--------------------------------------------------------------------------------


                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                -----------------


                                    FORM 10-Q

(Mark One)
          [X]     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                  SECURITIES EXCHANGE ACT OF 1934
                       For the Quarter Ended June 30, 1998
                                       OR
          [   ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                  THE SECURITIES EXCHANGE ACT OF 1934
                        For the transition period from to
                         Commission File Number 0-27460



                     PERFORMANCE TECHNOLOGIES, INCORPORATED
             (Exact name of registrant as specified in its charter)



                           -------------------

          Delaware                                   16-1158413
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
 incorporation of organization)

315 Science Parkway, Rochester   New York              14620
(Address of principal executive offices)            (Zip Code)

       Registrant's telephone number, including area code: (716) 256-0200

                    -----------------------------





         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 .


The number of shares outstanding of the registrant's  common stock was 7,306,450
as of July 27, 1998.


--------------------------------------------------------------------------------
                             Cover Page of 13 Pages



                                       1
<PAGE>




                  -
             Performance Technologies, Incorporated and Subsidiaries

                                      Index


                                                                            Page

Part I.                       Financial Information


Item 1.                   Consolidated Financial Statements

             Consolidated Balance Sheets as of June 30, 1998
             (unaudited) and December 31, 1997                               3

             Consolidated Statements of Income For The Three 
             Months Ended June 30, 1998 and 1997 (unaudited)                 4

             Consolidated Statements of Income For The Six
             Months Ended June 30, 1998 and 1997 (unaudited)                 5

             Consolidated Statements of Cash Flows For The  Six
             Months Ended June 30, 1998 and 1997 (unaudited)                 6

             Notes to Consolidated Financial Statements For The Six
             Months Ended June 30, 1998 (unaudited)                          7

Item 2.      Management's Discussion and Analysis of Financial
             Condition and Results of Operations                             8


Part II.                      Other Information

Item 2.      Changes in Securities and Use of Proceeds                      12

Item 4.      Submission of Matters to a Vote of  Security Holders           12

Item 6.      Exhibits and Reports on Form 8-K                               13

Signatures                                                                  14


                                       2
<PAGE>


             PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS


                                     ASSETS
<TABLE>
<CAPTION>
<S>                                               <C>            <C>



                                                     June 30,     December 31,
                                                       1998           1997
                                                  -------------  -------------
                                                    (unaudited)
Current assets:
 Cash and cash equivalents                        $  13,503,000  $   8,833,000
 Marketable securities                               10,002,000     12,010,000
 Accounts receivable, net                             3,978,000      4,956,000
 Inventories, net - Note C                            3,466,000      3,329,000
 Prepaid expenses and other                             300,000        346,000
 Deferred taxes                                         466,000        466,000
                                                  -------------  -------------
   Total current assets                              31,715,000     29,940,000
Equipment and improvements, net                         877,000        982,000
Software development, net                               958,000        579,000
Other assets                                                           125,000
                                                  -------------  -------------
   Total assets                                   $  33,550,000  $  31,626,000
                                                  =============  =============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
 Current portion of long term debt                $      12,000  $      12,000
 Accounts payable                                       977,000        824,000
 Income taxes payable                                   260,000        255,000
 Accrued expenses                                     1,841,000      2,265,000
                                                  -------------  -------------
   Total current liabilities                          3,090,000      3,356,000
Long term debt, less current portion                     12,000         18,000
Deferred taxes                                          220,000        220,000
                                                  -------------  -------------
Total liabilities                                     3,322,000      3,594,000
                                                  -------------  -------------

Stockholders' equity
 Preferred stock
 Common stock  - Note B                                  75,000         74,000
 Additional paid-in capital - Note B                 13,136,000     13,055,000
 Retained earnings                                   17,341,000     15,061,000
 Treasury stock - Note B                               (324,000)      (158,000)
                                                  -------------  -------------
   Total stockholders' equity                        30,228,000     28,032,000
                                                  -------------  -------------
   Total liabilities and stockholders' equity     $  33,550,000  $  31,626,000
                                                  =============  =============



</TABLE>


                                       3
<PAGE>

             PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND 1997
                                   (Unaudited)


<TABLE>
<CAPTION>
<S>                                               <C>            <C>

                                                       Three Months Ended 
                                                             June 30, 
                                                        1998          1997
                                                   -------------  -------------

Sales                                             $   6,051,000  $   7,539,000
Cost of goods sold                                    2,482,000      3,025,000
                                                  -------------  -------------
Gross profit                                          3,569,000      4,514,000
                                                  -------------  -------------

Operating expenses:
  Selling and marketing                               1,041,000      1,102,000
  Research and development                              907,000        972,000
  General and administrative                            600,000        740,000
                                                  -------------  -------------
    Total operating expenses                          2,548,000      2,814,000
                                                  -------------  -------------
Income from operations                                1,021,000      1,700,000

Other income, net                                       303,000        237,000
                                                  -------------  -------------
Income before income taxes                            1,324,000      1,937,000

Provision for income taxes                              463,000        737,000
                                                  -------------  -------------
    Net income                                    $     861,000  $   1,200,000
                                                  =============  =============


Per share of common stock - Note D

Basic earnings per share                          $         .12  $         .17
                                                  =============  =============

Diluted earnings per share                        $         .11  $         .16
                                                  =============  =============


</TABLE>


                                       4
<PAGE>



             PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                 FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
                                   (Unaudited)
<TABLE>
<CAPTION>
<S>                                               <C>            <C>

                                                        Six Months Ended
                                                            June 30, 
                                                       1998           1997
                                                  -------------  -------------
Sales                                             $  13,462,000  $  14,973,000
Cost of goods sold                                    5,345,000      6,357,000
                                                  -------------  -------------
Gross profit                                          8,117,000      8,616,000
                                                  -------------  -------------
Operating expenses:
  Selling and marketing                               1,934,000      2,010,000
  Research and development                            1,970,000      1,915,000
  General and administrative                          1,286,000      1,429,000
                                                  -------------  -------------
    Total operating expenses                          5,190,000      5,354,000
                                                  -------------  -------------
Income from operations                                2,927,000      3,262,000

Other income, net                                       614,000        467,000
                                                  -------------  -------------
Income before income taxes                            3,541,000      3,729,000

Provision for income taxes                            1,261,000      1,417,000
                                                  -------------  -------------
    Net income                                    $   2,280,000  $   2,312,000
                                                  =============  =============

Per share of common stock - Note D

Basice earnings per share                         $        .31   $        .32
                                                  =============  =============

Diluted earnings per share                        $        .30   $        .31
                                                  =============  =============



</TABLE>


                                       5
<PAGE>





             PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                 FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
                                   (Unaudited)
<TABLE>
<CAPTION>
<S>                                               <C>            <C>


                                                       Six Months Ended
                                                           June 30,
                                                      1998           1997
                                                  ------------   --------------
Cash flows from operating activities
   Net income                                     $  2,280,000   $  2,312,000

Non-cash adjustments:
   Depreciation and amortization                       394,000        729,000
   Other                                                13,000         10,000
Changes in operating assets and liabilities:
   Accounts receivable                                 968,000       (419,000)
   Inventories                                        (137,000)      (265,000)
   Prepaid expenses and other                           48,000       (134,000)
   Accounts payable                                    153,000        100,000
   Accrued expenses                                   (424,000)      (314,000)
   Income taxes payable                                  5,000         61,000
                                                  ------------   ------------

     Net cash provided by operating activities       3,300,000      2,080,000
                                                  ------------   ------------

Cash flows from investing activities
   Cash purchases of equipment and improvements, net  (145,000)      (416,000)
   Capitalized software development                   (403,000)      (400,000)
   Purchase of marketable securities                (4,000,000)    (4,998,000)
   Maturities of marketable securities               6,008,000
                                                  ------------   ------------
     Net cash provided (used)
      by investing activities                        1,460,000     (5,814,000)
                                                  ------------   ------------

Cash flows from financing activities

   Repayment of notes payable                           (6,000)        (5,000)
   Proceeds from issuance of common stock               59,000         39,000
   Purchase of treasury stock                         (143,000)
   Payments on capital lease obligations                              (15,000)
                                                  ------------   ------------
     Net cash (used) provided
      by financing activities                          (90,000)        19,000
                                                  ------------   ------------

     Net increase (decrease) in
      cash and cash equivalents                      4,670,000     (3,715,000)

Cash and cash equivalents at beginning of period     8,833,000     10,027,000
                                                  ------------   ------------
Cash and cash equivalents at end of period        $ 13,503,000   $  6,312,000
                                                  ============   ============

</TABLE>


                                       6
<PAGE>
             Performance Technologies, Incorporated and Subsidiaries
                   Notes to Consolidated Financial Statements
                     For The Six Months Ended June 30, 1998
                                   (Unaudited)

Note - A  The  unaudited   Consolidated  Financial  Statements  of   Performance
Technologies,  Incorporated and Subsidiaries  (the "Company") have been prepared
in  accordance  with  generally  accepted  accounting   principles  for  interim
financial  information and with the  instructions to Form 10-Q and Article 10 of
Regulation  S-X of the  Securities  and Exchange  Commission.  Accordingly,  the
Consolidated  Financial  Statements  do not include all of the  information  and
footnotes  required by generally  accepted  accounting  principles  for complete
financial statements.  In the opinion of management,  all adjustments considered
necessary  for a fair  presentation  have been  included.  The  results  for the
interim periods are not necessarily indicative of the results to be expected for
the year. The accompanying  Consolidated  Financial Statements should be read in
conjunction with the audited Consolidated Financial Statements of the Company as
of December 31, 1997,  as reported in its Annual  Report on Form 10-K filed with
the Securities and Exchange Commission.

Note - B  There were 7,289,650 and 7,267,450  shares issued and outstanding (net
of treasury  shares held) at June 30, 1998 and December 31, 1997,  respectively,
of the Company's  $.01 par value Common Stock.  During the six months ended June
30, 1998,  38,400  common  shares were issued upon the exercise of stock options
and 16,200 common shares were added to the number of treasury shares held.

Note - C  Inventories  consisted of the following at June 30, 1998 and  December
          31, 1997:<TABLE> <CAPTION>
                                                    June 30,     December 31,
                                                     1998            1997
                                                  -----------    ------------
         <S>                                      <C>            <C>  
         Purchased parts and components           $ 1,362,000    $    954,000
         Work in process                            2,552,000       2,580,000
         Finished goods                               196,000         333,000
                                                  -----------    ------------
                                                    4,110,000       3,867,000
         Less:  reserve for inventory obsolescence   (644,000)       (538,000)
                                                  -----------    ------------
           Net                                    $ 3,466,000    $  3,329,000
                                                  ===========    ============
</TABLE>

Note - D  The following  table  illustrates  the  calculation  of both basic and
diluted  earnings per share for the three months and six months  ending June 30,
1998 and 1997: <TABLE> <CAPTION>
                                                      Three Months Ended
                                                             June 30,
                                                        1998             1997
<S>                                               <C>            <C>
                                                  -----------    -------------
Basic earnings per share
Net income available to common stockholders       $   861,000    $   1,200,000
                                                  ===========    =============
Weighted average common shares                      7,296,000        7,220,000
                                                  ===========    =============
Basic earnings per share                          $       .12    $         .17
                                                  ===========    =============

Diluted earnings per share
Net income available to common stockholders       $   861,000    $   1,200,000
                                                  ===========    =============
Weighted average common and common
   equivalent shares                                7,595,000        7,400,000
                                                  ===========    =============
Diluted earnings per share                        $       .11    $         .16
                                                  ===========    =============

                                                        Six Months Ended
                                                             June 30,
                                                        1998             1997
                                                  ------------------------------
Basic earnings per share
Net income available to common stockholders       $ 2,280,000    $   2,312,000
                                                  ===========    =============
Weighted average common shares                      7,284,000        7,213,000
                                                  ===========    =============
Basic earnings per share                          $       .31    $         .32
                                                  ===========    =============

Diluted earnings per share
Net income available to common stockholders       $ 2,280,000    $   2,312,000
                                                  ===========    =============
Weighted average common and common
   equivalent shares                                7,634,000        7,389,000
                                                  ===========    =============
Diluted earnings per share                        $       .30    $         .31
                                                  ===========    =============
</TABLE>

                                       7
<PAGE>

             Performance Technologies, Incorporated and Subsidiaries


Item 2. Management's  Discussion and Analysis of Financial Condition and Results
        of Operations

The   Company's   operating   performance   is  subject  to  various  risks  and
uncertainties.  This report on Form 10-Q should be read in conjunction  with the
Consolidated Financial Statements,  the notes thereto,  Management's  Discussion
and Analysis of Financial Condition and Results of Operations as of December 31,
1997 and "Risk Factors" as reported in the Company's Annual Report on Form 10-K,
and as of  March  31,  1998,  as  reported  in its  Form  10-Q,  filed  with the
Securities and Exchange Commission.

Matters discussed in Management's Discussion and Analysis of Financial Condition
and Results of Operations in this Form 10-Q 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 those Sections.  The Company's future operating
results  could differ  materially  from those  discussed in the forward  looking
statements  and may be affected by various  trends and factors  which are beyond
the Company's control. These include, among other factors,  general business and
economic conditions,  rapid or unexpected changes in technologies,  cancellation
or delay of customer  orders,  changes in the product or customer  mix of sales,
delays in new product  development,  customer  acceptance  of new  products  and
customer delays in qualification of products.


Overview

For the six months ended June 30, 1998, the Company's  after-tax profit improved
to 16.9% of sales based on sales of  $13,462,000,  compared to a 15.4% return on
sales for the same period in 1997 based on sales of $14,973,000.  An improvement
in gross margin over the past twelve months has  contributed  to a higher return
on sales this year. For the second quarter 1998, the Company's  after-tax profit
as a  percentage  of sales was 14.2% based on sales of  $6,051,000,  compared to
15.9%  for the  second  quarter  1997  based on sales of  $7,539,000.  Sales and
earnings  for the  second  quarter  1998 were  affected  because  a  significant
follow-on Department of Defense contract was delayed and not received during the
quarter.  Management  believes  it  will  receive  this  contract  award  but is
disappointed that the delay in its award impacted the second quarter's operating
results.  Management  remains  optimistic  about the Company's  future prospects
because of the breadth of new products it continues to introduce  which  address
rapidly expanding  markets.  For the six months ended June 30, 1998, the Company
generated  cash from  operating  activities  of $3.3  million,  compared to $2.1
million  for the  same  period  in 1997.  At June  30,  1998,  the  Company  had
approximately  $23.5  million  in  cash  and  marketable   securities,   and  no
significant debt.

Management  believes that the Company's key factors for continued growth for the
second half of 1998 and beyond will be its Data Communications products for Wide
Area Networks and its Network Switching products for Local Area Networks.

The  Company  is  focusing  a  substantial  amount  of  resources  on  the  Data
Communications  market where computer and telephony  technologies are converging
in the advanced intelligent network being built worldwide. Through a combination
of internal  development,  licensing and strategic  partnering,  the Company has
created one of the most comprehensive groups of Data Communications products for
Wide Area  Networks  (WAN) in its market  segment.  These  products  encompass a
comprehensive  family of  communications  software  protocols  and WAN  hardware
products for PCI and CompactPCI platforms.  The communication protocols include:
Frame  Relay,  Signaling  System #7 (SS7),  X.25,  High-Level  Data Link Control
(HDLC)  and  a  variety  of   protocols  to   facilitate   high  and  low  speed
communications.  The  Company's  "add-in"  hardware  products  function  on  all
standard  PCI  and  CompactPCI  platforms.   In  this  arena,  the  Company  has
established strategic partnering relationships with a number of major PCI server
and   workstation   manufacturers   including  Sun   Microsystems   and  Digital
Equipment/Compaq,  as  well  as  several  of  the  leading  CompactPCI  platform
manufacturers.  In addition,  the Company has a line of specialized  stand-alone
communication server platforms.

                                       8
<PAGE>

For the past  eighteen  months,  the  Company  has been  developing  its  second
generation  family of high performance  100Mbit/Gigabit  Network Switch products
for the Local Area Network  market.  At the end of June,  the Company  completed
production  releases of its new  Nebula(TM)  4000  Workgroup  Switch and its new
Nebula  6000  High  Density  switch.  The  Nebula  4000 is ideal  for  demanding
workgroup applications such as imaging, CAD/CAM and multimedia development.  The
Nebula 6000 is the highest density  department switch on the market and has been
specifically  designed for  Internet/Intranet  applications  where  installation
space is a premium  and  overall  cost is a  critical  component  in the  buying
decision.  The Company's new Fault  Tolerant  Switch,  Nebula 8000, is the first
100/1000  Ethernet switch to offer true fault tolerance at an affordable  price.
The Nebula 8000 has been  engineered  for maximum  availability  and is targeted
toward the financial  community and those commercial,  industrial and government
operations  that must have  their  networks  available  on a 7  days-a-week,  24
hours-a-day basis. This model was demonstrated at  Networld+Interop98 in May, is
currently  in Beta  Testing and is expected to start  generating  revenue in the
fourth quarter of this year. This new Nebula Family of network switches features
Pulsar(TM),  PTI's  innovative new ASIC  technology as well as  StarGazerII(TM),
PTI's platform  independent  Web-based network management system. The Company is
pursuing a patent on certain aspects of the Nebula 8000 fault tolerant design.

            Quarter and Six Months Ended June 30, 1998, compared with
                 the Quarter and Six Months Ended June 30, 1997

Sales. Sales for the second quarter 1998 were $6,051,000, compared to $7,539,000
for the  second  quarter  1997.  The  decrease  in second  quarter  revenue  was
attributable to a delay in receiving a significant  follow-on  contract with the
Department of Defense  discussed below.  Sales for the six months ended June 30,
1998 were $13,462,000, a decrease of $1,511,000,  from $14,973,000 for the first
six months of 1997.  The  Company's  products are grouped into five  categories:
Data Communications  products,  LAN Interface Adapter products,  Network Systems
products,   Mass  Storage  Interface  products  and  Inter-system   Connectivity
products.

Shipments of Data Communications products for WAN applications were 60% of sales
during  the second  quarter  1998,  compared  to 43% for  second  quarter  1997.
Shipments were 62% of sales for the first six months of 1998, compared to 46% of
sales for the comparable 1997 period. Sales of WAN products increased 20% during
the first six months of 1998 over the respective 1997 period  primarily  because
during the past  fifteen  months,  the Company has  introduced  numerous new WAN
products for the PCI and CompactPCI markets.

Shipments of LAN Adapter products for the second quarter 1998 amounted to 12% of
sales as compared to 23% for the second  quarter 1997, and were 11% of sales for
the six months  ended June 30,  1998,  compared  to 18% for the first six months
1997.  The largest share of the  Company's  LAN business is in  connection  with
Commercial  Off-the-Shelf  (COTS)  Defense  applications.  The  decrease  of LAN
adapter  revenue  during the first half of 1998 was  attributable  to a delay in
receiving a significant  follow-on contract with the Department of Defense.  The
Company has been a supplier on this  program  since 1994 and the second phase of
this project is in the process of being  re-awarded.  The contract was scheduled
for award in February 1998 and then in June 1998. While management believes that
the Company will be awarded this follow-on  contract,  there  continues to be no
specific information available on the timetable for this award;  therefore,  the
Company's estimated revenue for the third quarter does not include shipments for
this contract.

Shipments  of Network  Systems  products  represented  4% of total  sales in the
second quarter 1998 and 8% for the same period in 1997.  Network  shipments were
6% of total sales for the six months ended June 30, 1998, compared to 12% during
the same period in 1997. Network Systems are primarily comprised of shipments of
I/O  subsystems  to a major OEM  customer  and sales of  protocol  software  for
specialty WAN applications.  The decrease in revenue during the first and second
quarters  in  this  product   group,   from  the  previous  year,  is  primarily
attributable to significantly lower shipments to the OEM customer. This customer
appears  to  be   experiencing  a  slowdown  in  orders  for  the  product  that
incorporates the Company's I/O subsystem.  Shipments to this customer of the I/O
subsystem  amounted  to  approximately  $100,000  during the first half of 1998,
compared to $870,000  during the first half of 1997. This customer has placed an
order for shipment in the fourth  quarter but no meaningful  revenue is expected
prior to that  time.  Revenue  from the sales of  protocol  software  is project
oriented and is not expected to grow appreciably  because the engineering  staff
for these products has been  reassigned to develop  software  protocols for Data
Communications solutions and products.

                                       9
<PAGE>

Shipments of Mass  Storage  Interface  products  for the second  quarter of 1998
amounted to 13% of sales, compared to 17% in the second quarter of 1997. For the
six months ended June 30, 1998,  Mass Storage  products were 12% of total sales,
compared to 16% for the same 1997 period. Revenue for the second quarter 1998 is
consistent  with the amount of revenue for the first  quarter.  The  decrease in
sales volume from 1997 is believed to be primarily  attributable  to  technology
changes occurring in this market. These changes include customers  transitioning
from SBus to PCIbus  applications  and from the slower  SCSI  adapters to faster
Fibre  Channel  adapters.  The Company has been  transitioning  its products and
customers into these new technologies, however, the decline in the SBus business
has been greater than the  increase in the PCI  business.  Both the PCI SCSI and
Fibre Channel markets are very competitive.

Shipments of Inter-system Connectivity products represented 11% of sales for the
second  quarter  1998 and 9% of sales for the six months  ended  June 30,  1998,
compared to 9% for the second  quarter 1997 and 7% for the six months ended June
30, 1997.  The Company is not  investing in this group of products and a decline
in revenue for the year is expected.

International sales amounted to 15% of sales in the first half of 1998, compared
to 10% of sales for all of 1997.  International  markets represent a significant
untapped  opportunity  for the  Company.  During  the second  quarter,  a senior
management  position,  based in Europe, was created to direct market development
of  PTI's  complete  line  of  communications  and  network  switching  products
throughout that region of the world.

Gross Profit. Gross profit for the second quarter 1998 was $3,569,000, or 59% of
sales,  compared to  $4,514,000,  or 60% of sales for the second  quarter  1997.
Gross profit for the first half of 1998 was  $8,117,000,  or 60.3% of sales from
$8,616,000, or 57.5% of sales for the same period in 1997. The slight decline in
gross margin for the second quarter 1998 is primarily  attributable to the lower
sales volume during the quarter.  The increase in gross margin for the first six
months of 1998 over the  comparable  1997 period is  primarily  attributable  to
management's  focus  on  reducing  its  material  costs  and  on  improving  its
manufacturing efficiencies during the past eighteen months.

Operating Expenses. Total operating expenses were $2,548,000,  or 42.1% of sales
for the second quarter 1998,  compared to $2,814,000,  or 37.3% of sales for the
second quarter 1997. Total operating expenses were $5,190,000, or 38.6% of sales
for the first half of 1998,  compared to  $5,354,000,  or 35.8% of sales for the
six months ended June 30, 1997.

Selling and marketing expenses were $1,041,000, or 17.2% of sales for the second
quarter 1998, compared to $1,102,000,  or 14.6% of sales for the same quarter in
1997. Selling and marketing  expenses amounted to $1,934,000,  or 14.4% of sales
for the six months  ended June 30,  1998,  compared to  $2,010,000,  or 13.4% of
sales for the same  period  in 1997.  Selling  and  marketing  expenses  for the
remainder of 1998 are expected to continue at the same percentage of sales in an
effort to promote the new products being introduced during the later half of the
year,  particularly the Nebula Network Switch Family. During the second quarter,
the   Company   demonstrated   its  Nebula   Family  of  network   switches   at
Networld+Interop98  in Las  Vegas  and  the  Company's  new  Data  Communication
products and strategies at SuperComm '98 in Atlanta.

Research  and  development  expenses  were  $907,000,  or 15.0% of sales for the
second quarter 1998, compared to $972,000,  or 12.9% of sales for the comparable
quarter of 1997. Research and development expenses were $1,970,000,  or 14.6% of
sales for the six months ended June 30, 1998,  compared to $1,915,000,  or 12.8%
of sales for the six months  ended June 30,  1997.  The increase of research and
development expenses during the first half of 1998 is primarily  attributable to
the  development of the new Nebula product line  introduced in June.  Management
expects  research and development to continue to increase during the second half
of  1998  as the  Company  continues  to  make  significant  investments  in the
development of new products.

General and  administrative  expenses  were  $600,000,  or 9.9% of sales for the
second  quarter  1998,  compared  to  $740,000,  or 9.8% of sales for the second
quarter 1997.  General and administrative  expenses were $1,286,000,  or 9.6% of
sales for the six months ended June 30, 1998, compared to $1,429,000, or 9.5% of
sales for the first half of 1997. General and  administrative  expenses declined
in the second quarter primarily because of the reduced accrual for the corporate
bonus program which is based on profitability.

                                       10
<PAGE>

Income Taxes.  The provision for income taxes was $463,000 in the second quarter
1998, compared to $737,000 for the same quarter in 1997. The effective corporate
income tax rate for the second  quarter 1998 was 35.0%,  compared to 38% for the
second  quarter 1997.  For the six months ended June 30, 1998, the provision for
income taxes  amounted to  $1,261,000,  compared to $1,417,000 for the first six
months of 1997. The effective  corporate income tax rate was 35.6%,  compared to
38.0% for the first six months of 1997.





Liquidity and Capital Resources

At June 30, 1998, the Company's  primary  source of liquidity  included cash and
cash equivalents of $13,503,000,  marketable  securities with a maturity of less
than one year of  $10,002,000  and available  borrowings  of $3,000,000  under a
revolving  credit facility with a bank. No amounts were  outstanding  under this
credit  facility  as of June 30,  1998.  The  Company  had  working  capital  of
$28,625,000 at June 30, 1998,  compared to $26,584,000 at December 31, 1997, and
$23,223,000 at June 30, 1997.

Cash provided by operating activities for the six months ended June 30, 1998 was
$3,300,000  compared to $2,080,000  for the same period in 1997. The increase in
cash provided by operating  activities for the six months ended June 30, 1998 is
primarily attributable to changes in the components of working capital.

Capitalization  of certain software  development  costs amounted to $403,000 for
the six months ended June 30, 1998,  compared to $400,000 for the same period in
1997.

Many companies are facing a potential issue regarding the ability of information
systems to  accommodate  the coming year 2000.  The Company  has  evaluated  its
information  systems and believes that an appropriate plan is in place to ensure
that all  critical  systems  can,  or will be able to,  accommodate  the  coming
century without  material adverse effect on the Company's  financial  condition,
results of  operations,  capital  spending or  competitive  position.  Such plan
consists of obtaining  upgrades of its  information  systems from the  Company's
software  vendor to be year 2000  compatible.  The current  products sold by the
Company do not require any  programming  date  changes to function as  intended,
however,  the new switching  products do require date sensitive  programming and
are being developed to be year 2000 compatible.

Assuming there is no significant  change in the Company's  business,  management
believes  that its current cash and  marketable  securities  together  with cash
generated  from  operations  and available  borrowings  under the Company's loan
agreement will be sufficient to meet the Company's anticipated needs,  including
working  capital and  capital  expenditure  requirements,  for at least the next
twelve months. However, it is the Company's intention to continue aggressive new
product  introductions  throughout  1998 for a variety of markets  served by the
Company.  Management  has also  initiated  a  strategic  acquisition  program to
further  accelerate  new product and market  penetration  efforts.  This program
could have an impact on the Company's working capital requirements, liquidity or
capital resources.


                                       11
<PAGE>



             Performance Technologies, Incorporated and Subsidiaries

Part II. Other Information


Item 2.           Changes in Securities and Use of Proceeds

The following table  summarizes the proceeds from the sale of securities and use
of  proceeds  therefrom  in  connection  with the  Registrant's  Initial  Public
Offering on January 24,  1996.  Amounts  reported  represent  an estimate of the
amount of these expenditures.
<TABLE> 
<CAPTION>

Proceeds from the sale of securities:
<S>                                                              <C>

Gross proceeds                                                   $ 12,800,000
Less:    Underwriter's commission                                     896,000
         Finder's fees                                                      0
         Underwriter's expenses                                        27,000
         Payments to Directors, Officers, General Partners                  0
         Other                                                        461,000
                                                                 ------------
Net proceeds                                                     $ 11,416,000
                                                                 ============

Use of Proceeds:

Construction of facilities                                       $          0
Purchase of machinery                                               1,733,000
Purchase of real estate                                                     0
Acquisition of other business(es)                                           0
Repayment of debt                                                           0
General working capital purposes                                            0
Temporary investments                                                 931,000
Inventory for new products                                          1,265,000
Software development                                                1,487,000
Product development                                                 6,000,000
                                                                 ------------
Total use of proceeds                                            $ 11,416,000
                                                                 ============
</TABLE>


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

The 1998 Annual Meeting of Stockholders  was held on June 3, 1998. The Directors
elected at the meeting were as follows:

                                                       Votes Cast
                           Nominees                 For           Abstain
                           -----------------------------------------------------
                           John E. Mooney         5,375,572        6,880
                           John M. Slusser        5,372,777        9,675


The stockholders voted to approve an amendment to the Performance  Technologies,
Incorporated  Stock  Option  Plan to  provide  that  formula  options to Outside
Participating  Directors  shall be granted on the date of the Annual Meeting and
shall  vest  and  become  fully  exercisable  one year  from the date of  grant.
5,299,580  shares of common stock voted in favor of the proposal,  54,222 shares
of common stock voted  against the  proposal,  and 28,650 shares of common stock
abstained.

The stockholders also voted to ratify the appointment of Price Waterhouse LLP as
independent accountants for 1998. 5,371,832 shares of common stock were voted in
favor of the proposal,  7,870 shares of common stock voted against the proposal,
and 2,750 shares of common stock abstained.

                                       12
<PAGE>


Item 6.           Exhibits and Reports on Form 8-K

                  A.       Exhibits

                           None.

                  B.       Reports on Form 8-K

                           There were no  reports  on Form 8-K filed  during the
                           three month period ended June 30, 1998.





                                       13
<PAGE>


                                   SIGNATURES




Pursuant  to the  requirements  of the  Securities  Exchange  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



August 11, 1998                                   By: s/ Donald L. Turrell
                                               ------------------------
                                                      Donald L. Turrell
                                                       President and
                                                  Chief Executive Officer




August 11, 1998                                   By: s/ Dorrance W. Lamb
                                               -----------------------
                                                      Dorrance W. Lamb
                                                Chief Financial Officer and
                                                  Vice President, Finance



                                       14
<PAGE>