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                                  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 September 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)

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

       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
7,265,920 as of October 13, 1998.


--------------------------------------------------------------------------------
                           Cover Page of 15 Pages 


                                       1
<PAGE>

             Performance Technologies, Incorporated and Subsidiaries

                                      Index


                                                                           Page

Part I.           Financial Information

Item 1.           Consolidated Financial Statements

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

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

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

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

          Notes to Consolidated Financial Statements For The Nine
          Months Ended September 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                        14

Item 6.   Exhibits and Reports on Form 8-K                                 14

Signatures                                                                 15





                                       2
<PAGE>



             PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                     ASSETS

                                                    September 30,   December 31,
                                                        1998            1997    
                                                    ------------    ------------
                                                     (unaudited)
<S>                                                 <C>             <C>         
Current assets:
  Cash and cash equivalents                         $ 19,108,000    $  8,833,000
  Marketable securities                                6,000,000      12,010,000
  Accounts receivable, net                             4,806,000       4,956,000
  Inventories, net - Note C                            3,890,000       3,329,000
  Prepaid expenses and other                             365,000         346,000
  Deferred taxes                                         466,000         466,000
                                                    ------------    ------------
    Total current assets                              34,635,000      29,940,000

Equipment and improvements, net                          898,000         982,000
Software development, net                                902,000         579,000
Other assets                                                             125,000
                                                    ------------    ------------
    Total assets                                    $ 36,435,000    $ 31,626,000
                                                    ============    ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Current portion of long term debt                 $     12,000    $     12,000
  Accounts payable                                     1,672,000         824,000
  Income taxes payable                                   675,000         255,000
  Accrued expenses                                     2,378,000       2,265,000
                                                    ------------    ------------
    Total current liabilities                          4,737,000       3,356,000

Long term debt, less current portion                       9,000          18,000
Deferred taxes                                           220,000         220,000
                                                    ------------    ------------
    Total liabilities                                  4,966,000       3,594,000
                                                    ------------    ------------

Stockholders' equity
  Preferred stock
  Common stock - Note B                                   75,000          74,000
  Additional paid-in capital - Note B                 13,148,000      13,055,000
  Retained earnings                                   18,871,000      15,061,000
  Treasury stock - Note B                               (625,000)       (158,000)
                                                    ------------    ------------
    Total stockholders' equity                        31,469,000      28,032,000
                                                    ------------    ------------
    Total liabilities and stockholders' equity      $ 36,435,000    $ 31,626,000
                                                    ============    ============
</TABLE>




                                       3
<PAGE>



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


<TABLE>
<CAPTION>
                                                         Three Months Ended    
                                                            September 30,      
                                                         1998           1997   
                                                     -----------    -----------
<S>                                                  <C>            <C>        
Sales                                                $ 7,857,000    $ 7,606,000
Cost of goods sold                                     2,947,000      3,263,000
                                                     -----------    -----------
Gross profit                                           4,910,000      4,343,000
                                                     -----------    -----------


Operating expenses:
  Selling and marketing                                1,088,000      1,004,000
  Research and development                             1,240,000        791,000
  General and administrative                             565,000        552,000
                                                     -----------    -----------
    Total operating expenses                           2,893,000      2,347,000
                                                     -----------    -----------
Income from operations                                 2,017,000      1,996,000

Other income, net                                        337,000        266,000
                                                     -----------    -----------
Income before income taxes                             2,354,000      2,262,000

Provision for income taxes                               824,000        860,000
                                                     -----------    -----------
    Net income                                       $ 1,530,000    $ 1,402,000
                                                     ===========    ===========



Per share of common stock - Note D

Basic earnings per share                             $       .21    $       .19
                                                     ===========    ===========

Diluted earnings per share                           $       .20    $       .18
                                                     ===========    ===========
</TABLE>






                                       4
<PAGE>


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


<TABLE>
<CAPTION>
                                                          Nine Months Ended
                                                            September 30,
                                                         1998           1997   
                                                     -----------    -----------
<S>                                                  <C>            <C>        
Sales                                                $21,319,000    $22,579,000
Cost of goods sold                                     8,292,000      9,620,000
                                                     -----------    -----------
Gross profit                                          13,027,000     12,959,000
                                                     -----------    -----------


Operating expenses:
  Selling and marketing                                3,022,000      3,015,000
  Research and development                             3,210,000      2,705,000
  General and administrative                           1,851,000      1,980,000
                                                     -----------    -----------
    Total operating expenses                           8,083,000      7,700,000
                                                     -----------    -----------
Income from operations                                 4,944,000      5,259,000

Other income, net                                        951,000        733,000
                                                     -----------    -----------
Income before income taxes                             5,895,000      5,992,000

Provision for income taxes                             2,085,000      2,278,000
                                                     -----------    -----------
    Net income                                       $ 3,810,000    $ 3,714,000
                                                     ===========    ===========



Per share of common stock - Note D

Basic earnings per share                             $       .52    $       .51
                                                     ===========    ===========

Diluted earnings per share                           $       .50    $       .50
                                                     ===========    ===========
</TABLE>












                                       5
<PAGE>



           PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
                                   (Unaudited)


<TABLE>
<CAPTION>
                                                        Nine Months Ended
                                                           September 30,
                                                       1998            1997    
                                                   ------------    ------------
<S>                                                <C>             <C>         
Cash flows from operating activities

  Net income                                       $  3,810,000    $  3,714,000

Non-cash adjustments:
  Depreciation and amortization                         646,000       1,119,000
  Other                                                  18,000         168,000
Changes in operating assets and liabilities:
  Accounts receivable                                   135,000      (1,628,000)
  Inventories                                          (561,000)        409,000
  Prepaid expenses and other                            (17,000)       (251,000)
  Accounts payable                                      848,000         220,000
  Accrued expenses                                      113,000          19,000
  Income taxes payable                                  420,000         304,000
                                                   ------------    ------------

    Net cash provided by operating activities         5,412,000       4,074,000
                                                   ------------    ------------

Cash flows from investing activities
  Cash purchases of equipment and improvements, net    (274,000)       (456,000)
  Capitalized software development                     (491,000)       (537,000)
  Purchase of marketable securities                  (6,000,000)     (6,512,000)
  Maturities of marketable securities                12,010,000
                                                   ------------    ------------
    Net cash provided (used)
    by investing activities                           5,245,000      (7,505,000)
                                                   ------------    ------------

Cash flows from financing activities
  Repayment of notes payable                             (9,000)         (8,000)
  Proceeds from issuance of common stock                 71,000          65,000
  Purchase of treasury stock                           (444,000)
  Payments on capital lease obligations                                 (15,000)
                                                   ------------    ------------
    Net cash (used) provided
    by financing activities                            (382,000)         42,000
                                                   ------------    ------------
    Net increase (decrease) in
    cash and cash equivalents                        10,275,000      (3,389,000)

Cash and cash equivalents at beginning of period      8,833,000      10,027,000
                                                   ------------    ------------

Cash and cash equivalents at end of period         $ 19,108,000    $  6,638,000
                                                   ============    ============
</TABLE>









                                       6
<PAGE>
             Performance Technologies, Incorporated and Subsidiaries
                   Notes to Consolidated Financial Statements
                  For The Nine Months Ended September 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 7,265,920 and 7,267,450  shares issued and outstanding  (net
of  treasury  shares  held)  at  September  30,  1998  and  December  31,  1997,
respectively,  of the  Company's  $.01 par value Common  Stock.  During the nine
months ended  September  30,  1998,  46,350  common  shares were issued upon the
exercise of stock options and 47,880 were added to the number of treasury shares
held.

Note - C  Inventories  consisted  of the  following  at  September  30, 1998 and
          December 31, 1997:
<TABLE><CAPTION>
                                                 September 30,    December 31,
                                                     1998            1997    
                                                  -----------     -----------
<S>                                               <C>             <C>        
     Purchased parts and components               $ 1,570,000     $   954,000
     Work in process                                2,880,000       2,580,000
     Finished goods                                   173,000         333,000
                                                  -----------     -----------
                                                    4,623,000       3,867,000
     Less:  reserve for inventory obsolescence       (733,000)       (538,000)
                                                  -----------     -----------
       Net                                        $ 3,890,000     $ 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 nine months ending September
30, 1998 and 1997:
<TABLE><CAPTION>
                                                       Three Months Ended      
                                                         September 30,         
                                                     1998              1997    
                                                  -----------     -----------
<S>                                               <C>             <C>        
Basic earnings per share
Net income available to common stockholders       $ 1,530,000     $ 1,402,000
                                                  ===========     ===========
Weighted average common shares                      7,287,000       7,238,000
                                                  ===========     ===========
Basic earnings per share                          $       .21     $       .19
                                                  ===========     ===========
Diluted earnings per share
Net income available to common stockholders       $ 1,530,000     $ 1,402,000
                                                  ===========     ===========
Weighted average common and common
  equivalent shares                                 7,499,000       7,626,000
                                                  ===========     ===========
Diluted earnings per share                        $       .20     $       .18
                                                  ===========     ===========

                                                        Nine Months Ended    
                                                          September 30,      
                                                      1998            1997   
                                                  -----------     -----------
Basic earnings per share
Net income available to common stockholders       $ 3,810,000     $ 3,714,000
                                                  ===========     ===========
Weighted average common shares                      7,285,000       7,221,000
                                                  ===========     ===========
Basic earnings per share                          $       .52     $       .51
                                                  ===========     ===========
Diluted earnings per share
Net income available to common stockholders       $ 3,810,000     $ 3,714,000
                                                  ===========     ===========
Weighted average common and common
  equivalent shares                                 7,589,000       7,468,000
                                                  ===========     ===========
Diluted earnings per share                        $       .50     $       .50
                                                  ===========     ===========
</TABLE>
                                       7
<PAGE>


             Performance Technologies, Incorporated and Subsidiaries

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

Overview

The  Company  produced  record  quarterly  revenue  and net income for the third
quarter September 30, 1998. Revenue increased by 30% and net income increased by
78% from the prior quarter. Profitability improved during the third quarter 1998
despite a significant  increase in research and  development  expenses.  For the
first nine months of 1998, the Company's net income as a percentage of sales was
18%,  increasing  from 16% for the comparable  1997 period.  For the nine months
ending September 30, 1998, the Company generated cash from operating  activities
of $5.4  million,  compared  to $4.1  million  for the same  period in 1997.  At
September 30, 1998, the Company had  approximately  $25.1 million in cash,  cash
equivalents, and marketable securities and no significant debt.

Late in the third  quarter the Company  received  the order,  the delay of which
caused a severe  financial  impact on the  Company's  second  quarter  financial
results.  This initial order,  amounting to $1.8 million,  was received from the
prime  contractor on a new seven year  contract  with the  Department of Defense
(DOD).  Under  this  contract,   the  Company  will  provide  products  used  in
retrofitting and updating the military's fault-tolerant communications systems.

During the third quarter of 1998,  the Company  signed an agreement  with Compaq
and began  shipping  T1/E1 WAN  communication  products for  integration  into a
variety of embedded  applications  being supplied to the telecom industry.  This
agreement  could result in Compaq  becoming one of the Company's major customers
in 1998 and beyond.

Management  believes  that the  Company's  key areas for growth 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 server,
workstation   and   telecommunications   equipment   suppliers   including   Sun
Microsystems, Compaq/Digital Equipment and NewNet/ADC, as well as several of the
leading CompactPCI platform  manufacturers.  In addition, the Company has a line
of specialized stand-alone communication server platforms for this market.

For the past  twenty-one  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 port 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.  The Nebula 8000 model is the  centerpiece  of the Company's
network  switch  strategy.  Its release has been delayed  until  January 1999 in
order to  strengthen  and  solidify  a number  of the  fault  tolerant  features
stressed  at certain  Beta  sites.  This new Nebula  Family of network  switches
features   Pulsar(TM),   PTI's   innovative  new  ASIC  technology  as  well  as



                                       8
<PAGE>


StarGazerII(TM), PTI's platform independent Web-based network management system.
The  Company  has filed for a patent  on  certain  aspects  of the  Nebula  8000
fault-tolerant design.


         Quarter and Nine Months Ended September 30, 1998, compared with
              the Quarter and Nine Months Ended September 30, 1997

Sales. Sales for the third quarter of 1998 increased to $7,857,000, (3.3%), from
$7,606,000  for the  third  quarter  of 1997.  Sales for the nine  months  ended
September 30, 1998 were $21,319,000,  compared to $22,579,000 for the comparable
1997  period.  The  Company's  products are grouped  into five  categories:  WAN
Interface  Adapter products,  LAN Interface  Adapter  products,  Network Systems
products,   Mass  Storage  Interface  products  and  Inter-system   Connectivity
products.

Shipments of WAN Adapter  products were 53% of sales during the third quarter of
1998, compared to 47% for the same quarter in 1997.  Shipments were 58% of sales
for the first nine months of 1998,  compared to 47% of sales for the same period
in 1997. Sales of WAN products  increased by 11% in the third quarter,  over the
previous 1998 quarter. Shipments of PCI Wan adapter products are accelerating.

Shipments of LAN Adapter  products for the third quarter of 1998 amounted to 32%
of sales, compared to 15% of sales for the third quarter of 1997. Shipments were
19% of sales for the first  nine  months of 1998,  compared  to 17% for the same
period in 1997. The largest share of the Company's LAN business has historically
been generated from Commercial  Off-the-Shelf  (COTS) Defense  applications.  As
indicated  herein,  the Company  received the initial  order for a follow-on DOD
contract in September.  Approximately  $800,000 of  communication  products were
shipped on this contract in the third  quarter with the remainder  scheduled for
shipment in the fourth quarter.

Shipments of Network Systems products represented 3% of total sales in the third
quarter of 1998 and 11% for the same quarter in 1997.  Network Systems shipments
were 5% of sales for the nine months ended  September 30, 1998,  compared to 11%
for the same 1997 period.  Network Systems are primarily  comprised of shipments
of I/O  subsystems  to an OEM  customer and sales of  specialized  communication
server  hardware  and protocol  software for  specialty  WAN  applications.  The
decrease in quarterly  revenue in this product group from the previous  year, is
primarily  attributable  to  significantly  lower shipments to the OEM customer.
Shipments to this customer  amounted to approximately  $100,000 during the first
nine months of 1998,  compared to $1.6  million  during the first nine months of
1997.  This  customer has placed an order for shipment in the fourth  quarter of
approximately   $500,000  and  no  other  significant  shipments  are  currently
scheduled.  Revenue  from the sales of  specialized  communication  servers  and
associated  protocol  software is project oriented and has declined this year as
the engineering staff for these products has been reassigned to develop software
protocols for Data Communications  solutions and products within the WAN product
group.

Shipments  of Mass  Storage  Interface  products  for the third  quarter of 1998
amounted to 7% of sales,  compared to 14% in the third quarter of 1997.  For the
nine months ended  September 30, 1998,  Mass Storage  products were 10% of total
sales  compared to 16% for the same 1997  period.  The  decrease in sales volume
from 1997 is primarily  attributable  to  technology  changes  occurring in this
market and sales of these  products are forecasted to decline in 1999. The first
component of this revenue group is SCSI adapters. The decline in this revenue is
due to customers transitioning from SBus to PCIbus based computer platforms. The
PCI market has become a commodity  market  with  greater  competition  and lower
pricing. The Company is experiencing difficulty in achieving value-added margins
in the PCI market.  The second  component of this revenue group is Fibre Channel
adapters. This has become very competitive and the standards for the fundamental
Fibre   Channel   technology   are  still  being   developed   for  wide  spread
implementation.

Shipments of Inter-system  Connectivity products represented 5% of sales for the
third quarter of 1998 and 8% of total sales for the nine months ended  September
30, 1998, compared to 13% and 9%, respectively for the 1997 periods. The Company
is not  investing in this group of products  and a decline in these  revenues is
expected from last year's levels.


                                       9
<PAGE>


International  sales amounted to 21% of total sales for the first nine months of
1998,  compared  to 10% of sales for the same period in 1997.  This  increase is
primarily  attributable  to the  Company's  new  relationship  with an  offshore
operating unit of Compaq, along with a number of new European customers.

Gross Profit.  Gross profit consists of sales, less cost of goods sold including
materials costs, manufacturing expenses and amortization of software development
costs. Gross margin improved to 62.5% of sales for the third quarter, from 57.1%
in the third  quarter of 1997.  For the first nine months of 1998,  gross margin
improved to 61.1% of sales as compared to 57.4% for the same period in 1997. The
improvement  in gross  margin is  primarily  attributable  to the mix of product
shipments,  and achieving  manufacturing and purchasing  efficiencies during the
past twelve months.

Operating Expenses.  Total operating expenses increased to $2,893,000,  or 36.8%
of sales for the third quarter 1998, from $2,347,000,  or 30.9% of sales for the
comparable 1997 quarter.  Total operating expenses  increased to $8,083,000,  or
37.9% of sales for the first nine months of 1998, from  $7,700,000,  or 34.1% of
sales for the nine months ended September 30, 1997.

Selling and marketing  expenses  increased to $1,088,000,  or 13.8% of sales for
the third quarter 1998, from $1,004,000,  or 13.2% of sales for the same quarter
in 1997.  Selling and marketing expenses for the nine months ended September 30,
1998 were  $3,022,000,  or 14.2% of sales,  compared to $3,015,000,  or 13.4% of
sales,  for the same period in 1997. The  acceleration  in selling and marketing
expense expected during the third quarter of 1998 was delayed for  approximately
ninety days in order to be coordinated  with the  availability of the new Nebula
8000 fault-tolerant  switch.  During the third quarter, the Company demonstrated
its Nebula Family of network switch  products at VarVision which was attended by
over 200 Value Added Resellers (VARs) and numerous network vendors. VarVision is
a highly focused program  primarily  designed to bring together VARs and network
vendors.  Unlike an industry trade show, which is predominately  for vendors and
end-users,  VarVision is  exclusively  designed for  establishing  sales channel
relationships.  This was the first time the Company participated in this program
and it was uniquely more  effective for  presenting  the Nebula Switch Family to
pre-qualified  VARs.  In  addition,  our Nebula 8000  fault-tolerant  switch was
recognized as one of the top five new products at this prestigious event.

Research and  development  expenses were  $1,240,000,  or 15.8% of sales for the
third  quarter  of 1998,  compared  to  $791,000,  or  10.4%  of  sales  for the
comparable 1997 quarter.  Research and development expenses were $3,210,000,  or
15.1% of sales  for the nine  months  ended  September  30,  1998,  compared  to
$2,705,000, or 12.0% of sales for the same period in 1997. Recruiting and hiring
engineers  is one of the  Company's  greatest  challenges.  While  a  number  of
engineers  have been  hired  during  the past  year,  the  Company  is  actively
recruiting to fill several open  positions and has engaged  outside  engineering
consultants  to assist in meeting  certain  project  deadlines.  The increase of
research and development  expenses for the third quarter and for the nine months
ending  September  30,  1998  is  attributable  to  the  additional   number  of
engineering positions added and the use of outside engineering consultants.

General and  administrative  expenses  were  $565,000,  or 7.2% of sales for the
third quarter 1998, compared to $552,000, or 7.3% of sales for the third quarter
1997. General and administrative expenses were $1,851,000,  or 8.7% of sales for
the nine months ended  September 30, 1998,  compared to  $1,980,000,  or 8.8% of
sales for the first nine months of 1997. The Company continues to maintain tight
control over its general and administrative expenses.

Income  taxes.  The provision for income taxes was $824,000 in the third quarter
of 1998,  compared  to  $860,000  for the same  quarter in 1997.  The  effective
corporate  income tax rate for the third quarter of 1998 was 35.0%,  compared to
38.0% for the third  quarter of 1997.  For the nine months ended  September  30,
1998,  the  provision  for income  taxes  amounted  to  $2,085,000,  compared to
$2,278,000 for the first nine months of 1998. The effective corporate income tax
rate during 1998 has been 35.4%,  compared to 38.0% for the first nine months of
1997.


                                       10
<PAGE>


LIQUIDITY AND CAPITAL RESOURCES

At September 30, 1998, the Company's  primary source of liquidity  included cash
and cash  equivalents of $19,108,000,  marketable  securities with a maturity of
less than one year of $6,000,000 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 September  30, 1998.  The Company had working  capital of
$29,898,000 at September 30, 1998, compared to $26,584,000 at December 31, 1997.

Cash provided by operating  activities  for the nine months ended  September 30,
1998 was  $5,412,000,  compared to $4,074,000  for the same period in 1997.  The
increase in cash  provided by  operating  activities  for the nine months  ended
September  30, 1998 is primarily  attributable  to changes in the  components of
working capital.

Capitalization  of certain software  development  costs amounted to $491,000 for
the nine months  ended  September  30,  1998,  compared to $537,000 for the same
period in 1997.

In March 1998,  the Board of Directors  authorized  the repurchase of up to $5.0
million of the Company's Common Stock. As of September 30, 1998, the Company has
repurchased  a total of 46,680  shares  at a total  cost of  $444,000  since the
program began.

Assuming there is no significant  change in the Company's  business,  management
believes that its current cash,  cash  equivalents,  and  marketable  securities
together with cash generated from operations and available  borrowings under the
Company's loan  agreement  will be sufficient to meet the Company's  anticipated
needs,  including working capital and capital expenditure  requirements,  for at
least the next twelve months. However, it is the Company's intention to continue
aggressive new product introductions throughout 1998 and beyond 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.



Impact of the Year 2000 Issue

Many companies are facing a potential issue regarding the ability of information
systems to  accommodate  the coming year 2000. The Year 2000 issue is the result
of computer  programs  using only the last two digits to indicate  the year.  If
uncorrected, such computer programs will be unable to interpret dates beyond the
year 1999,  which could cause computer  system failure or other computer  errors
disrupting  operations.  The Company  recognizes the importance of the Year 2000
issue and has been giving it high priority. The Company created a corporate-wide
Year 2000  project team and the team's  objective is to ensure an  uninterrupted
transition  into the Year  2000.  The  scope of the Year 2000  readiness  effort
includes (i) information  technology ("IT") such as software and hardware;  (ii)
non-IT systems or embedded technology; and (iii) readiness of key third parties,
including  suppliers and customers,  and the electronic data  interchange  (EDI)
with those key third parties.  If needed  modifications  and conversions are not
made on a timely basis, the Year 2000 issue could have a material adverse effect
on the Company operations.

The Company is in the process of completing  phase 1 of its  readiness  plan for
its IT systems and non-IT systems. This phase consists of evaluating its systems
and  equipment  based on the  current  status and normal  scheduled  upgrade and
replacement of such system  components.  Phase II, planned during fourth quarter
1998 and the first  half of 1999,  will  consist of testing IT system and non-IT
system components whose Year 2000 status cannot be determined by research. Phase
III,  planned  during the third  quarter  1999,  will consist of upgrade  and/or
replacement of IT system and non-IT system components  specifically required for
Year 2000  readiness.  Phase IV, planned during the fourth quarter of 1999, will
consist  of  developing   contingency  plans  for  temporary   operation  should
unexpected difficulties with IT systems and non-IT system occur.

In addition  to internal  Year 2000 IT and non-IT  remediation  activities,  the
Company is in the process of contacting  key suppliers and  electronic  commerce
customers to assure no interruption in the relationship  between the Company and
these  important third parties from the year 2000 issue. If third parties do not
convert their  systems in a timely  manner and in a way that is compatible  with


                                       11
<PAGE>


the Company's systems,  the Year 2000 issue could have a material adverse effect
on Company  operations.  The Company believes that its diligent actions with key
suppliers and customers will minimize these risks.

The vast majority of the Company's products are not date-sensitive.  The Company
is  in  the  process  of  summarizing  information  on  its  products  and  this
information will be available to customers by the end of November 1998.

While the  Company  expects its  internal IT and non-IT  systems to be Year 2000
compliant  by the dates  specified  within its  internal  plan,  the  Company is
working on a  contingency  plan  specifying  what the  Company  will do if it or
important third parties are not Year 2000 compliant by the required  dates.  The
Company  expects to have such a  contingency  plan  finalized  by second half of
1999.

Through  September  1998, the Company has not incurred  significant  incremental
costs related to the Year 2000 issue.  The total projected  incremental  cost is
estimated to be $150,000. The Company is expensing as incurred all costs related
to the  assessment  and  remediation of the Year 2000 issue unless the nature of
the item is an upgrade or  replacement of a system with a useful life that meets
the capitalization  policy of the Company.  These costs are being funded through
operating cash flows.  The Company's total cost for the Year 2000 issue includes
estimated costs and time associated  with  interfacing  with third parties' Year
2000 issues. These estimates are based on currently available information.

The  Company's  current  estimates of the amount of time and costs  necessary to
remediate and test its computer systems are based on the facts and circumstances
existing  at this time.  The  estimates  were made using  assumptions  of future
events  including the continued  availability  of certain  resources,  Year 2000
modification  plans,  implementation  success  by key  third-parties,  and other
factors. New developments may occur that could affect the Company's estimates of
the  amount of time and costs  necessary  to modify  and test its IT and  non-IT
systems  for Year  2000  compliance.  These  developments  include,  but are not
limited to: (i) the  availability  and cost of  personnel  trained in this area;
(ii) the  ability  to  locate  and  correct  all  relevant  computer  codes  and
equipment,  and (iii) the  planning  and Year 2000  compliance  success that key
customers and suppliers attain.

Year 2000  compliance is an issue for virtually all  businesses,  whose computer
systems and applications may require significant  hardware and software upgrades
or modifications. Companies owning and operating such systems may plan to devote
a  substantial  portion  of their  information  systems'  spending  to fund such
upgrades and  modifications.  It is the Company's  intention to fulfill its plan
and  become  Year  2000  compliant;  however,   uncertainties  exist  about  the
thoroughness  of how other  companies,  vendors,  customers  and  other  service
providers,  that the  Company  does  business  with will be  successful  at also
becoming Year 2000 compliant.  These other  companies,  regardless of the dollar
volume transacted with the Company,  may significantly affect either directly or
indirectly the operations of the Company.  Where  practicable,  the Company will
attempt to mitigate  its risks with  respect to the failure of  suppliers  to be
Year 2000  compliant.  In the event that suppliers are not Year 2000  compliant,
the Company will seek alternative  sources of supplies.  However,  such failures
remain a possibility  and could have an adverse impact on the Company's  results
of operations or financial condition.














                                       12
<PAGE>


Forward-Looking Statements AND RISK FACTORS

The Private  Securities  Litigation  Reform Act of 1995 provides a "safe harbor"
for  certain  forward-looking  statements.  This  Quarterly  Report on Form 10-Q
contains forward-looking  statements,  which reflect the Company's current views
with respect to future events and financial  performance,  within the meaning of
Section 27A of the  Securities  Act of 1933, as amended,  and Section 21E of the
Securities Act of 1934, as amended, and is subject to the safe harbor provisions
of those Sections.

These forward-looking statements are subject to certain risks and uncertainties,
including  those  identified  below,  which could cause actual results to differ
materially from historical results or those  anticipated.  The words "believes,"
"anticipates,"  "plans," "may," "intend,"  "estimate," "will," should," "could,"
and other  expressions  which  indicate  future  events and trends also identify
forward-looking  statements.  However,  the  absence of such words does not mean
that a statement is not forward-looking.

The  Company's  future  operating  results  are  subject  to  various  risks and
uncertainties  and 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.  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 and June 30, 1998
as  reported  in its Form  10-Q,  as  filed  with the  Securities  and  Exchange
Commission.







                                       13
<PAGE>


             Performance Technologies, Incorporated and Subsidiaries

                           Part II. Other Information


<TABLE><CAPTION>

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.
<S>                                                              <C>         
Proceeds from the sale of securities:
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                                               1,862,000
Purchase of real estate                                                     0
Acquisition of other business(es)                                           0
Repayment of debt                                                           0
General working capital purposes                                            0
Temporary investments                                                 114,000
Inventory for new products                                          1,265,000
Software development                                                1,575,000
Product development                                                 6,600,000
                                                                 ------------
Total use of proceeds                                            $ 11,416,000
                                                                 ============
</TABLE>





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 September 30, 1998.







                                       14
<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





November 2, 1998                                    By: s/ Donald L. Turrell    
                                                       -------------------------
                                                           Donald L. Turrell    
                                                             President and      
                                                        Chief Executive Officer 




November 2, 1998                                    By: s/ Dorrance W. Lamb     
                                                       -------------------------
                                                           Dorrance W. Lamb     
                                                     Chief Financial Officer and
                                                       Vice President, Finance  




                                       15
<PAGE>