
Grant (the "Incumbent Board") have ceased for any reason to constitute at least
a majority thereof (or a majority of the Board as then constituted), provided
that any person becoming a director subsequent to the Date of Grant whose
election, or nomination for election by the Company's stockholders, was approved
by a vote of at least three-quarters (3/4) of the directors comprising the
Incumbent Board (either by a specific vote or by approval of the proxy statement
of the Company in which such person is named as a nominee for director without
objection to such nomination) shall be, for purposes of this Plan, considered as
though such person were a member of the Incumbent Board; (iii) the closing of a
reorganization, merger or consolidation of the Company, other than one with
respect to which all or substantially all of those persons who were the
beneficial owners, immediately prior to such reorganization, merger or
consolidation, of outstanding securities of the Company ordinarily having the
right to vote in the election of directors own, immediately after such
transaction, more than three-quarters (3/4) of the outstanding securities of the
resulting corporation ordinarily having the right to vote in the election of
directors; (iv) the closing of a sale or other disposition of all or
substantially all of the assets of the Company, other than to a subsidiary; or
(v) the complete liquidation and dissolution of the Company.

         5. Limitation of Rights. You will not have any rights as a stockholder
with respect to the shares covered by the Option until you become the holder of
record of such shares by exercising the Option. Neither the Plan, the granting
of the Option nor this Award Notice gives you any right to remain employed by
the Company or a Subsidiary.

         6. Restrictions on Issuance of Shares. If at any time the Company
determines that listing, registration or qualification of the shares covered by
the Option upon any securities exchange or under any state or federal law, or
the approval of any governmental agency, is necessary or advisable as a
condition to the exercise of the Option, the Option may not be exercised in
whole or in part unless and until such listing, registration, qualification or
approval shall have been effected or obtained free of any conditions not
acceptable to the Company.

         7. Restriction on Transfers. You may not make any sale or other
distribution or disposition of any shares of Common Stock acquired by you
pursuant to the exercise of all or any part of the Option unless (i) a
registration statement with respect to such shares is in effect at the time of
such sale, distribution or disposition and the Company shall have received proof
satisfactory to it that there has been compliance with applicable state law, or
(ii) the Company shall have received an opinion of counsel satisfactory to it
that no violation of the Securities Act of 1933, as amended, or applicable state
law will be involved in such transfer.

         8. Plan Controls. The Option is subject to all of the provisions of the
Plan, which is hereby incorporated by reference, and is further subject to all
the interpretations, amendments, rules and regulations that may from time to
time be promulgated and adopted by the Committee pursuant to the Plan. In the
event of any conflict among the provisions of (i) the Plan, (ii) this Award
Notice and the attached summary, or (iii) that certain Employment Agreement
between the Company and the Grantee dated as of November 3, 2005, the provisions
of the Plan will be controlling and determinative.

                                 ACKNOWLEDGEMENT

         The undersigned Grantee acknowledges receipt of a copy of the Plan, and
understands and agrees to the terms of this Award Notice and the Plan. The
Grantee further acknowledges that as of the Date of Grant, this Award Notice,
the Plan and that certain Employment Agreement between the Company and the
Grantee dated as of November 3, 2005 set forth the entire understanding between
the Grantee and the Company regarding the acquisition of Common Stock and
supersede all prior oral and written agreements on that subject, with the
exception of any other awards under the Plan made to the Grantee
contemporaneously with this Option.

Date:  November 3, 2005
       ---------------------
                                                  Grantee:


                                                  /s/ Michael P. Skarzynski
                                                  -------------------------
                                                  Michael P. Skarzynski

<PAGE>

                                   APPENDIX B
                                   ----------


                          GENERAL RELEASE OF ALL CLAIMS
                          -----------------------------

I am signing this General Release of All Claims (the "General Release") pursuant
to the foregoing Employment Agreement (the "Agreement") in consideration for the
severance benefits provided therein. I agree that in exchange for the benefits
provided by Section 10 of the Agreement, I hereby forever release and discharge
Performance Technologies, Incorporated (the "Company"), and any and all of
Company's parents, subsidiaries, departments, divisions, affiliated entities,
successors, and assigns, and any and all of its and/or their past and/or present
shareholders, partners, members, directors, officers, employees, attorneys and
agents (collectively, the "Releasees"), from any and all claims, demands, causes
of action, fees and liabilities of any kind whatsoever, whether known or
unknown, which I ever had, now have or may have against the Releasees by reason
of any actual or alleged act, omission, transaction, practice, conduct,
occurrence, or other matter occurring up to and including the date of this
General Release.

Without limiting the generality of the foregoing, this General Release is
intended to and shall release the Releasees from any and all claims, whether
known or unknown, which I ever had, now have, or may have against the Releasees,
with respect to my employment by the Company, the terms and conditions of such
employment, and/or the termination of my employment, including but not limited
to: (i) any and all claims of age discrimination under the Age Discrimination in
Employment Act (ADEA) and the Older Workers' Benefit Protection Act; (ii) any
and all claims under the New York Human Rights Law; (iii) any and all claims
under Title VII of the Civil Rights Act of 1964; (iv) any and all claims under
the Americans with Disabilities Act; (v) any and all claims under the Family and
Medical Leave Act; (vi) any and all claims under the Employee Retirement Income
Security Act (ERISA); (vii) any and all claims under United States Constitution
and/or the New York Constitution; (viii) any and all claims relating to any
contract for past employment, any failure to offer employment, any
representations or commitments made by the Company regarding future employment,
the conclusion of my employment with the Company and benefits payable by the
Company; (ix) any and all claims under municipal, State and federal contract or
tort law, such as claims of wrongful discharge, constructive discharge, breach
of implied covenant of good faith and fair dealing, fraud, intentional
interference with contract, intentional interference with prospective economic
relations, negligent or intentional infliction of emotional distress,
defamation, and failure of due process; (x) any other claim based on any
Federal, State, or local law, ordinance, or regulation (whether statutory or
decisional); and (xi) any and all claims for attorneys' fees, costs,
disbursements, and/or the like.

I expressly agree and understand that the release given by me pursuant to this
Release applies to all unknown, unsuspected and unanticipated claims,
liabilities and causes of action that I may have against the Company or any of
the other Releasees.

By signing this General Release, I hereby acknowledge: (i) that the Company
advises that I consult with an attorney of my choice before signing this General
Release; (ii) that the consideration provided by the Agreement exceeds any
benefit or other thing of value to which I am otherwise entitled under any
policy, plan, or procedure of the Company or pursuant to any agreement or
contract with the Company; and (iii) that I have read this General Release in
its entirety, I understand that it contains a full and final release of all
claims that I have or may have against the Company up to the present, and I
knowingly and voluntarily agree to all the terms and conditions contained
herein.

The terms of this General Release and the Agreement constitute the complete
understanding between the Company and me regarding the matters set forth
therein, and may only be modified by a subsequent written agreement signed by
both the Company and me. I acknowledge that no representative of the Company
made any promise or representation regarding these matters that is not
explicitly set forth in either the Agreement or this General Release.

I understand that I may take twenty-one (21) days from the date that this
General Release is provided to me to consider it before signing and returning
this General Release to the Company. I may revoke this General Release by asking
for its return within seven (7) days of the date of my signature below. If I do
not revoke this General Release within seven (7) days, it shall be binding upon
me.

                                         /s/ Michael P. Skarzynski
                                         -------------------------
                                         Michael P. Skarzynski

                                         November 3, 2005
                                         -------------------------
                                         Date

State of New York
County of Monroe


On this 3rd day of November, 2005, before me personally came Michael P.
Skarzynski, to me known and known to me to be the individual described in and
who executed the foregoing instrument, and the above-named person acknowledged
to me that said person executed the same.


                                         /s/ Notary Public
                                         -------------------------
                                         Notary Public
<PAGE>

                                                                      Exhibit 21

                                  Subsidiaries

3688283 Canada, Inc., a Canadian 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 Massachusetts Corporation, a Delaware corporation wholly owned by
Performance Technologies, Incorporated

Performance Technologies, Inc. - Korea, a South Korean 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
Statements on Form S-8 (Nos. 333-32421, 333-39834, 333-89636 and 333-113330) of
Performance Technologies, Incorporated of our report dated March 15, 2006
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 15, 2006

<PAGE>

                                                                    Exhibit 31.1
                    Certification of Chief Executive Officer

I, Michael P. Skarzynski 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, 2006                      By:/s/   Michael P. Skarzynski
                                          ------------------------------
                                          Michael P. Skarzynski
                                          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, 2006                      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"), Michael P. Skarzynski 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, 2005 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, 2006                     By:/s/ Michael P. Skarzynski
                                          ----------------------------
                                          Michael P. Skarzynski
                                          President and Chief Executive Officer

Date:  March 16, 2006                     By:/s/ Dorrance W. Lamb
                                          -------------------------
                                          Dorrance W. Lamb
                                          Senior Vice President and
                                          Chief Financial Officer