PERFORMANCE TECHNOLOGIES INC \DE\ - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
For the Fiscal Year Ended December 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from to
Commission File Number 0-27460

PERFORMANCE TECHNOLOGIES, INCORPORATED
(Exact name of registrant as specified in its charter)
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Delaware 16-1158413
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)

205 Indigo Creek Drive, Rochester, New York 14626
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (585) 256-0200
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Securities registered pursuant to section 12(b) of the Act:
NONE
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Securities registered pursuant to section 12(g) of the Act:
COMMON STOCK, par value $.01 per share
(Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ].

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

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

The aggregate market value of the voting stock held by non-affiliates of the
registrant as of the close of business on June 30, 2003 was approximately
$70,134,000.

The number of shares outstanding of the registrant's Common Stock, $.01 par
value, was approximately 12,714,625 as of March 22, 2004.

Documents Incorporated by Reference
The information called for by Items 10-14 of Part III is incorporated by
reference to the definitive Proxy Statement for the Annual Meeting of
Stockholders of the Company to be held June 3, 2004, which will be filed with
the Securities and Exchange Commission not later than 120 days after December
31, 2003.
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Performance Technologies, Incorporated
Index to Annual Report on Form 10-K

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

PART II
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ITEM 5 Market for the Registrant's Common Equity and 14
Related Stockholder Matters
ITEM 6 Selected Financial Data 15
ITEM 7 Management's Discussion and Analysis of Financial 15
Condition and Results of Operations
ITEM 7A Quantitative and Qualitative Disclosures About Market Risk 25
ITEM 8 Financial Statements and Supplementary Data 25
ITEM 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 41
ITEM 9A Controls and Procedures 41

PART III
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ITEM 10 Directors and Executive Officers of the Registrant 41
ITEM 11 Executive Compensation 41
ITEM 12 Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters 41
ITEM 13 Certain Relationships and Related Transactions 42
ITEM 14 Principal Accountant Fees and Services
42

PART IV
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ITEM 15 Exhibits, Financial Statement Schedule and Reports on
Form 8-K
42

ITEM 1 - Business

Overview

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

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

The Company's annual operating performance is subject to various risks and
uncertainties. The following discussion should be read in conjunction with the
Consolidated Financial Statements and related notes, included elsewhere herein,
as well as the section appearing in ITEM 1 of this Form 10-K under the heading
"Risk Factors." The Company's future operating results may be affected by
various trends and factors which are beyond the Company's control. These
include, among other factors, general business and economic conditions, rapid
technological changes accompanied by frequent new product introductions,
competitive pressures, dependence on key customers, the attainment of design
wins, fluctuations in quarterly and annual results, the reliance on a limited
number of third party suppliers, limitations of the Company's manufacturing
arrangements, the protection of the Company's proprietary technology, the
dependence on key personnel, potential delays associated with the purchase
and implementation of an enterprise wide software system, and potential
impairments related to investments. In addition, during weak economic periods,
customers' visibility deteriorates causing delays in the placement of their
orders. These factors often result in a substantial portion of the Company's
revenue being derived from orders placed within a quarter and shipped in the
final month of the same quarter.

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

Important Year 2003 Milestones

2003 was an important transitional year for the Company. While a challenging
business environment existed as the year began, there was evidence that the
economic deterioration in the Company's target markets that occurred during 2001
and 2002 was subsiding. More importantly, as a result of a pivotal acquisition
in the latter part of 2002, the Company was able to reposition its product
offering and substantially improve its market position. While many of the
Company's customers and peers experienced little growth during 2003, the Company
was able to nearly double its year-over-year revenue and increase its earnings
ninefold.

During the economic downturn in 2001 and 2002, most equipment manufacturers in
the Company's target markets implemented cost controls, reduced workforces and
realigned their business models. This restructuring dramatically reduced the
product design capabilities of many of these companies. This is expected to
result in a greater reliance on organizations such as Performance Technologies
for "standards-based" platforms as a foundation for their next-generation
products. It is also expected that outsourcing of equipment and services will
result in these organizations establishing strategic relationships with fewer
vendors who can supply larger portions of their embedded system platform
requirements.

As the Company entered 2003, it was clear that the Company's traditional
customers, the telecommunication equipment manufacturers, were continuing to
suffer from lethargic capital spending by carriers in North America and Europe.
It was also clear that many of the carriers' forward-looking initiatives related
to "next-generation" network deployment were stalled. However, as 2003
progressed there were market indications suggesting that demand for
next-generation network infrastructure might improve as carrier capital spending
rebounded. In addition, other end markets for embedded systems were also
experiencing low activity levels as 2003 began. However, as the year progressed
and the Company's newly expanded platform capability gained traction, a variety
of embedded market segments demonstrated discernable signs of improvement.

2001 and 2002 were also difficult years for many of the Company's peers who sell
products into the embedded systems marketplace. They also experienced
significant revenue declines and operating losses and were involved with
restructuring and consolidation while attempting to recover profitability.

With less focused competitors and greater customer demands for higher level,
integrated platform products, 2003 became an opportune time to establish the
Company's position as a broad-base, integrated platform supplier.

To take advantage of this environment, management targeted a number of programs
in 2003 to reposition the Company to be a stronger platform supplier when
business conditions improve. These initiatives included:

1) Target the Company's Products to a Wider Set of Embedded System Applications:
During the year, a number of actions were initiated to expand our core
communications product features which are expected to broaden the customer base
in a variety of promising market segments outside of a narrow traditional
telecommunications focus.

2) Continue Aggressive Use of the Company's Balance Sheet Strength for
Acquisitions and Investments: Valuations of companies are currently depressed in
comparison to valuations before the economic downturn several years ago. This
window offers the Company an opportunity to acquire products, technologies and
organizations that were unavailable in the past. The Company exerted significant
effort during 2003 on two such acquisitions/investments that were completed in
early 2004. These were:

Mapletree Networks, Inc.(R) - Acquisition: In January 2004, the Company
completed the acquisition of substantially all of the assets of
Mapletree Networks. This acquisition was the culmination of substantial
efforts during the second half of 2003 to add a key strategic
technology to the Company's communications product portfolio. This
technology enables voice, data and fax processing using Digital Signal
Processing (DSP) technology. These new products, when integrated with
the Company's network access products and integrated platforms, will
enable the Company to compete more effectively in the re-emerging voice
over IP (VoIP) and wireless communication markets.

InSciTek Microsystems, Inc. - Investment: In mid-February 2004, the
Company entered into an agreement to invest up to $3.0 million in
InSciTek Microsystems, Inc. in the form of an interest bearing
convertible note that can be drawn upon in three stages. As with
Mapletree Networks, this reflected the Company's efforts in late 2003
to gain expertise in IP-based technology. If the Company makes all
three stages of the investment, it will have the option to acquire
InSciTek during a future period. InSciTek is focused on providing
easy-to-deploy, highly integrated IP-based communications server
appliances for small to mid-size businesses.

3) Continue Development of Innovative, Packet-based IP Technology for Use in
Embedded Systems: Despite the weak economic outlook at the beginning of 2003,
the Company increased spending on new product development during 2003 in order
to gain market share when the economy improves. Some of the new and innovative
products developed during 2003 include:

Advanced Managed Platform: In the fall of 2003, the Company introduced
the IPnexus(TM) Advanced Managed Platform which is the Company's latest
generation of fully-managed and redundant packet-based platforms for
communications and server blade applications. The Advanced Managed
Platform architecture offers distinct cost advantages which allow
developers of next-generation systems to reduce design complexity while
increasing overall system reliability and performance. From a market
perspective, the IPnexus Advanced Managed Platform line is a viable
alternative to proprietary platforms and directly addresses equipment
manufacturers' requirements for designing high availability into their
applications using a flexible and scalable architecture.

Gigabit Embedded Ethernet Switch: The Company continued to expand its
IPnexus switching product line to include an embedded Gigabit Ethernet
switch that offers network routing capabilities which is important to
enhanced speed and security in data networks. This product began
shipping the first quarter of 2003 and represents one of the fastest
growing products, from a revenue perspective, among the Company's
extensive line of switching products. Revenue from the Company's family
of embedded Ethernet switching products grew by more than 100% during
2003, from 2002.

Intelligent Shelf Manager: In the spring of 2003, the Company
introduced the Intelligent Shelf Manager. This product is a key element
of the Advanced Managed Platform and is an important requirement for
customers because it enables the management of components in a
functional embedded platform, including third-party supplied
components.

New Network Access Products: During 2003, the Company continued to
expand its family of network access products to include additional
contemporary components for the Advanced Managed Platform. New products
in this area also included an updated model for the Multi-Protocol
Server line that is now being deployed in Air Traffic Control Radar
Systems and Weather Prediction Imaging System applications.

Extend the Company's Significant Suite of Value-add Software:
Performance Technologies continued to expand its NexusWare(TM) software
capabilities in a variety of areas. Management believes that its
NexusWare software provides distinct user advantages unmatched by
competitive offerings and is an important enabler for our customers.
This software family is based on the popular and rapidly growing Linux
operating system.

New Single Board Computer Products: The Company continued to expand and
update its line of Intel-based, single board computers for embedded
applications. These new products are designed to stay current with the
advancing capability of microprocessor and memory technologies.

Signaling Product Extension: During the second half of 2003, the
Company saw an emergence of new opportunities in the signaling
marketplace as a number of telecommunication operators initiated modest
capital programs for next-generation equipment. During 2003, the
Company introduced the IPnexus Signaling Blade that provides OEMs with
all the functional capabilities needed to front-end applications
requiring access to the SS7 network. The IPnexus Signaling Blade
incorporates Performance Technologies' robust SS7 stack on top of the
Company's NexusWare software in order to provide customers with a
complete SS7 platform.

Industry Overview

As the sluggish economy continued into 2003, the Company's customers who are
embedded system suppliers continued to maintain tight cost controls, limit
engineering resources and realign their business models. These fiscal controls
appear to have created a more concentrated supplier landscape for 2004 that is
trimmer, but more highly focused on market opportunities. It was not just these
equipment manufacturers who made such adjustments. Across the technology sector,
many organizations downsized staffs and tightened cost controls. Many such
organizations are now looking to do more outsourcing of equipment and services
and are establishing more strategic relationships with fewer vendors.

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

Industry marketing research organizations, such as Dataquest and Venture
Development Corporation, are estimating the worldwide, embedded systems market
to be over $100 billion in size by 2007. Traditionally, the largest segment of
this market uses "proprietary," purpose-built embedded systems and products.
Embedded systems built on open standards comprise a smaller segment of this
market, which is estimated to grow to as large as $10 billion by 2007. While
proprietary systems are expected to continue to dominate this market in the
future, a growing share of embedded systems being implemented, especially in the
more limited market segments served by the Company, is expected to use open
standards-based products. The driving factors behind this changing paradigm are
twofold. First, systems are becoming increasingly more complex, requiring larger
investments and longer lead times to design. Second, as organizations have
downsized, they do not have the necessary staff to carry out extensive new
product development while successfully meeting the competitive pressures of
"time-to-market" found in most technology businesses. Due to these changes,
embedded equipment suppliers are increasing their reliance on companies such as
Performance Technologies to deliver major building blocks or complete platforms,
allowing the supplier to "layer on" their "value add" which can be software
and/or additional hardware elements directed at specific applications.

In addition, when organizations resized their engineering and development
resources, they also made similar staffing changes in purchasing, logistics and
supply groups. Due to these circumstances, many customers are now anxious to
limit their number of suppliers and form strategic relationships with
organizations that have broader capabilities.

Management believes that the added capability resulting from the acquisition in
2002 and integration of a portion of the Intel Communications Platform Group has
positioned the Company to service these evolving market needs and opportunities.
Furthermore, this acquisition more than doubled the Company's total available
market through the addition of key computing and platform products. The
Company's capability and market served was further expanded in early 2004 by the
acquisition of Mapletree Networks and its products that address voice-processing
applications. These additions to the Company's traditional product offerings
will further enhance the Company's ability to become a strategic partner for
higher level, integrated platform solutions to our customers.

During 2003, the Company continued its involvement in promoting and supplying
embedded platforms based on the contemporary use of Ethernet technology as an
integral element of the system design. This forward-looking approach to building
embedded systems was created by Performance Technologies' engineers and has
earned the Company a leading position in the industry as this innovative concept
reached standardization and became widely adopted as the next-generation
benchmark. This standard, known in the industry as the PICMG(R) 2.16
specification, applies the concepts developed for enterprise Ethernet
networks to embedded systems design. While the sluggish economy slowed the
deployment of equipment built to this standard, there is widespread adoption of
this concept and many embedded system suppliers have incorporated this standard
into their next-generation products. Central to this new system architecture is
the use of an embedded Ethernet switch and Ethernet technology for communication
between the blades in a system. As 2003 progressed, new design activity
demonstrably increased among our customers and many are using the
PICMG 2.16 concepts for their latest product efforts. This places the Company
in a favorable position to participate in these new design opportunities.

In support of this new system concept, the Company continued aggressive
development of its comprehensive line of embedded Ethernet switches.
Despite the sluggish economy, the Company's Ethernet switches have had
noteworthy adoption among major customers and showed 100% revenue growth in
2003, compared to 2002. Furthermore, of the Company's numerous design wins,
there were only selected customers at the end of 2003 who had actually
implemented full-scale production. It is management's belief that the Company is
in a leading market position with its embedded switching technology and that
this product family will not only provide noteworthy growth as a stand-alone
component but will also be a key element of our comprehensive solution set
in the Company's recently introduced Advanced Managed Platform.

On a broader but related market observation, management is optimistic that its
business will show improvement in 2004 based on the number of public
announcements from carriers concerning capital spending for next-generation
network infrastructure. These are the types of applications that many of the
Company's contemporary products are targeted to fulfill. As an example of this
renewed level of market activity, a recent report by Venture Development
Corporation projects sales of SS7 Gateways to reach $215 million by 2006 with an
annual growth rate of over 21%. While this report outlines a number of factors
for this growth, one important element noted was that "carriers are choosing a
gradual migration path from SS7 to voice over IP (VoIP) - to facilitate this
transition, they are looking to purchase devices capable of supporting both
traditional SS7 protocols and new VoIP-related protocols."

Also, telecommunications as a whole is continuing to demonstrate impressive
growth in the Asia-Pacific region. While telecommunications equipment
manufacturers and operators in the United States and Europe continue to report
only modest growth, Asian operators and equipment manufacturers, such as NTT,
Huawei, Samsung, LG and UT Starcom have shown continuing strength. According to
the International Telecommunication Union (ITU), the number of telephone
subscribers in the Asia-Pacific region in 2002 (both fixed and mobile) accounted
for 36 percent of the worldwide total. Ten years earlier, this region accounted
for less than 22 percent. This region has added more than one telephone user
every second for the last decade. Mobile phone growth in the Asia-Pacific region
is also continuing to grow and future networks in this region will no doubt be
IP-based because of its low price point and ease of implementation. Based on the
Company's IP network focus, this geographic area has great market opportunity,
compared to the telecommunications markets in North America and Europe which
are moving less rapidly.

Strategy

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

In late 2002, the Company acquired a portion of the Communications Platform
Group from Intel Corporation. At about the same time, the Company also invested
in Momentum Computers, a small organization supplying "non Intel-based" computer
products that can complement the Company's embedded platform products. Both
actions are intended to broaden the Company's product breadth.

Throughout 2003, a new product strategy was executed that management believes
will continue to drive the Company's future growth. This strategy repositioned
the Company to deliver fully managed, system-level platform solutions to the
embedded systems marketplace. An important milestone in this strategy was
achieved during 2003 with the release of the IPnexus Advanced Managed Platform
product line. This new line of platform solutions specifically addresses
equipment manufacturers' requirements for an increased level of system
integration and services from suppliers. The Company's new platform products
enable equipment manufacturers' downsized engineering staffs to improve
time-to-market for their new products. The Company's strategy addresses this
trend by enabling customers to replace proprietary or legacy platforms with the
latest generation of fully managed system functionality.

In early 2004, the Company completed the Mapletree Networks acquisition, adding
important voice processing technologies to its product family.

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

The Company's product strategy for 2004 is a continuation of the strategies
initiated in 2003. These efforts will be directed at effectively expanding the
Company's focus of supplying integrated embedded system platforms incorporating
multiple components and software from the Company.

The 2004 initiatives are expected to improve the Company's embedded platform
offerings, emphasizing ease of use for our customers and expanding the
geographic presence of our selling efforts.

Six specific Company initiatives have been identified for 2004:

Enhance the Embedded Platform Capability: During 2003, the Company
introduced the Advanced Managed Platform (AMP) product line. AMP is the
product cornerstone of our program to establish a strong market
position as a leading integrated platform supplier. In 2004, our
development efforts will extend the features and ease of use of this
offering. In addition, the Company will strengthen the internal
organization to support the customer expectations that are associated
with being a supplier of advanced embedded platforms.

Integrate the New Voice Technology Group's Products into the Product
Line: In early 2004, the Company acquired substantially all of the
assets of Mapletree Networks. This organization and its associated
products further expand our strategic initiative to supply a more
comprehensive platform solution to our customers by adding voice-
processing capability. This organization will operate as the Voice
Technology Group and will provide key elements to the Company's
embedded platform capability for VoIP and wireless applications.

Enhance the Significant Suite of Value-add Software: Performance
Technologies has a comprehensive software capability in a variety of
areas. One of management's objectives for 2004 is to continue to
enhance our NexusWare software to include additional features, support
a variety of new products and incorporate the Voice Technology Group
products. Management believes that the Company's software capability is
a key differentiator in its marketplace and is responsible for
providing value to our customers and enhancing product margins.

Expand the Direct Presence in the Asia Pacific Region: An intriguing
aspect of our Voice Technology Group (VTG) acquisition is their
customer base in the international markets, especially the Chinese
market. Since a number of geographic areas outside of North America
and Europe are experiencing rapid growth, the Company expects to focus
additional selling efforts and resources into these markets.
Building on the Chinese customer base of the recently acquired VTG and
an already established direct presence in Shanghai, it is expected that
additional sales resources will be added into this market during 2004.
While this initiative is longer term in its payback, the Company
believes there is a need to be in closer touch with these potential
customers to fulfill our growth objective in this area of the world.

Expand the Signaling Product Sales Efforts Directed at Carrier and
Telecom Operators: Much of Performance Technologies' business involves
the supply of integrated platforms and components to original equipment
manufacturers (OEMs). The Company's SEGway(TM) Signaling products are
sold to both telecom carriers and OEMs. Based on the improved capital
spending outlook in the telecom market, the Company expects to increase
its direct selling efforts to these customers in 2004.

Continuing Acquisition Activities: While it is the Company's intention
to continue the current levels of internal product development in all
areas of the business, the Board of Directors supports an aggressive
program to seek additional opportunities to accelerate growth through
external initiatives. These efforts continue to be targeted at adding
products to the Company's platform mix and addressing additional market
areas. The Company is also seeking opportunities to expand its
capabilities in the application software areas that would add more
value in addressing customer requirements. Management expects to use
the organization's balance sheet and other capital opportunities to
support these external growth efforts.

Certainly, there are identifiable risks associated with carrying out the
Company's expansive corporate and product strategies in the current uncertain
economic climate. Many of the Company's end markets are forecasted to show
limited growth in 2004. In order to realize growth in this environment, the
Company will have to gain market share from competitors. However, management
believes that based on its analysis of the marketplace and the Company's
strengthened and innovative product portfolio, the identified risks are
manageable. If successful, management believes these initiatives
will continue to reposition the organization as an important strategic partner
with many of its customers, thereby increasing their utilization of the
Company's broadened product capabilities. When the business cycle starts to show
improvement, it is further expected that these ongoing 2004 initiatives can
yield significant rewards through accelerated revenue and profitability growth.

To effectively implement the forward-looking strategy elements, management
expects to selectively add to investments in sales, while sustaining the
aggressive engineering development levels of 2003. Management expects to
continue to leverage additional top line growth with modest increases in expense
levels during the year. With an improving business environment and revenue
expansion, the Company should move toward higher levels of profitability.

Products

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

The Company markets its products under a variety of brand names including
IPnexus, Advanced Managed Platforms, Intelligent Shelf Manager, NexusWare and
SEGway Products. IPnexus, NexusWare, FlexNAT, Ziatech and SEGway are trademarks
of Performance Technologies, Inc.

The Company's IPnexus product line, based on open systems architectures,
consists of a wide range of embedded building blocks, which can be mixed and
matched to construct packet-based integrated platforms. Customers select the
appropriate platform, components and software to fit system and application
requirements with full confidence that all elements have been designed and
engineered to work together.

The IPnexus product family consists of:
o Advanced Managed Platforms - chassis, switches and system management
o Network access and communications products
o Embedded SS7 and SS7/IP
o Software and middleware

IPnexus Advanced Managed Platforms: In September 2003, the Company introduced
the IPnexus Advanced Managed Platform which is the Company's latest generation
of fully-managed and redundant packet-based platforms for communications and
server blade applications. This new platform line is based on an architecture
referred to as PICMG 2.16, an embedded technology developed by the Company and
offered as an industry standard. The Advanced Managed Platform architecture
offers distinct cost advantages while allowing developers of next-generation
systems to reduce design complexity with increased overall system reliability
and performance. From a market perspective, the IPnexus Advanced Managed
Platform line is a viable alternative to proprietary platforms and directly
addresses equipment manufacturer's requirements for designing high availability
into their applications using a flexible and scalable architecture. Management
believes that as the economy improves and capital spending rebounds, more
customers will move their new products to production using this architecture and
these products.

Key elements of the IPnexus Advanced Managed Platform products include:

Intelligent Shelf Management: This offers the ability to comprehensively manage
all the Company's IPnexus products, as well as third-party components
integrated into the platform.

Ethernet Switching: The Company's Ethernet switching products operate as the
"nexus" of the packet-based platform. As part of the Company's initiative in
creating the PICMG 2.16 standard, the Company undertook an aggressive
development program aimed at becoming the premier supplier of embedded Ethernet
switches. Today, the Company's IPnexus switching family is the broadest
switching product line in the embedded system marketplace.

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

IPnexus Single Board Computer Products: Single board computers continue to play
a significant role in embedded platforms. The Company continues to offer and
introduce new products based on the Intel processor architecture for systems
requiring control or applications processing.

IPnexus Network Access and Communications Products: The Company's IPnexus
network access and communications products are available in a number of formats
that operate in a broad range of data communications and telecommunications
applications. Performance Technologies' access products provide a connection
between a variety of voice, data and signaling networks and embedded systems
platforms that are used to control the network and/or process information being
transported over networks. The access product family includes stand-alone
communication servers and embedded access products that operate as part of
systems based on a variety of open standards.

IPnexus Software and Middleware: NexusWare, the core element of our entire
software offering, is the Company's key differentiating factor in the embedded
platform marketplace. NexusWare includes a comprehensive Linux-based development
environment that can be supplied either as part of the IPnexus Advanced Managed
Platform or with IPnexus component products. NexusWare is intended for system
engineers to facilitate rapid integration and development of packet-based
embedded systems while leveraging the robust and standardized software
foundation of Linux.

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

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

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

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

Performance Technologies offers a suite of signaling gateway solutions in
stand-alone or embedded platform models suitable for new or existing telephony
carriers or telephony equipment manufacturers. Powered by Performance
Technologies' carrier-grade SS7 and SS7/IP signaling software, SEGway products
are designed for easy installation and network management and are priced to
ensure carriers save money in meeting the demands of high-growth SS7 networks.

In May 2003, the Company introduced the IPnexus Signaling Blade that provides
OEMs with all the functional capabilities needed to front-end applications
requiring access to the SS7 network. The IPnexus Signaling Blade incorporates
Performance Technologies' robust SS7 stack on top of the Company's NexusWare
software to provide customers with a complete SS7 platform.

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

Sales, Marketing and Distribution

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

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

Currently, 32 sales, marketing and sales support personnel are located in the
Company's Rochester, New York; Old Saybrook, Connecticut; San Diego and San Luis
Obispo, California; Ottawa, Canada; Shanghai, China and Henley-on-Thames, United
Kingdom offices. In addition, independent sales representatives and agents cover
selected geographic areas nationally and internationally; and distributors or
integrators, handling selected products, supplement the Company's direct sales
team on a worldwide basis.

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

Sales to customers outside of North America represented 21%, 25% and 27% of the
Company's revenue in 2003, 2002 and 2001, respectively. The Company's products
are currently sold by the Company's direct sales force and by international
distributors throughout the more industrialized countries in Europe and in Asia.
International sales are subject to import and export controls, transportation
delays and interruptions, foreign currency exchange rates, and foreign
governmental regulations. Payments for shipments from the United States to
outside the United States are generally made in U.S. dollars and payments for
shipments from Canada to Canada are generally made in Canadian dollars.

Customers

The Company has more than 50 active customers worldwide, primarily in the
server, telecommunications and embedded systems markets. Many of the Company's
major customers are Fortune 500 companies in the United States or companies of
similar stature in Europe and Asia. In 2003, the Company's two largest
customers, Andrew Corporation and UT Starcom, represented 17% and 16% of
revenue, respectively. The Company's four largest customers (Andrew Corporation,
UT Starcom, Lucent Technologies and Sun Microsystems) represented 48% of the
Company's revenue.

At December 31, 2003, approximately 75% of the Company's customers are in the
telecommunications industry and the Company's products are generally integrated
into products for wireless and next-generation IP network infrastructure. These
products are targeted at customers in the following sectors: telecommunication
equipment manufacturers, server manufacturers, telecommunications service
providers and operators, international wireless carriers and platform
manufacturers. The Company's other customers represent a range of industries
utilizing open-architecture embedded systems.

Backlog

The scheduled backlog of orders amounted to $11.3 million and $8.4 million at
January 30, 2004 and January 31, 2003, respectively. Orders are subject to
postponement of delivery or cancellation in the normal course of business;
however, historically, the Company has filled most of its firm orders. A
substantial portion of the Company's revenue in each quarter results from orders
placed within the quarter and shipped in the final month of the quarter.
Unfortunately, forward-looking visibility on customer orders continues to be
very limited with almost no visibility beyond ninety days. (See Management's
Discussion & Analysis included elsewhere in this report).

Seasonality

The Company's business is not generally subject to large seasonal swings but is
frequently softer during the summer months due to the European vacation season.
Much of the Company's business is project-related, driven by customer demand,
which can cause quarterly fluctuations in revenue.

Environmental Matters

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

Competition

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

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

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

For the IPnexus Advanced Managed Platform, the Company faces a group of
competitors including Motorola Computer Group, Force Computers, Radisys
Corporation and SBS Technologies. Management believes that its continuing
emphasis on fully managed, system level platform solutions with a high level of
the Company's software content will be a key differentiating factor for winning
new accounts.

The Company's IPnexus Switching products operate in the CompactPCI systems
architecture referred to as the PICMG 2.16 standard. This architecture was
developed by the Company and adopted by the industry in the fall of 2001.
Initially, there were several small and large competitors offering one or two
different models of IP switches to the market. Today, some of these competitors
have withdrawn products from the market without introducing new products.
Management believes this has occurred because the technological requirements,
both hardware and software, were underestimated. Current competitors include
Zynx, a small private company that produces switching products and licenses its
switching technology to others; and Ramix, owned by GE Fanuc Embedded Systems.
The size of the Ethernet switching market is small compared to the enterprise
switch market, and larger companies in that market are not expected to enter
this segment due to the customization requirements and relatively low volumes,
as compared to the enterprise market.

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

For its SEGway Signaling Products, the Company generally focuses its engineering
on products that use Internet Protocol (IP) to carry signaling traffic. Since
this is a newer area in the signaling market, the Company believes it has an
advantage over competitors' products. Companies such as Ulticom, NMS
Communications and several larger companies that have proprietary SS7
technology, or products, could develop and sell products more directly
competitive with the Company's signaling products.

Research and Development

The Company's research and development expenses were approximately $9.5 million,
$6.9 million and $7.9 million for 2003, 2002 and 2001, respectively. These
expenses consist primarily of employee costs, material consumed in developing
and designing new products, and amounts expended for software license/tools. The
Company expects to continue to invest heavily in research and development in
order to create innovative new products for the embedded systems market.

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

Proprietary Technology

The Company's success depends upon retaining and maximizing the Company's
proprietary technologies. To date, the Company has relied principally upon
trademark, copyright and trade secret laws to protect its proprietary
technology. The Company generally enters into confidentiality or license
agreements with its customers, distributors and potential customers that contain
confidentiality provisions, and limits access to, and distribution of, the
source code to its software and other proprietary information. All of the
Company's employees are subject to the Company's employment policy regarding
confidentiality. The Company's software products are provided to customers under
license, generally in the form of object code, which to date has provided a
high degree of confidentiality with respect to the underlying intellectual
property.

Suppliers

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

Manufacturing

The Company maintains a state-of-the-art manufacturing facility in Rochester,
New York where it manufactures its network access, switching, signaling and a
number of its single board computing products. The Computing Products group
manufactures its chassis and a portion of its older single board computing
products under contract, and performs system level manufacturing and integration
in-house. As economically practical, management intends to continue
transitioning manufacturing of its single board computer products to its
Rochester manufacturing operation during 2004.

Rochester manufacturing operates under an integrated MRP system that assists in
managing inventory levels and facilitates demand forecast. Many of the Company's
products have high software content and are generally produced in low volumes.
By utilizing an in-house manufacturing capability, management believes that the
Company has achieved some safety from the risks inherent in utilizing contract
manufacturing. These risks typically include a contract manufacturer's inability
to meet flexible manufacturing requirements, inventory control and cost
containment. In addition, use of in-house manufacturing enables the Company to
maintain a high quality level for its products and greater responsiveness to
customer's delivery requirements. The Company has limited alternative
capabilities through third parties, however, to perform such manufacturing
activities. In the event of an interruption of production at its manufacturing
facility, the Company's ability to deliver products in a timely fashion would be
compromised, which would have a material adverse effect on the Company's results
of operations.

The Company intends to purchase, install and implement an enterprise-wide
software system by the end of 2004, which will include replacement of the
current MRP manufacturing systems in Rochester and San Luis Obispo. Delays in
the implementation of a system, interruption in business activities while
implementing a system, or actual costs higher than estimated, could adversely
impact our operating results.

Employees

As of December 31, 2003, the Company had 225 full-time employees, five part-time
and contract employees and two Engineering Cooperative student employees.
Management believes its relations with its employees are good. The Company's
employees are not subject to collective bargaining agreements.

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

Research and Development 99
Marketing and Sales 32
Manufacturing 71
General and Administrative 23

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

Risk Factors

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

The market for our products is characterized by rapid technological change and
frequent introduction of products based on new technologies. As new products are
introduced, the industry standards change. Additionally, the overall embedded
systems market, particularly the telecommunications industry, is volatile as the
effects of new technologies, new standards, new products and short life cycles
contribute to changes in the market and the performance of industry
participants. Our future revenue will depend upon our ability to anticipate
technological changes and to develop and introduce enhanced products on a timely
basis that comply with new industry standards. New product introductions, or the
delays thereof, could contribute to quarterly fluctuations in operating results
as orders for new products commence and orders for existing products decline.
Moreover, significant delays can occur between a product introduction and
commencement of volume production. The inability to develop and manufacture new
products in a timely manner, the existence of reliability, quality or
availability problems in our products or their component parts, or the failure
to achieve market acceptance for our products would have a material adverse
effect on our revenue and operating results. Further, in a poor economic climate
such as today, current technologies may become obsolete before being replaced by
new technologies.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Although we believe that our products do not infringe on the proprietary rights
of third parties, we cannot assure that infringement claims will not be
asserted, resulting in costly litigation in which we may not ultimately prevail.
Adverse determinations in such litigation could result in the loss of our
proprietary rights, subject us to significant liabilities, require us to seek
licenses from third parties or prevent us from manufacturing or selling our
products, any of which would have a material adverse effect on our revenue and
operating results.

Because of the existence of a large number of patents in the computer networking
industry and the rapid rate of new patents granted or new standards or new
technology developed, we may have to enter into technology licenses from others.
We do not know whether these third party technology licenses will be available
to us on commercially reasonable terms. The loss of, or inability to obtain, any
of these technology licenses could result in delays or reductions in our product
shipments. Any such delays or reductions in product shipments would have a
material adverse effect on our revenue and operating results.

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

Our success depends on the continued contributions of our personnel, many of
whom would be difficult to replace. Through mid-2001, competition for
engineering personnel in our marketplace was intense. Since mid-2001,
engineering personnel seem to be more readily available. Although our employees
are subject to our employment policy regarding confidentiality and ownership of
inventions, employees are generally not subject to employment agreements or
non-competition covenants. Changes in personnel could adversely affect our
operating results.

Delays in purchasing and implementing an enterprise-wide software system could
harm our operating results.

As a continuing effort to improve the flow of management information and control
of our operations, we intend to purchase, install, and implement an
enterprise-wide software system by the end of 2004. We are currently in the
process of evaluating our requirements and available enterprise-wide systems. We
are examining the hardware, software, consulting, and implementation costs of
available systems as well as the internal time and resources required for
implementation. Our current estimates of the time and costs necessary to
implement a system are based upon the facts and information available today. New
developments may occur that could affect our estimates of the amount of time and
the costs necessary to implement such a system. Significant delays in the
implementation of a system, interruption in business activities while
implementing a system, or actual costs higher than estimated, could adversely
impact our operating results.

We hold investments in certain companies. These investments or other future
investments are subject to potential impairment.

We hold investments in privately held companies. We may make additional
investments in the future in these or other companies. During 2003, we recorded
an impairment of one of our investments. Depending upon the future success of
these companies in meeting their operating goals, an impairment charge could be
recorded in the future. The occurence of a future impairment could adversely
affect our results.

Subsequent Events

On January 23, 2004, the Company acquired substantially all of the assets of
Mapletree Networks, Inc. (Mapletree), a company that provides voice-processing
technology to original equipment manufacturers. The Company paid $6.6 million,
including cash and the assumption of certain debt at closing and also agreed to
pay an additional $1.6 million if the operations of Mapletree (on a standalone
basis as operated by the Company) achieve certain milestones.

On February 18, 2004, the Company entered into an agreement to invest up to $3.0
million in InSciTek Microsystems, Inc. (InSciTek), an unrelated company, in the
form of an interest bearing convertible note. The Company invested $1.3 million
in conjunction with execution of the agreement. The balance of the investment
will be made in two stages during the next year based upon certain criteria.
If all stages of the remaining investment are made, the Company will have the
option to acquire ownership of InSciTek during a future specified period.

ITEM 2 - Properties

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

The Company's Computing Products group is located in 61,000 square feet of
office and manufacturing space leased in San Luis Obispo, California. This lease
expires in 2008. This facility includes sales and marketing personnel, and
engineering and manufacturing operations for the Computing Products group.
Approximately 14,000 square feet of this facility is currently sublet to a
tenant and there is sufficient room for the Computing Products group's
intermediate-term growth in this facility.

The Company's Signaling group has sales and marketing, and engineering staff
located in 13,000 square feet of office space leased in a building located in
downtown Ottawa, Canada. The office lease agreements in this building expire in
May 2005. The Company has the option to renew these leases for a future period
of one or two years. The Signaling group also leased 7,000 square feet of office
space in downtown Raleigh, North Carolina. The Company is attempting to sublet
this space, however; the commercial office space market in downtown Raleigh is
very weak. This office lease expires in February 2005.

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

ITEM 3 - Legal Proceedings

From time to time, the Company is involved in litigation relating to claims
arising out of its operations in the normal course of business. The Company is
not presently a party to any legal proceedings, the adverse outcome of which,
individually or in the aggregate, would have a material adverse effect on the
Company's results of operations, financial condition or cash flows. During
2003, the settlement agreement for the class action suit brought against the
Company in May 2000 was accepted by the Court and was paid by the Company.

ITEM 4 - Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders during the fourth
quarter 2003.

PART II

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

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

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

2002 High Low
-----------------------------------------------------------------------
First Quarter $13.57 $ 7.65
Second Quarter 8.60 6.25
Third Quarter 6.31 3.43
Fourth Quarter $ 4.74 $ 3.20

As of March 22, 2004, there were 182 stockholders of record of the Company's
common stock.

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

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

For the Years Ended December 31: 2003 2002 2001 2000 1999
- ----------------------------------------------- ----------- ----------- ----------- ----------- ------------
Sales $49,992 $27,014 $36,517 $38,963 $44,494
Net income 3,050 326 5,186 7,050 6,226
Basic earnings per share:
Net income $ .25 $ .03 $ .42 $ .54 $ .47
Weighted average common shares (1) 12,259 12,263 12,282 13,106 13,165
Diluted earnings per share:
Net income $ .24 $ .03 $ .41 $ .51 $ .45
Weight average common and
common equivalent shares (1) 12,692 12,373 12,708 13,769 13,789

Excluding non-recurring expenses (2) (3)
Net income $ 3,529 $ 1,186 $ 5,186 $ 7,050 $ 7,970
Basic earnings per share $ .29 $ .10 $ .42 $ .54 $ .61
Diluted earnings per share $ .28 $ .10 $ .41 $ .51 $ .58

At December 31: 2003 2002 2001 2000 1999
- ----------------------------------------------- ----------- ----------- ----------- ----------- ------------
Working capital $38,219 $32,130 $34,728 $36,975 $39,009
Total assets $51,660 $45,204 $42,954 $44,758 $49,142
Total stockholders' equity $43,952 $38,809 $38,342 $39,468 $40,828

(1) All per share amounts have been adjusted where appropriate, for the
three-for-two stock split effected in September 1999.

(2) In 2003, using an effective tax rate of 26%, amounts exclude non-recurring
expenses amounting to $.5 million, or $.04 per share. These non-recurring
expenses in 2003 include an incremental restructuring charge of $.1 million pre-
tax ($.01 per share) and a minority investment impairment charge of $.4 million
after-tax ($.03 per share). In 2002, using an effective tax rate of 31%, amounts
exclude non-recurring expenses amounting to $.9 million, or $.07 per share.
These non-recurring charges in 2002 include restructuring charges of $.6 million
pre-tax ($.03 per share), in-process research and development expense of $.4
million after-tax ($.03 per share), and class action settlement costs of $.1
million pre-tax ($.01 per share). In 1999, using an effective tax rate of 46%,
amounts exclude acquisition expenses amounting to $1.7 million, or $.13 per
share. Management believes that the Company's results excluding non-recurring
expenses is a better indicator of the operating results of the Company on a
comparative basis as these charges result from facts and circumstances that vary
in frequency and/or impact on continuing operations. All per share amounts
described within this paragraph are presented on a diluted basis.

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

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

The Company's annual operating performance is subject to various risks and
uncertainties. The following discussion should be read in conjunction with the
Consolidated Financial Statements and related notes, included elsewhere herein,
as well as the section appearing in ITEM 1 of this Form 10-K under the caption
"Business," for further information regarding "Risk Factors." The Company's
future operating results may be affected by various trends and factors, which
are beyond the Company's control. These include, among other factors, general
business and economic conditions, rapid technological changes accompanied by
frequent new product introductions, competitive pressures, dependence on key
customers, the attainment of design wins, fluctuations in quarterly and annual
results, the reliance on a limited number of third party suppliers, limitations
of the Company's manufacturing arrangements, the protection of the Company's
proprietary technology, the dependence on key personnel, potential delays
associated with the purchase and implementation of an enterprise-wide software
system and potential impairments of investments. In addition, during weak
economic periods, customer's visibility deteriorates causing delays in the
placement of orders. These factors often result in a substantial portion of the
Company's revenue being derived from orders placed within a quarter and
shipped in the final month of the same quarter.

Matters discussed in Management's Discussion and Analysis of Financial Condition
and Results of Operations and elsewhere in this Form 10-K include
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, and are subject to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. The Company's actual results could
differ materially from those discussed in the forward-looking statements.

Overview

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

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

Through its direct worldwide sales force, the Company markets its products under
a variety of brand names including IPnexus, Advanced Managed Platforms,
Intelligent Shelf Manager, NexusWare and SEGway Products.

The Company's IPnexus product line, based on open systems architectures,
consists of a wide range of embedded building blocks which can be mixed and
matched to construct packet-based integrated platforms. Customers select the
appropriate platform, components and software to fit system and application
requirements with full confidence that all elements have been designed and
engineered to work together. The Company's SEGway Signaling Gateways provide a
signaling bridge between traditional telephone networks and the growing IP
packet-switched network architectures of today. When used in conjunction with
softswitches, media gateways and application servers, signaling gateways can
provide the call control functionality or service processing capabilities of
traditional Public Switched Telephone Network switches. Please refer to PART 1,
ITEM 1, under the caption "Business," for further information regarding the
Company's "Products."

Historically, the Company's growth has been generated through a combination of
internal growth and acquisition of new products or complimentary technologies.
In October 2002, the Company acquired a portion of Intel Corporation's
Communications Platform Group. In January 2004, the Company acquired
substantially all of the assets of Mapletree Networks, Inc. The Company expects
that its future growth will continue to come from a combination of internal
growth and acquisitions.

Critical Accounting Estimates and Assumptions

In preparing the financial statements in accordance with GAAP, management is
required to make estimates and assumptions that have an impact on the assets,
liabilities, revenue and expense amounts reported. These estimates can also
affect supplemental information disclosures by the Company, including
information about contingencies, risk and financial condition. The Company
believes, given current facts and circumstances, its estimates and assumptions
are reasonable, adhere to GAAP, and are consistently applied. Inherent in the
nature of an estimate or assumption is the fact that actual results may differ
from estimates and estimates may vary as new facts and circumstances arise. The
critical accounting policies, judgments and estimates, that management believes
have the most significant effect on the financial statements are set forth
below:

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

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

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

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

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

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

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

Strategy

Throughout 2003, a new product strategy was executed that management believes
will continue to drive the Company's future growth. This strategy repositioned
the Company to deliver fully managed, system-level platform solutions to the
embedded systems marketplace. An important milestone in this strategy was
achieved during 2003 with the release of the IPnexus Advanced Managed Platform
product line. This new line of platform solutions specifically addresses
equipment manufacturers' requirements for an increased level of system
integration and services from suppliers. The Company's new platform products
enable equipment manufacturers' downsized engineering staffs to improve
time-to-market for their new products. The Company's strategy addresses this
trend by enabling customers to replace proprietary or legacy platforms with the
latest generation of fully managed platform functionality. Please refer to PART
1, ITEM 1, under the caption "Business," for further information regarding the
Company's "Strategy."

Key Performance Indicator

The Company's integrated platform and component products are incorporated into
current and next-generation embedded systems infrastructure. Traditionally,
"design wins" have been an important metric for management to judge the
Company's product acceptance in its marketplace. Design wins, if implemented,
reach production volumes at varying rates, generally beginning 12 to 18 months
after the design win occurs. A variety of risks such as schedule delays,
cancellations, changes in customer markets and economic conditions can adversely
affect a design win before production is reached, or during deployment.

During 2003, the Company was notified of 16 design wins by its customers. These
new design wins were for its integrated platform solutions (with multiple
products) (8), individual component design wins for IPnexus Switching (2),
IPnexus Access (2), Computing products (1) and SEGway Signaling products (3).
During 2002, the Company was informed of 24 new design wins. These design wins
were for its integrated platform solutions (with multiple products) (2),
individual component design wins for its IPnexus Switching (8), IPnexus Access
(12), and SEGway Signaling products (2). Not all design wins are expected to
result in production orders. The Company believes that the decrease in design
wins from 2002 to 2003 was a result of fewer firms doing new design activity.

Industry Overview

As the sluggish economy continued into 2003, the Company's customers who are
embedded system suppliers, continued to maintain tight cost controls, limit
engineering resources and realign their business models. These fiscal controls
appear to have created a more concentrated supplier landscape for 2004 that is
trimmer, but more highly focused on market opportunities. In addition, when
these organizations resized their engineering and product development resources,
they also made similar staffing changes in purchasing, logistics and supply
groups. Due to these circumstances, many customers are now anxious to limit
their number of suppliers and form strategic relationships with organizations
that have broader capabilities.

Management believes that the added capability resulting from the acquisition in
2002 and integration of the Intel Communications Platform Group has positioned
the Company to service these evolving market needs and opportunities.
Furthermore, this acquisition more than doubled the Company's total available
market through the addition of key computing and platform products. The
Company's capability and market served was further expanded in early 2004 by the
acquisition of Mapletree Networks, Inc. and its products that address voice-
processing applications. These additions to the Company's traditional product
offerings have enabled the Company to become a strategic partner for higher
level, integrated platform solutions for our customers. Please refer to PART 1,
ITEM 1, under the caption "Business," for a discussion of the industry, economic
environment and the Company's initiatives for 2004.

Financial

The Company acquired a portion of Intel Corporation's Communications Platform
Group (the Computing Products group) on October 2, 2002. Beginning in the fourth
quarter 2002, the Company's revenue and expenses reflect the operations of the
Computing Products group.

In 2003, the following non-recurring items affected the comparability of net
income between years:

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

In 2002, the following non-recurring items affected the comparability of income
between years:

o Restructuring charges ($.6 million pre-tax, or $.03 per diluted share);
o In-process research and development expense ($.4 million after-tax, or $.03
per diluted share); and
o Class action settlement costs ($.1 million pre-tax, or
$.01 per diluted share).

Management believes that the Company's results excluding non-recurring expenses
is a better indicator of the operating results of the Company on a comparative
basis as these charges result from facts and circumstances that vary in
frequency and/or impact on continuing operations.

Revenue for 2003 amounted to $50.0 million, compared to $27.0 million in 2002.
The increase in revenue of $23.0 million in 2003 is attributable to the
increased revenue contribution from the Computing Products group (acquired in
October 2002) of $13.3 million and an increase in sales benefiting from the
Company's new embedded solutions strategy, which began in early 2003. On an
annualized basis, revenue from the Computing Products group was lower in 2003
compared to 2002, due to a decrease in revenue from a single large customer in
late 2003.

Sales outside of North America amounted to $10.4 million and $6.9 million in
2003 and 2002, respectively.

On a GAAP earnings basis, net income in 2003 amounted to $3.0 million, or $.24
per diluted share including non-recurring expenses, based on 12.7 million shares
outstanding. Net income in 2002 amounted to $.3 million, or $.03 per diluted
share including non-recurring expenses, based on 12.4 million shares
outstanding.

On a non-GAAP earnings basis, net income for 2003 amounted to $3.5 million, or
$.28 per share excluding non-recurring charges, based on 12.7 million
shares outstanding. Using an effective income tax rate of 26%, non-recurring
expenses during 2003 amounted to $.5 million, or $.04 per share. These
non-recurring charges in 2003 include an incremental restructuring charge of $.1
million pre-tax ($.01 per share) and a minority investment impairment charge of
$.4 million after-tax ($.03 per share). Net income in 2002 amounted to $1.2
million, or $.10 per share excluding non-recurring expenses, based on
12.4 million shares outstanding. Using an effective income tax rate of 31%,
non-recurring expenses during 2002 amounted to $.9 million, or $.07 per share.
These non-recurring charges in 2002 include restructuring charges of $.6 million
pre-tax ($.03 per share), in-process research and development expense of $.4
million after-tax ($.03 per share), and class action settlement costs of $.1
million pre-tax ($.01 per share). Management believes that the Company's results
excluding non-recurring expenses is a better indicator of the operating results
of the Company on a comparative basis as these charges result from facts and
circumstances that vary in frequency and/or impact on continuing operations.
All per share amounts described within this paragraph are presented on a diluted
basis.

Cash, cash equivalents and marketable securities amounted to $29.6 million and
$24.1 million at December 31, 2003 and 2002, respectively, and no long-term debt
existed at either date.

During 2003 and 2002, the Company generated $5.6 million and $5.5 million from
operating activities, respectively. For 2003, the Company generated $7.5 million
in cash from all activities, compared to a usage of cash amounting to $4.8
million in 2002. Major items contributing to the increase in cash in 2003
included net income, non-cash charges related to depreciation and amortization,
an increase in inventory reserves, an increase in income taxes payable, the
maturity of certain investments, and cash received from the exercise of stock
options. Offsetting these increases were uses of cash related to increases in
inventory and accounts receivable, purchases of property and equipment, and
capitalized software development costs. The Company believes that the respective
changes in these items are primarily attributable to the increase in sales
volume and earnings that the Company experienced in 2003. Significant uses of
cash during 2002 included the acquisition of the Computing Products group of
$3.6 million and a minority interest investment and related note receivable
issuance, which together totaled $2.5 million.

The Company expended cash amounting to $.2 million and $.1 million to buy back
its shares in the open market during 2003 and 2002, respectively.

The Company holds a minority equity investment in a company that develops
specialized single board computer products. While results from that company's
operations improved, the company was still not profitable during 2003. Based
upon the Company's expectations of this company's performance at the time of the
investment and their current business prospects, the Company reduced its
investment from 47 percent to 30 percent and recorded an impairment
charge of $.4 million for this investment during the fourth quarter 2003.

On January 23, 2004, the Company acquired substantially all of the assets of
Mapletree Networks, Inc. (Mapletree), a company that provides voice, data and
fax access technology to original equipment manufacturers. The Company paid $6.6
million, including cash and the assumption of certain debt at closing and also
agreed to pay an additional $1.6 million if the operations of Mapletree (on a
stand-alone basis as operated by the Company) achieve certain milestones.

On February 18, 2004, the Company entered into an agreement to invest up to an
aggregate of $3.0 million in InSciTek Microsystems, Inc. (InSciTek), in the
form of an interest bearing convertible note. The Company invested $1.3 million
in conjunction with execution of the agreement. The balance of the investment
will be made in two stages during the next year based upon certain criteria.
If the Company makes the remaining investment, it will have the option to
acquire ownership of InSciTek during a future specified period.

Results of Operations

The following table sets forth, for the years indicated, certain consolidated
financial data expressed as a percentage of sales and is included as an aid to
understanding the Company's results and should be read in conjunction with the
selected financial data and Consolidated Financial Statements (including the
notes thereto) appearing elsewhere in this report. The table includes the
results of operations of the Computing Products group, since it was acquired on
October 2, 2002.

Year Ended December 31,
2003 2002 2001
----------- ---------- ----------
Sales 100.0% 100.0% 100.0%
Cost of goods sold 50.6 47.6 36.5
----------- ---------- ----------
Gross profit 49.4 52.4 63.5

Operating expenses:
Selling and marketing 11.8 16.2 15.2
Research and development 19.0 25.6 21.7
General and administrative 9.3 10.1 8.1
Restructuring charges .2 2.1
In-process research and development 1.4
Class action legal settlement .5
----------- ---------- ----------
Total operating expenses 40.3 55.9 45.0
----------- ---------- ----------
Income (loss) from operations 9.1 (3.5) 18.5

Other income, net 1.0 2.0 2.7
----------- ---------- ----------
Income (loss) before income taxes and
equity in loss of unconsolidated company 10.1 (1.5) 21.2

Income tax provision (benefit) 2.6 (3.0) 7.0
----------- ---------- ----------
Income before equity in loss of unconsolidated company 7.5 1.5 14.2

Equity in loss of unconsolidated company (.6) (.3)
Impairment of minority interest investment (.8)
----------- ---------- ----------

Net income 6.1% 1.2% 14.2%
=========== ========== ==========

Excluding non-recurring expenses (1) (2)

Income before income taxes and
equity in loss of unconsolidated company 10.4% 2.5% 21.2%

Income tax provision (benefit) 2.7 (2.2) 7.0
----------- ---------- ----------
Income before equity in loss of unconsolidated company 7.7 4.7 14.2

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

Net income, including non-recurring expenses 7.1% 4.4% 14.2%
=========== ========== ==========

(1) In 2003, using an effective tax rate of 26%, excludes non-recurring
expenses related to an incremental restructuring charge of $.1 million pre-tax,
or .2%, and the impairment of a minority interest investment of $.4 million
after-tax, or .8%, together which total $.5 million, or 1.0% of sales. In 2002,
using an effective tax rate of 31%, excludes non-recurring expenses related to
restructuring charges of $.6 million pre-tax, or 1.5% of sales, in-process
research and development costs of $.4 million after-tax, or 1.4% of sales, and
class action settlement costs of $.1 million pre-tax, or .3% of sales, together
which total $.9 million, or 3.2% of sales. Management believes that the
Company's results excluding non-recurring expenses is a better indicator of the
operating results of the Company on a comparative basis as these charges result
from facts and circumstances that vary in frequency and/or impact on continuing
operations.

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

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

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

2003 2002
------------------ -------------------

Signaling and network access products 52% 70%
Computing products 37% 18%
IPnexus switching products 10% 9%
Other products 1% 3%
------------------ -------------------
Total 100% 100%
================== ===================

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

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

IPnexus switching products: Revenue from switching products grew by 108% to $5.0
million in 2003, from $2.4 million in 2002. This growth reflects the rising
adaptation of the new embedded systems architecture, which requires use of
Ethernet switches and the Company's focus of providing a broad family of
products to meet this need. IPnexus switching product revenue is expected to
continue growing as more customers move their new products into production using
this architecture.

Other products: Revenue from other products amounted to $.6 million and $.8
million in 2003 and 2002, respectively. This revenue is related to legacy
products. Customer demand for these products continues to decline as customers
move to newer technology.

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

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

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

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

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

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

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

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

Other Income, net. Other income consists primarily of interest income. The
Company's funds are primarily invested in high quality municipal and U.S.
Treasury securities with maturities of less than one year. Interest rates
declined in 2003, compared to 2002, resulting in reduced interest income.
Offsetting this reduction was an increase in interest income from the note
receivable issued to an unconsolidated company in September 2002.

Income Taxes. The Company's income tax provision for 2003 totaled $1.3 million,
compared to an income tax benefit of $.8 million in 2002. The Company's
effective income tax rate is a combination of federal, state and foreign tax
rates and is generally lower than statutory rates because it includes benefits
derived from its international operations, research activities, tax-exempt
interest and foreign sales. For 2003, the Company's effective tax rate was 26%
and also included the favorable resolution of prior year tax uncertainties. For
2002, the Company's income tax was a tax benefit due the Company and included
the effect of in-process research and development expenses as well as the
favorable resolution of prior year tax uncertainties.

Equity in Loss of Unconsolidated Company. In September 2002, the Company
completed a minority interest investment in Momentum Computer, Inc. (Momentum),
a developer of specialized single board computer products located in Carlsbad,
California. During 2003, the Company recorded losses of $.3 million related to
its allocation of Momentum's net loss. During the fourth quarter 2003, the
Company reduced its investment in Momentum from 47 percent to 30 percent and
recorded an impairment of its investment due to Momentum's weaker than expected
financial results. The Company wrote this investment down by $.4 million, to $.4
million at December 31, 2003, the Company's estimate of the investment's fair
market value at that date. During 2002, a loss of $.1 million was recorded
reflecting the allocation of Momentum's net loss to the Company, based on the
Company's ownership percentage.

Year Ended December 31, 2002 compared with the Year Ended December 31, 2001

Sales. Total revenue for 2002 was $27.0 million, compared to $36.5 million for
2001. The acquired Computing Products group contributed $5.0 million to revenue
in 2002. For the years indicated, the Company's products are grouped into four
distinct categories in one market segment: Signaling and network access
products, Computing products, IPnexus switching products, and other products.
Revenue from each product category, expressed as a percentage of sales for 2002
and 2001, are as follows:

2002 2001
------------------ -------------------

Signaling and network access products 70% 87%
Computing products 18% 0%
IPnexus switching products 9% 5%
Other 3% 8%
------------------ -------------------
Total 100% 100%
================== ===================

Signaling and network access products: Revenue from this product category
amounted to $18.8 million and $31.8 million in 2002 and 2001, respectively. The
continuing decline in capital expenditure investments by customers in the
Company's target markets significantly reduced signaling and network access
product revenue in 2002.

Computing products: Revenue from this product category amounted to $5.0 million
in 2002. This product revenue was generated in the fourth quarter 2002 by the
acquired Computing Products group.

IPnexus switching products: Revenue from this category grew 44% to $2.4 million
in 2002, compared to $1.7 million for 2001. The Company's IPnexus switch product
family has been designed for the embedded systems market and is based on the
PICMG 2.16 systems architecture, which was ratified in September 2001.

Other products: Revenue from other products amounted to $.8 million and $3.0
million in 2002 and 2001, respectively. This revenue is related to legacy
products. Customer demand for these products declined significantly during
the twelve months of 2002 as customers moved to newer technology. Many of these
products are project oriented and shipments can fluctuate on a quarterly basis.

Gross Profit. Gross profit consists of sales, less cost of goods sold including
material costs, manufacturing expenses, amortization of software development
costs, expenses associated with engineering contracts and technical support
function expenses. Gross margin was 52.4% and 63.5% of sales in 2002 and 2001,
respectively. Fixed expenses such as certain manufacturing labor and overhead
costs, technical support costs, and amortization of capitalized software
development spread over lower sales volumes impacted gross margin as a
percentage of sales during 2002, compared to 2001. The decrease in gross margin
in 2002 is also attributable to the write off of certain software capitalization
projects of $.3 million, an increase in inventory obsolescence expense of $.3
million, and lower gross margins on the acquired Computing Products group.

Total Operating Expenses. Total operating expenses amounted to $15.1 million and
$16.4 million in 2002 and 2001, respectively, and include expenses associated
with the Computing Products group during the fourth quarter 2002. During January
and September 2002, the Company took actions to improve its cost structure by
more closely aligning expenses with current revenue levels. These expense
reductions amounted to $2.6 million annually and were attained by reducing
staffing levels by approximately 20% and by consolidating one remote office
location to more efficiently provide engineering and product support. Despite
these efforts, when total operating expenses are spread over lower sales
volumes, total operating expenses increased to 55.9% of sales in 2002, compared
to 45.0% in 2001.

Selling and marketing expenses amounted to $4.4 million and $5.5 million in 2002
and 2001, respectively. This decrease in expense is primarily the result of
lower personnel and commission expenses, and reductions in advertising, travel
and trade show participation. This decrease was partially offset by expenses
associated with the Computing Products group during the fourth quarter 2002.

Research and development expenses amounted to $6.9 million and $7.9 million in
2002 and 2001, respectively. This decrease in expense is primarily attributable
to lower engineering staff levels. This decrease was partially offset by
expenses associated with the Computing Products group during the fourth quarter
2002. Despite the net reduction in expense, management continued to commit
significant resources to the development of new products. In addition, the
Company capitalizes certain software development costs, which reduce the amount
of software development costs charged to operating expense. Amounts capitalized
were $1.2 million and $1.7 million for 2002 and 2001, respectively. Gross
expenditures for engineering and software development were $8.1 million and $9.6
million for 2002 and 2001, respectively.

General and administrative expenses amounted to $2.7 million and $2.9 million in
2002 and 2001, respectively. This decrease in expense is the result of tightened
control over general and administrative expenses and lower personnel related
expenses. This decrease was partially offset by expenses associated with the
Computing Products group during the fourth quarter 2002.

Restructuring charges amounted to $.6 million in 2002. These non-recurring
expenses were associated with actions the Company took to improve its cost
structure. They include severance related to staffing reductions and expenses
associated with closing the Raleigh, North Carolina engineering facility.

In-process research and development expenses were $.4 million in 2002. This is a
one-time charge for in-process research and development costs associated with
the Computing Products group acquisition that were expensed in accordance with
FASB Interpretation No. 4, "Applicability of SFAS No. 2 to Business Combinations
Accounted for by the Purchase Method." This charge relates to research and
development projects that had not reached technological feasibility and had no
alternative use.

Class action legal settlement charges were $.1 million in 2002. In September
2002, the Company signed a Memorandum of Understanding for settlement of the
class action litigation outstanding since May 2000.

Other Income, net. Other income consists primarily of interest income from
marketable securities and cash equivalents. The funds are primarily invested in
high quality municipal and U.S. Treasury securities with maturities of less than
one year. During 2002, interest rates declined reducing interest income by
$.4 million in 2002.

Income Taxes. The income tax benefit of $.8 million during 2002 reflects tax
credits due the Company relating to its international operations, as well as
benefits derived from its research activities, foreign sales, tax-exempt
interest, and the favorable resolution of prior year tax uncertainties. The
income tax provision for 2001 is based on the combined federal, state and
foreign effective tax rate of 33%.

Equity in Loss of Unconsolidated Company, net of tax. During 2002, a loss of $.1
million was recorded reflecting the allocation of an unconsolidated company's
net loss to the Company, based on the Company's ownership percentage.

Liquidity and Capital Resources

At December 31, 2003, the Company's primary source of liquidity included cash
and cash equivalents of $29.6 million. The Company had working capital of $38.2
million at December 31, 2003.

Cash provided by operating activities was $5.6 million for 2003. This amount
included net income of $3.0 million, non-cash charges related to depreciation
and amortization of $2.3 million and inventory reserves of $1.3 million. Cash
used in operations due to changes in operating assets and liabilities included
increases in inventory of $2.2 million and an increase in accounts receivable of
$1.3 million. Both of these increases relate to higher sales volumes in 2003.
Offsetting these uses of cash, income taxes payable increased by $1.3 million,
which is the result of the increase in the Company's taxable income in 2003.

Cash generated from investing activities during 2003 amounted to $.03 million.
During 2003, the Company's capital equipment purchases amounted to $.7 million.
The Company capitalizes certain software development costs. Amounts capitalized
and included within investing activities were $1.5 million in 2003. Maturities
of investments of $2.0 million occurred in 2003 which increased cash provided by
investing activities.

Cash provided by financing activities totaled $1.9 million for 2003. Funds
received from the exercise of stock options amounted to $2.1 million. As part of
a stock buy-back plan authorized by the Board of Directors which expired in
April 2003, the Company purchased shares of its stock in the open market
amounting to $.2 million in 2003.

Off Balance Sheet Arrangements

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

Contractual Obligations

The Company leases facilities under operating leases. Under the terms of the
facility lease in Rochester, New York, which expires in March 2012, the Company
agreed to pay an annual rental of $740,000 in the first full year, with
pre-established adjustments each year thereafter. Under the terms of the
facility lease in San Luis Obispo, California, which expires in December 2008,
the Company agreed to pay an annual rental of $422,000 with an annual adjustment
based on the Consumer Price Index. For both lease agreements, the Company is
also required to pay the pro rata share of the real property taxes and
assessments, expenses and other charges associated with these facilities. The
Company has leased facilities in its other operating locations in North America
that expire between 2003 through 2005. Subsequent to December 31, 2003, the
Company renewed the lease for its operation in Canada through May 2006. The
minimum lease payments associated with this renewal are included in the table
below.

The Company enters into purchase commitments during the normal course of its
operations. Certain of the purchase commitments of the Company are
non-cancellable. At December 31, 2003, the Company's purchase commitments expire
through December 31, 2004. Included in the table below is the total of
non-cancelable purchase commitments outstanding as of December 31, 2003.

Future minimum payments for all operating leases having a remaining term in
excess of one year and outstanding non-cancellable purchase commitments at
December 31, 2003 are as follows:

Operating Leases Purchase Commitments
---------------- --------------------
2004 $1,617,000 $2,490,000
2005 1,454,000
2006 1,348,000
2007 1,301,000
2008 1,316,000
Thereafter 2,526,000
-------------
Total $9,562,000
=============
The Company is not a party to any other significant contractual obligations.

Subsequent Events

In January 2004, the Company paid $6.6 million to acquire substantially all of
the assets of Mapletree Networks, Inc. and in February 2004, paid $1.3 million
related to a convertible note receivable by InSciTek Microsystems, Inc., in
favor of the Company.

Current Position

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 should be sufficient to meet the
Company's anticipated operating needs, including working capital and capital
expenditure requirements, for at least the next twelve months. However,
management is continuing its strategic acquisition program to further accelerate
its growth and market penetration efforts. These efforts could have an impact on
the Company's working capital, liquidity or capital resources and the Company
may raise additional capital to facilitate these efforts.

Recently Issued Accounting Pronouncements

FIN 45 - In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." Interpretation No. 45 required that at
the time a company issues a guarantee, the company must recognize an initial
liability for the fair value, or market value, of the obligations it assumes
under that guarantee. This interpretation is applicable on a prospective basis
to guarantees issued or modified after December 31, 2002. The Company does not
currently provide significant guarantees on a routine basis. The Company adopted
this interpretation and it did not have a material impact on the results of
operations or the financial position of the Company.

FIN 46 - In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities," an Interpretation of Accounting
Research Bulletin (ARB) No. 51, "Consolidated Financial Statements." FIN 46
addresses the consolidation by business enterprises of variable interest
entities (VIEs) either: (1) that do not have sufficient equity investment at
risk to permit the entity to finance its activities without additional
subordinated financial support, or (2) in which the equity investors lack an
essential characteristic of a controlling financial interest. In December 2003,
the FASB completed deliberations of proposed modifications to FIN 46 (Revised
Interpretations) resulting in multiple effective dates based on the nature and
creation date of the VIE. The Revised Interpretations must be applied to all
VIEs no later than the end of the first interim or annual reporting period
ending after March 15, 2004. However, prior to the required application of the
Revised Interpretations, its provisions must be adopted by the end of the first
interim or annual reporting period that ends after December 15, 2003 (for the
year ended December 31, 2003 for the Company) for VIEs considered to be special
purpose entities (SPEs). SPEs for this provision include any entity whose
activities are primarily related to securitizations or other forms of
asset-backed financings or single-lessee leasing arrangements. The Company is
currently evaluating the effect that the adoption of FIN 46 for non-SPE VIEs
created prior to February 1, 2003 will have on its financial position, results
of operations and cash flows.

ITEM 7A - Quantitative and Qualitative Disclosures About Market Risk

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

ITEM 8 - Financial Statements and Supplementary Data

Index to Financial Statements: Page
----

Report of Independent Auditors 26
Consolidated Balance Sheets at December 31, 2003 and 2002 27
Consolidated Statements of Income for the Years Ended December 31,
2003, 2002 and 2001 28
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended December 31, 2003, 2002 and 2001 29
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2003, 2002 and 2001 30
Notes to Consolidated Financial Statements 31

Index to Financial Statement Schedules:

Schedule II - Valuation and qualifying accounts
Allowance for doubtful accounts 43
Reserve for inventory obsolescence 43

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

Report of Independent Auditors

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

In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Performance Technologies, Incorporated and its subsidiaries at December 31, 2003
and 2002, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2003 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial statement
schedule are the responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

Rochester, New York
February 5, 2004 (except for the second paragraph of Note U as to which the date
is February 18, 2004)

PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

ASSETS

December 31,
2003 2002
---- ----

Current assets:
Cash and cash equivalents $29,589,000 $22,077,000
Marketable securities 2,006,000
Accounts receivable, net 7,857,000 6,622,000
Inventories, net 5,443,000 4,550,000
Prepaid expenses and other assets 626,000 942,000
Deferred taxes 1,714,000 1,574,000
--------------- ---------------
Total current assets 45,229,000 37,771,000

Property, equipment and improvements, net 2,432,000 3,012,000
Software development costs, net 2,597,000 2,068,000
Note receivable from unconsolidated company 1,000,000 1,000,000
Investment in unconsolidated company 402,000 1,353,000
--------------- ---------------
Total assets $51,660,000 $45,204,000
=============== ===============

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable $ 1,231,000 $ 1,926,000
Income taxes payable 1,760,000 502,000
Accrued expenses 4,019,000 3,213,000
--------------- ----------------
Total current liabilities 7,010,000 5,641,000

Deferred taxes 698,000 754,000
--------------- ----------------
Total liabilities 7,708,000 6,395,000
--------------- ----------------

Commitments and contingencies (Note I and P)

Stockholders' equity:
Preferred stock - $.01 par value; 1,000,000
shares authorized; none issued
Common stock - $.01 par value; 50,000,000
shares authorized; 13,260,038 shares
issued 133,000 133,000
Additional paid-in capital 12,863,000 12,725,000
Retained earnings 40,532,000 38,801,000
Treasury stock - at cost, 811,049 and
1,013,696 shares held at December 31,
2003 and 2002, respectively (9,536,000) (12,782,000)
Accumulated other comprehensive loss (40,000) (68,000)
--------------- ----------------
Total stockholders' equity 43,952,000 38,809,000
--------------- ----------------
Total liabilities and stockholders'
equity $51,660,000 $45,204,000
=============== ================

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

PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME

Year Ended December 31,
2003 2002 2001
---- ---- ----

Sales $49,992,000 $27,014,000 $36,517,000
Cost of goods sold 25,293,000 12,846,000 13,327,000
--------------- --------------- ---------------
Gross profit 24,699,000 14,168,000 23,190,000
--------------- --------------- ---------------

Operating expenses:
Selling and marketing 5,881,000 4,385,000 5,534,000
Research and development 9,493,000 6,914,000 7,941,000
General and administrative 4,639,000 2,735,000 2,946,000
Restructuring charges 118,000 573,000
In-process research and development 366,000
Class action legal settlement 143,000
--------------- --------------- ---------------
Total operating expenses 20,131,000 15,116,000 16,421,000
--------------- --------------- ---------------
Income (loss) from operations 4,568,000 (948,000) 6,769,000

Other income, net 522,000 550,000 971,000
--------------- --------------- ---------------
Income (loss) before income taxes and
equity in loss of unconsolidated company 5,090,000 (398,000) 7,740,000

Income tax provision (benefit) 1,339,000 (819,000) 2,554,000
--------------- --------------- ---------------
Income before equity in loss of unconsolidated
company 3,751,000 421,000 5,186,000

Equity in loss of unconsolidated company (309,000) (95,000)
Impairment of minority interest investment (392,000)
--------------- --------------- ---------------
Net income $ 3,050,000 $ 326,000 $ 5,186,000
=============== =============== ===============

Basic earnings per share $ .25 $ .03 $ .42
=============== =============== ===============

Diluted earnings per share $ .24 $ .03 $ .41
=============== =============== ===============

Weighted average number of common shares used in
basic earnings per share 12,258,575 12,263,351 12,282,400
Potential common shares 433,624 109,721 425,661
--------------- --------------- ---------------
Weighted average number of common shares used in
diluted earnings per share 12,692,199 12,373,072 12,708,061
=============== =============== ===============

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

PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

Accumulated
Additional Other
Common Stock Paid-in Retained Treasury Comprehensive
Shares Amount Capital Earnings Stock Loss Total
----------- ---------- ------------ ------------ ------------- ------------- -------------
Balance -
January 1, 2001 13,260,038 $133,000 $12,679,000 $34,749,000 $(8,042,000) $(51,000) $39,468,000
Comprehensive income:
2001 net income 5,186,000 5,186,000
Exercise of options
and warrants (1,089,000) 1,630,000 541,000
Tax benefit-option plan 19,000 19,000
Purchase of treasury
stock-547,334 shares (6,872,000) (6,872,000)
----------- ---------- ------------ ------------ ------------- ------------- -------------
Balance -
December 31, 2001 13,260,038 133,000 12,698,000 38,846,000 (13,284,000) (51,000) 38,342,000

Comprehensive income:
2002 net income 326,000 326,000
Currency
translation
adjustment (17,000) (17,000)
Exercise of options (371,000) 621,000 250,000
Tax benefit-option plan 27,000 27,000
Purchase of treasury
stock-34,511 shares (119,000) (119,000)
----------- ---------- ------------ ------------ ------------- ------------- -------------
Balance -
December 31, 2002 13,260,038 133,000 12,725,000 38,801,000 (12,782,000) (68,000) 38,809,000

Comprehensive income:
2003 net income 3,050,000 3,050,000
Currency
translation
adjustment 28,000 28,000
Exercise of options (1,319,000) 3,440,000 2,121,000
Restricted stock
compensation expense 67,000 67,000
Tax benefit-option plan 71,000 71,000
Purchase of treasury
stock-56,350 shares (194,000) (194,000)
----------- ---------- ------------ ------------ ------------- ------------- ------------
Balance -
December 31, 2003 13,260,038 $133,000 $12,863,000 $40,532,000 $(9,536,000) $(40,000) $43,952,000
=========== ========== ============ ============ ============= ============= =============

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

PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended December 31,
2003 2002 2001
---- ---- ----
Cash flows from operating activities:
Net income $ 3,050,000 $ 326,000 $ 5,186,000
Non-cash adjustments:
Depreciation and amortization 2,277,000 2,124,000 1,537,000
Provision for bad debts 87,000 200,000 152,000
Reserve for inventory obsolescence 1,275,000 980,000 708,000
Non-cash restructuring charges 118,000 209,000
Restricted stock compensation expense 67,000
Deferred taxes (125,000) 32,000 392,000
In-process research and development 366,000
Equity in loss of unconsolidated company 309,000 95,000
Impairment of minority interest investment 392,000
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable (1,322,000) 80,000 336,000
Inventories (2,168,000) (104,000) 1,324,000
Prepaid expenses and other assets 316,000 (226,000) 386,000
Accounts payable and accrued expenses 26,000 1,221,000 (1,130,000)
Income taxes payable 1,258,000 177,000 150,000
---------------- ---------------- ----------------
Net cash provided by operating activities 5,560,000 5,480,000 9,041,000
---------------- ---------------- ----------------
Cash flows from investing activities:
Purchases of property, equipment and improvements (674,000) (1,110,000) (1,325,000)
Capitalized software development costs (1,524,000) (1,188,000) (1,654,000)
Purchases of marketable securities (2,006,000) (5,000)
Maturities of marketable securities 2,006,000 10,000,000
Business acquisition (33,000) (3,643,000)
Investment in unconsolidated company 250,000 (1,500,000)
Note receivable from unconsolidated company (1,000,000)
---------------- ---------------- ----------------
Net cash provided (used) by investing activities 25,000 (10,447,000) 7,016,000
---------------- ---------------- ----------------
Cash flows from financing activities:
Exercise of stock options and warrants 2,121,000 250,000 541,000
Purchase of treasury stock (194,000) (119,000) (6,872,000)
---------------- ---------------- ----------------
Net cash provided (used) by financing activities 1,927,000 131,000 (6,331,000)
---------------- ---------------- ----------------
Net increase (decrease) in cash and cash equivalents 7,512,000 (4,836,000) 9,726,000
Cash and cash equivalents at beginning of year 22,077,000 26,913,000 17,187,000
---------------- ---------------- ----------------
Cash and cash equivalents at end of year $29,589,000 $22,077,000 $26,913,000
================ ================ ================

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid, net of (refunds) $ 161,000 $(1,050,000) $ 2,033,000

Non-cash financing activity:
Exercise of stock options using 800 shares
of common stock in 2001 $ $ $ 10,000

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

PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The Company: Performance Technologies, Incorporated (the Company) was formed in
1981 under the laws of the State of Delaware and maintains its corporate offices
in Rochester, New York. The Company is a supplier of platforms, components and
software solutions for the embedded systems marketplace that can be used in a
broad range of applications and end markets.

Segment Data, Geographic Information and Significant Customers: The Company
operates in one industry segment. Export sales to customers outside North
America represented 21%, 25% and 27% of total sales for the years ended December
31, 2003, 2002 and 2001, respectively.

For 2003, 2002, and 2001, four customers accounted for approximately 48%, 28%,
and 30%, respectively, of sales. For 2003, the Company had two customers who
comprised greater than 10% of sales. These customers were Andrew Corporation and
UT Starcom, who comprised 17% and 16% of 2003 sales, respectively. For 2002 and
2001, no single customer represented greater than 10% of sales.

Principles of Consolidation: The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. Investments in which
the Company owns 20% to 50% of the voting stock and exercises significant
influence over operating and financial policies are accounted for using the
equity method of accounting. In addition, the consolidated financial statements
include the operating results of Ziatech Corporation from the date of the
acquisition (Note B). All significant inter-company transactions have been
eliminated. Certain reclassifications have been made in prior years to conform
with the current year presentation.

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

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

Concentration of Credit Risk: Financial instruments that potentially expose the
Company to significant concentrations of credit risk consist principally of bank
deposits, marketable securities and accounts receivable. Marketable securities
consist of high quality, short-term interest bearing financial instruments. The
Company performs ongoing credit evaluations of its customers' financial
condition and maintains an allowance for uncollectible accounts receivable based
upon the expected collectability of all accounts receivable. As of December 31,
2003, Andrew Corporation comprised 17% of net accounts receivable. As of
December 31, 2002, UT Starcom represented 23% of net accounts receivable.

Fair Value of Financial Instruments: The carrying amounts of the Company's
financial instruments, including marketable securities, accounts receivable and
accounts payable approximate fair values at December 31, 2003 and 2002, as the
maturity of these instruments are generally short term.

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

Marketable Securities: The Company classified all of its marketable debt
securities at December 31, 2002 as held to maturity and has accounted for these
investments at amortized cost. Marketable securities classified as held to
maturity are high credit quality securities in accordance with the Company's
investment policy. The Company did not hold any marketable securities at
December 31, 2003.

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

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

Revenue Recognition: The Company recognizes revenue in accordance with the SEC
Staff Accounting Bulletin (SAB) No. 104, "Revenue Recognition". Revenue is
recognized upon receipt of a signed purchase order or contract, product
shipment, provided the sales price is fixed or determinable, and collectability
is reasonably assured. Revenue from arrangements for software systems requiring
significant production, modification, or customization of software is recognized
over the contract period as performance milestones are fulfilled. Revenue from
consulting and other services is recognized at the time the services are
rendered. Any anticipated losses on contracts are charged to operations as soon
as such losses are determined. Revenue from software maintenance contracts is
recognized ratably over the contractual period. At the time of sale, the Company
provides for future expected sales returns and warranty costs. These estimates
are based upon historical experience. These estimates have not varied
significantly from actual returns and warranty costs incurred.

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

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

Repairs and maintenance costs are expensed as incurred.

Long-Lived Assets: The Company regularly assesses all of its long-lived assets
for impairment when events or circumstances indicate their carrying amounts may
not be recoverable, in accordance with Statement of Financial Accounting
Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets."

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

Advertising: Advertising costs are expensed as incurred and recorded in
"Selling and marketing" in the Consolidated Statements of Income.
Advertising expense amounted to $173,000, $69,000 and $249,000 for 2003, 2002
and 2001, respectively.

Software Development Costs: On a product-by-product basis, software development
costs incurred subsequent to the establishment of technological feasibility and
prior to general release of the product are capitalized and amortized commencing
after general release over their estimated remaining economic life, generally
three years, or using the ratio of current revenues to current and anticipated
revenues from such software, whichever provides greater amortization.

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

Earnings Per Share: Basic earnings per share is computed by dividing net income
available by the weighted average number of common shares outstanding for the
period. Diluted earnings per share calculations reflect the assumed exercise and
conversion of dilutive employee stock options, warrants and unvested restricted
stock, applying the treasury stock method. Dilutive earnings per share
calculations exclude the effect of approximately 660,000, 1,740,000 and 864,000
options for 2003, 2002 and 2001, respectively, since such options have an
exercise price in excess of the average market price of the Company's
common stock.

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

Stock Based Employee Compensation: At December 31, 2003, the Company had stock
options outstanding from three stock-based employee compensation plans. The
Company accounts for stock-based compensation under the recognition and
measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Accordingly, no stock-based employee
compensation cost has been recognized in net income for the stock options
granted. Had compensation cost for the stock options granted been determined
based on the fair value recognition provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company's net income (loss) and earnings (loss)
per share would have been as follows:

Year Ended December 31,
2003 2002 2001
---------- ----------- -----------

Net income, as reported $3,050,000 $ 326,000 $5,186,000
Add: Restricted stock compensation expense 67,000

Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax
effects (1,457,000) (2,285,000) (1,699,000)
----------- ----------- -----------
Pro forma net income (loss) $1,660,000 $(1,959,000) $3,487,000
=========== =========== ===========

Earnings (loss) per share:
Basic - as reported $ .25 $ .03 $ .42
=========== =========== ===========
Basic - pro forma $ .14 $ (.16) $ .28
=========== =========== ===========
Diluted - as reported $ .24 $ .03 $ .41
=========== =========== ===========
Diluted - pro forma $ .13 $ (.16) $ .27
=========== =========== ===========

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

The assumptions regarding the annual vesting of stock options were 33% for
options granted in 2003 and 25% per year for options granted in 2002 and 2001.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2003, 2002 and 2001: Dividend yield of 0%;
expected volatility of 67%, 68% and 64%; risk-free interest rate of 2.0%, 3.7%
and 4.7%; and expected lives of three years in 2003 and four years in 2002 and
2001, respectively. The weighted average fair value of options granted during
2003, 2002 and 2001 was $1.96, $4.17 and $7.30, respectively.

Recent Accounting Pronouncements: In November 2002, the FASB issued
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others."
Interpretation No. 45 required that at the time a company issues a guarantee,
the company must recognize an initial liability for the fair value, or market
value, of the obligations it assumes under that guarantee. This interpretation
is applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The Company does not currently provide significant guarantees
on a routine basis. The Company adopted this interpretation and it did not have
a material impact on the results of operations or the financial position of the
Company.

In January 2003, the FASB issued Interpretation No. 46 (FIN 46), "Consolidation
of Variable Interest Entities," an Interpretation of Accounting Research
Bulletin (ARB) No. 51, "Consolidated Financial Statements." FIN 46 addresses the
consolidation by business enterprises of variable interest entities (VIEs)
either: (1) that do not have sufficient equity investment at risk to permit the
entity to finance its activities without additional subordinated financial
support, or (2) in which the equity investors lack an essential characteristic
of a controlling financial interest. In December 2003, the FASB completed
deliberations of proposed modifications to FIN 46 (Revised Interpretations)
resulting in multiple effective dates based on the nature and creation date of
the VIE. The Revised Interpretations must be applied to all VIEs no later than
the end of the first interim or annual reporting period ending after March 15,
2004. However, prior to the required application of the Revised Interpretations,
its provisions must be adopted by the end of the first interim or annual
reporting period that ends after December 15, 2003 (for the year ended December
31, 2003 for the Company) for VIEs considered to be special purpose entities
(SPEs). SPEs for this provision include any entity whose activities are
primarily related to securitizations or other forms of asset-backed financings
or single-lessee leasing arrangements. The Company is currently evaluating the
effect that the adoption of FIN 46 for non-SPE VIEs created prior to February 1,
2003 will have on its financial position, results of operations and cash flows.

Note B - Acquisition

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

The purchase price allocation was prepared in accordance with the application of
SFAS No. 141, "Business Combinations." Following is a summary of the fair
values of the assets acquired and liabilities assumed as of the date of the
acquisition:

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

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

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

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

Note C - Accounts Receivable, net

Accounts receivable consisted of the following: At December 31,
2003 2002
------------- -------------
Accounts receivable $ 8,236,000 $ 6,923,000
Less: allowance for doubtful accounts (379,000) (301,000)
------------- -------------
Net $ 7,857,000 $ 6,622,000
============= =============

Note D - Inventories, net

Inventories consisted of the following: At December 31,
2003 2002
------------- -------------
Purchased parts and components $ 3,836,000 $ 3,967,000
Work in process 3,434,000 2,046,000
Finished goods 1,969,000 2,088,000
------------- -------------
9,239,000 8,101,000
Less: reserve for inventory obsolescence (3,796,000) (3,551,000)
------------- -------------
Net $ 5,443,000 $ 4,550,000
============= =============

Note E - Property, Equipment and Improvements, net

Property, equipment and improvements consisted of the following:
At December 31,
2003 2002
------------- -------------
Land $ 407,000 $ 407,000
Engineering equipment and software 4,487,000 4,180,000
Manufacturing equipment 2,097,000 1,955,000
Furniture and equipment 1,572,000 1,655,000
Leasehold improvements 326,000 271,000
------------- -------------
8,889,000 8,468,000
Less: accumulated depreciation and amortization (6,457,000) (5,456,000)
------------- -------------
Net $ 2,432,000 $ 3,012,000
============= =============

Total depreciation and amortization expense for equipment and improvements for
2003, 2002 and 2001 was $1,272,000, $1,070,000 and $975,000, respectively.

Note F - Investment in Unconsolidated Company

In September 2002, the Company completed an agreement to invest $1,500,000 for a
47% ownership interest in Momentum Computer, Inc. (Momentum), a developer of
specialized single board computer products for the data communications, telecom,
military and aerospace markets. The investment is accounted for under the equity
method. Accordingly, the Company records its investment in Momentum on the
Consolidated Balance Sheets as "Investment in unconsolidated company" and its
share of Momentum's earnings or loss as "Equity in loss of unconsolidated
company" on the Consolidated Statements of Income.

The Company has an option to acquire the remaining ownership of Momentum during
a specified future period for additional consideration based upon a formula
calculation. As part of the investment agreement, the Company also loaned
$1,000,000 to Momentum to be used for its working capital requirements. The loan
is due and payable in September 2006, is guaranteed by the majority stockholder
and earns interest as defined in the agreement. As of December 31, 2003 and
2002, the interest rate on this loan was 4% and 4.75%, respectively.

During 2003, the Company reduced its ownership in Momentum from 47% to 30% when
the Company sold a portion of its investment back to the majority stockholder of
Momentum. Based upon the Company's expectations of Momentum's performance at the
time of the investment and its current business prospects, the Company concluded
that an impairment of this investment occurred in late 2003. Based upon this
conclusion, the Company recorded an impairment charge of $.4 million on its
investment and reduced the carrying value of the investment to the Company's
estimate of fair market value at December 31, 2003.

Note G - Accrued Expenses

Accrued expenses consisted of the following: At December 31,
2003 2002
------------- -------------
Accrued compensation $ 2,056,000 $ 1,642,000
Accrued professional services 379,000 453,000
Deferred revenue 857,000 470,000
Accrued restructuring charges 146,000 163,000
Accrued warranty obligations 233,000 82,000
Other accrued expenses 348,000 403,000
------------- -------------
Total $ 4,019,000 $ 3,213,000
============= =============

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

Accrued warranty obligations at December 31, 2002 $ 82,000
Actual warranty experience (231,000)
Warranty provisions 382,000
----------
Accrued warranty obligations at December 31, 2003 $ 233,000
==========
Note H - Credit Agreements

At December 31, 2002, the Company had a revolving credit loan agreement with a
bank under which it could borrow up to $5 million. The agreement expired on
April 15, 2003 and was not renewed. There were no balances outstanding under
this agreement at December 31, 2002. The annual fee on the credit loan agreement
was not material.

Note I - Commitments

The Company leases facilities under operating leases. Under the terms of the
facility lease in Rochester, New York, which expires in March 2012, the Company
agrees to pay an annual rental of $740,000 in the first full year, with
pre-established adjustments for each year thereafter. Under the terms of the
facility lease in San Luis Obispo, California, which expires in December 2008,
the Company agrees to pay an annual rental of $422,000 with an annual adjustment
based on the Consumer Price Index. For both lease agreements, the Company is
also required to pay the pro rata share of the real property taxes and
assessments, expenses and other charges associated with these facilities. The
Company has leased facilities in its other operating locations in North America
that expire between 2003 through 2005. Subsequent to December 31, 2003, the
Company renewed the lease for its operations in Canada through May 2006. The
minimum lease payments associated with this renewal are included in the table
below.

Future minimum payments for all operating leases having a remaining term in
excess of one year at December 31, 2003 are as follows:

Operating Leases
-------------
2004 $1,617,000
2005 1,454,000
2006 1,348,000
2007 1,301,000
2008 1,316,000
Thereafter 2,526,000
-------------
Total $9,562,000
=============

Rental expense amounted to $1,730,000, $1,218,000 and $908,000 for 2003, 2002
and 2001, respectively.

Note J - Stockholders' Equity

In August 2000, the Board of Directors authorized the repurchase of up to one
million shares of the Company's common stock. During 2001, the Company
repurchased 341,800 of its common shares at a total cost of $4,699,000. This
program was completed in March 2001.

In March 2001, the Board of Directors authorized the repurchase of an additional
five hundred thousand shares of the Company's common stock. The Company
repurchased zero shares and 205,534 shares at a total cost of zero dollars and
$2,173,000 in 2002 and 2001, respectively. This program expired in March 2002.

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

Note K - Stock Option Plan

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

Stock options may be granted to any officer or employee at not less than the
fair market value at the date of grant (not less than 110% of the fair market
value in the case of holders of more than 10% of the Company's common stock).
Options granted under the plans generally expire five or six years from the date
of grant and generally vest over three, four or five years.

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

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

The following table summarizes stock option activity under the plans:

Weighted-Average Option
Number of Options Exercise Price Price Range
----------------- -------------- --------------
Outstanding at January 1, 2001 1,500,531 $10.91 $4.44 - $28.75
Granted 572,950 $13.85 $8.00 - $14.50
Exercised (65,650) $ 7.36 $4.44 - $10.25
Expired (189,001) $15.05 $6.17 - $28.75
----------
Outstanding at December 31, 2001 1,818,830 $11.54 $4.83 - $28.75
Granted 615,250 $ 7.72 $3.40 - $ 8.60
Exercised (45,362) $ 5.51 $4.83 - $ 9.88
Expired (242,038) $12.55 $7.82 - $28.75
----------
Outstanding at December 31, 2002 2,146,680 $10.46 $3.40 - $28.75
Granted 630,167 $4.28 $3.44 - $11.40
Exercised (258,997) $8.19 $3.88 - $13.94
Expired (268,226) $10.96 $3.83 - $18.75
----------
Outstanding at December 31, 2003 2,249,624 $8.93 $3.40 - $28.75
==========

The following table summarizes information about stock options at December 31,
2003:

Options outstanding Options exercisable
------------- --------------------------------- ----------------------------------
Weighted Weighted Weighted
average average average
Range of remaining exercise exercise
exercise price Options life (yrs) price Options price
- ----------------------- ------------- -------------- ------------------ -------------- -------------------
$3.40 to $5.94 1,000,060 3.78 $ 4.36 397,856 $ 5.06
$5.95 to $9.00 468,894 4.02 $ 8.31 137,453 $ 8.51
$9.01 to $11.40 121,120 1.55 $ 9.93 98,567 $ 9.79
$11.41 to $14.24 421,050 3.04 $13.80 225,700 $13.74
$14.25 to $28.75 238,500 1.48 $20.20 238,188 $20.21
- ----------------------- ------------- -------------- ------------------ -------------- -------------------
2,249,624 3.33 $ 8.93 1,097,764 $10.99

At December 31, 2003, 1,997,099 options were available for future grant under
the two stock option plans. During 2001, warrants for 56,250 shares, issued at
fair market value in 1995, were exercised at an exercise price of $1.22 per
share. At December 31, 2003 and 2002, there are no warrants outstanding.

Note L - Stockholder Rights Plan

On October 27, 2000, the Company's Board of Directors adopted a Stockholder
Rights Plan. Under this plan, one preferred stock Purchase Right was distributed
as a dividend for each share of common stock held by the stockholders of record
as of the close of business of November 8, 2000. Until the occurrence of certain
events, the Rights are traded as a unit with the common stock. Each Right will
separate and entitle stockholders to buy stock upon the occurrence of certain
events generally related to the change of control of the Company as defined in
the Plan. The Rights become exercisable ten days after either (1) an "Acquiring
Person" acquires or commences a tender offer to acquire 15% or more of the
Company's Common Stock, or (2) an "Adverse Person" has acquired 10% or more of
the Company's common stock and the Board determines this person is likely to
cause pressure on the Company to enter into a transaction that is not in the
Company's best long-term interest. All Rights not held by an Acquiring Person or
an Adverse Person become rights to purchase from the Company one one-thousandth
of one share of preferred stock at an initial exercise price of $110 per Right.
Each Right entitles the holder of that Right to purchase the equivalent of $220
worth of the Company's common stock for $110. If after such an event the Company
merges, consolidates or engages in a similar transaction in which it does not
survive, each holder has a "flip over" right to buy discounted stock in the
surviving entity. The Company may redeem the Rights for $.001 each. The Rights
Plan expires on November 1, 2010 or can be modified or terminated, at the option
of the Board of Directors.

Note M - Income Taxes

Pre-tax earnings and provision for income taxes consisted of the following for
the years ended December 31, 2003, 2002 and 2001:
2003 2002 2001
-------------- ------------ ------------
Pre-tax earnings (loss):
United States $4,583,000 $(1,125,000) $6,265,000
Outside United States 507,000 727,000 1,475,000
-------------- ------------ ------------
Total pre-tax earnings (loss) $5,090,000 $ (398,000) $7,740,000
============== ============ ============

The provisions (benefit) for income taxes were as follows:
2003 2002 2001
-------------- ------------ ------------
Current income tax provision (benefit):
Federal $1,252,000 $ (827,000) $1,551,000
State 242,000 (102,000) 198,000
Foreign 41,000 76,000 401,000
-------------- ------------ ------------
1,535,000 (853,000) 2,150,000
Deferred (benefit) provision (196,000) 34,000 404,000
-------------- ------------ ------------
Total provision (benefit) $1,339,000 $ (819,000) $2,554,000
============== ============ ============

Reconciliation of the statutory U.S. federal income tax rate to effective rates
is as follows:
2003 2002 2001
----- ------ ----
Federal income tax at statutory rate 34.0% (34.0)% 34.0%
State tax provision, net of federal benefit 2.6 (17.0) 1.7
Tax credits (2.9) (90.9) (4.5)
Foreign sales exemption (4.0) (46.8) (3.4)
Acquired in-process research and development 31.3
Resolution of prior year tax uncertainties (3.9) (61.6)
Other .2 13.2 5.2
----- ------ -----
Effective tax rate 26.0% (205.8)% 33.0%
===== ======= =====

The deferred income tax assets and liabilities consist of the following:
At December 31,
Assets 2003 2002
- ------- ------------- -------------
Current:
Accrued vacation, payroll and other accrued
expenses $ 349,000 $ 181,000
Inventory obsolescence reserve and other inventory
related items 1,468,000 1,272,000
Bad debt reserve 133,000 105,000
Other 22,000 (35,000)

Non-current:
Investment in unconsolidated company 297,000 51,000
------------- -------------
Total gross deferred tax assets 2,269,000 1,574,000
Valuation allowance (297,000)
------------- -------------

Total net deferred tax assets $1,972,000 $1,574,000
------------- -------------
Liabilities (non-current)
- -------------------------
Capitalized software development cost, net $ (905,000) $ (724,000)
Difference in tax basis of assets 37,000
Investment tax credit (51,000) (67,000)
------------- -------------
Total deferred tax liabilities $ (956,000) $ (754,000)
------------- -------------
Net deferred tax asset $1,016,000 $ 820,000
============= =============

The total deferred tax assets and liabilities as presented in the accompanying
Consolidated Balance Sheets are as follows:
2003 2002
------------- -------------
Net current deferred tax assets $1,714,000 $1,574,000
Net long-term deferred tax liabilities $ 698,000 $ 754,000

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

As of December 31, 2003, no deferred taxes have been provided on the
undistributed earnings of its Canadian subsidiary, as the Company does not plan
to initiate any action that would require the payment of income taxes. It is not
practicable to estimate the amount of additional tax that might be payable on
these undistributed earnings.

Note N - Research and Software Development Costs

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

2003 2002 2001
------------ ------------ ------------

Gross expenditures for engineering and software
development $11,027,000 $8,102,000 $9,595,000
Less: amounts capitalized (1,534,000) (1,188,000) (1,654,000)
------------ ------------ ------------
Net charged to operating expenses $ 9,493,000 $6,914,000 $7,941,000
============ ============ ============

Software development costs consisted of the following:
At December 31,
2003 2002
------------ ------------
Capitalized software development costs $ 5,701,000 $4,167,000
Less: accumulated amortization (3,104,000) (2,099,000)
------------ ------------
Net $ 2,597,000 $2,068,000
============ ============

Amortization of software development costs included in cost of goods sold was
$1,005,000, $1,068,000 and $558,000 for 2003, 2002 and 2001, respectively.

Note O - Employee Benefit Plans

For the Company's operations in the United States, the Company's Retirement
Savings Plans qualify under Section 401(k) of the Internal Revenue Code.
Discretionary matching contributions by the Company to the plans were $0,
$15,000 and $99,000 for 2003, 2002 and 2001, respectively. In conjunction with
its Flexible Benefits plans, the Company made additional discretionary qualified
contributions to employee accounts which vest immediately amounting to $69,000,
$82,000 and $119,000 for 2003, 2002 and 2001, respectively.

For its operations in Canada, contributions were made in 2002 and 2001 to a
Registered Retirement Savings Plan (RRSP) that is administered by the Canadian
government. Discretionary matching contributions to the Plan amounted to $28,000
and $186,000 for 2002 and 2001, respectively. The Company did not make any
matching contributions in 2003.

Note P - Litigation

Following the Company's announcement on May 19, 2000 regarding its preliminary
results of operations for the second quarter, several class action lawsuits were
filed in the United States District Court for the Western District of New York
against the Company, as well as several of its officers and directors, alleging
violations of federal securities laws. On September 25, 2002, the Company
announced it had signed a Memorandum of Understanding for the settlement of the
class action litigation. The Company recorded a charge of $143,000 in the third
quarter of 2002 in connection with the litigation. During 2003, the settlement
agreement was accepted and approved by the Court and the settlement was paid by
the Company.

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

Note Q - Transactions with Related Parties

Prior to the Company relocating to its current corporate headquarters and
manufacturing facility in April 2002, the Company leased its primary facility in
Rochester, New York from an entity controlled by two directors of the Company.
During 2002 and 2001, the Company paid rent of $117,000 and $347,000,
respectively, for the use of this location. This lease expired in April 2002.

Note R - Restructuring Programs

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

The initial restructuring charge recorded in 2002 for lease commitments included
certain estimates for expected future sublease receipts. Due to market
conditions in the Raleigh, North Carolina area, the Company recorded an
incremental restructuring charge of $118,000 in 2003, which related to a revised
estimate of the sublease receipts expected through the remaining term of this
lease, which expires in 2005. A summary of the activity with respect to the
restructuring charges is as follows:

Severance and Leasehold Asset
related costs commitments impairment Total
----------- ----------- ---------- ------------
2002 charge $ 341,000 $177,000 $55,000 $573,000
2002 utilization (332,000) (23,000) (55,000) (410,000)
----------- ----------- ---------- ------------
Balance at December 31, 9,000 154,000 163,000
2002

2003 utilization (9,000) (126,000) (135,000)
2003 incremental charge 118,000 118,000
----------- ----------- ---------- ------------
Balance at December 31, $146,000 $146,000
2003 =========== =========== ========== ============

Note S - Product Revenue

The following table represents the Company's total sales for 2003, 2002 and
2001 classified by product category:

2003 2002 2001
------------- ------------- ------------

Signaling and network access products $26,081,000 $18,826,000 $31,857,000
Computing products 18,306,000 5,024,000
IPnexus switching products 4,997,000 2,383,000 1,655,000
Other products 608,000 781,000 3,005,000
------------- ------------- ------------
Total $49,992,000 $27,014,000 $36,517,000
============= ============= ============

During 2003, Andrew Corporation purchased signaling and network access products
in addition to IPnexus switching products and UT Starcom purchased computing
products.

Note T - Quarterly Results (unaudited)

The following is a summary of unaudited quarterly results of operations for the
years ended December 31, 2003 and 2002:

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

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

2002
--------------------------------------------------------
(in thousands, except per share data)
Mar. 31 Jun. 30 Sep. 30 Dec. 31
----------- ------------ ----------- -----------
Sales $ 6,407 $ 6,619 $ 3,955 $ 10,033
Gross profit 3,755 3,943 1,739 4,731
Income (loss)
from operations 454 468 (1,803) (67)
Net income (loss) 393 407 (1,191) 717

Basic earnings (loss)
per share $ .03 $ .03 $ (.10) $ .06
=========== ============ =========== ===========
Diluted earnings (loss)
per share $ .03 $ .03 $ (.10) $ .06
=========== ============ =========== ===========

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

Note U - Subsequent Events

Acquisition:

On January 23, 2004, the Company entered into an agreement to acquire
substantially all of the assets and assumed certain liabilities of Mapletree
Networks, Inc. (Mapletree), a company that provides voice, data and fax access
technology to original equipment manufacturers. In accordance with the purchase
agreement the Company agreed to pay $6,625,000 at closing and also agreed to pay
an additional $1,625,000 if the operations of Mapletree (on a standalone basis
as operated by the Company) achieve certain milestones. Any additional future
payments will be recorded as additional purchase price. The purchase price is
also subject to adjustment based upon certain factors, as defined in the
agreement. The Company accounted for the acquisition in 2004 under the
provisions of SFAS No. 141, "Business Combinations."

Investment:

On February 18, 2004, the Company entered into an agreement to invest up to $3.0
million in InSciTek Microsystems, Inc. (InSciTek), an unrelated company, in the
form of an interest bearing convertible note. The Company invested $1.3 million
in conjunction with execution of the agreement. The balance of the investment
will be made in two stages during the next year based upon certain criteria.
If all stages of the investment are made, the Company will have the option to
acquire ownership of InSciTek during a future specified period.

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

None.

ITEM 9A - Controls and Procedures

a. Evaluation of Disclosure Controls and Procedures

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

b. Changes in Internal Controls

There has been no change in the Company's internal controls over
financial reporting that occurred during the fiscal year covered by
this annual report that has materially affected, or is reasonably
likely to materially affect, the Company's internal controls over
financial reporting.

PART III

The information required by Part III, Items 10 - 14, is omitted from this Report
and presented in the Company's definitive proxy statement to be filed pursuant
to Regulation 14A not later than 120 days after the end of the fiscal year
covered by this Report, in connection with the Company's Annual Meeting of
Stockholders to be held on June 3, 2004, which information included therein is
incorporated herein by reference.

ITEM 10 - Directors and Executive Officers of the Registrant

The sections entitled "Election of Directors" and "Executive Officers" appearing
in the Company's proxy statement for the Annual Meeting of Stockholders to be
held on June 3, 2004, set forth certain information with respect to the
directors and executive officers of the Company and is incorporated herein by
reference.

ITEM 11 - Executive Compensation

The section entitled "Executive Compensation" appearing in the Company's proxy
statement for the Annual Meeting of Stockholders to be held on June 3, 2004,
sets forth certain information with respect to the compensation of management of
the Company and is incorporated herein by reference.

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

The section entitled "Security Ownership of Certain Beneficial Owners and
Management" appearing in the Company's proxy statement for the Annual Meeting
of Stockholders to be held on June 3, 2004, sets forth certain information with
respect to the ownership of the Company's common stock and is incorporated
herein by reference.

Equity Plan Information

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

The table below provides certain information regarding the Company's equity
compensation plan:
Equity Compensation Plan Information
(a) (b) (c)
Number of
securities to be
issued upon Weighted average Number of
exercise of exercise price of securities
outstanding outstanding remaining
options, warrants options, warrants available for
Plan Category and rights and rights future issuance

-------------- -------------- ---------------
Equity compensation plans
approved by security holders 2,265,604 $8.93 1,997,099

Equity compensation plans not
approved by security holders
-------------- -------------- ---------------
Total 2,265,604 $8.93 1,997,099
============== ============== ===============

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

ITEM 13 - Certain Relationships and Related Transactions

The section entitled "Certain Relationships and Transactions" appearing in the
Company's proxy statement for the Annual Meeting of Stockholders to be held on
June 3, 2004, sets forth certain information with respect to certain business
relationships and transactions between the Company and its directors and
officers and is incorporated herein by reference.

ITEM 14 - Principal Accountant Fees and Services

The section entitled "Principal Accountant Fees and Services" appearing in the
Company's proxy statement for the Annual Meeting of Stockholders to be held on
June 3, 2004, sets forth certain information with respect to fees and services
between the Company and its principal accountant and is incorporated herein by
reference.

PART IV

ITEM 15 - Exhibits, Financial Statement Schedule and Reports on Form 8-K

(1) Financial Statements

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

(2) Financial Statement Schedule

Schedule II - Valuation and Qualifying Accounts

Allowance for Doubtful Accounts

Additions Deductions
Balance at ------------- ------------- Balance at
beginning charged to amounts end of
of period earnings written off period
------------ ------------- ------------- ------------
Year Ended December 31, 2003
Deducted in the Consolidated Balance Sheet
from Accounts Receivable

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

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

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

Year Ended December 31, 2001
Deducted in the Consolidated Balance Sheet
from Accounts Receivable

Allowance for doubtful accounts $186,000 $152,000 $ 54,000 $284,000
============ ============= ============= ============

Reserve for Inventory Obsolescence

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

Year ended December 31, 2003
Deducted in the Consolidated
Balance Sheet from Inventories

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

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

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

Year ended December 31, 2001
Deducted in the Consolidated
Balance Sheet from Inventories

Reserve for inventory obsolescence $1,124,000 $ 708,000 $ $1,013,000 $ 819,000
============= ============ ============= ============ =============

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

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

(3) Exhibits
Exhibit Ref.
Number Number Description
- --------------------------------------------------------------------------------
2.1 (8) Stock Purchase Agreement between Intel Corporation and
the Registrant, dated as of September 12, 2002.
2.2 (10) Asset Purchase Agreement by and among Mapletree
Networks, Inc., Performance Technologies,
Incorporated and PTI Massachusetts Corporation,
dated as of January 12, 2004
3.1 (1) Restated Certificate of Incorporation
3.2 (3) Certificate of Amendment
3.3 (1) Amended By-laws
4.1 (1) Form of Common Stock Certificate
4.2 (1) Amended and Restated 1986 Incentive Stock Option Plan
4.4 (4) February 2000 Amendment to Amended and Restated 1986
Incentive Stock Option Plan
4.5 (5) Rights Agreement
4.6 (6) 2001 Incentive Stock Option Plan
4.7 (9) 2003 Omnibus Incentive Plan
10 (1) Material Contracts
10.16 (1) License Agreement between the Registrant and Spider
Systems Limited dated March 18, 1992
10.28 (1) Adoption Agreement between the Registrant and
Principal Mutual Life Insurance Company dated
September 20, 1993
10.29 (1) The Principal Financial Group Prototype Basic Savings
Plan dated May 7, 1990
10.30 (1) Form of Stock Option Agreement
10.32 (2) Share Acquisition Agreement between Registrant and
MicroLegend Telecom Systems, Inc. as of December
2, 1999
10.33 (2) Amendment to Share Acquisition Agreement between
Registrant and MicroLegend Telecom Systems, Inc.
as of December 10, 1999
10.33a (7) Lease Agreement dated as of May 19, 2001 between the
Registrant and Christa PT, LLC
10.33b (7) First Amendment to Lease dated as of July 19, 2001
between the Registrant and Christa PT, LLC
10.33c (7) Second Amendment to Lease dated as of July 31, 2001
between the Registrant and Christa PT, LLC
21 (*) Subsidiaries
23.1 (*) Consent of PricewaterhouseCoopers LLP
31.1 (*) Certification of Chief Executive Officer
31.2 (*) Certification of Chief Financial Officer
32.1 (*) Section 1350 Certification
- --------------------------------------------------------------------------------
(1) Incorporated by reference to the Registrant's Registration Statement
on Form S-1 filed November 22, 1995 (Registration No. 33-99684).
(2) Incorporated by reference to the Registrant's Registration Statement
on Form S-3 filed January 28, 2000 (Registration No. 333-94371).
(3) Incorporated by reference to the Annual Report on Form 10-K filed on
March 30, 2000.
(4) Incorporated by reference to the Registrant's Registration Statement
on Form S-8 filed June 21, 2000 (Registration No. 333-39834).
(5) Incorporated by reference to the Registrant's Registration Statement
on Form 8-A filed November 8, 2000 (Registration No. 000-27460).
(6) Incorporated by reference to the Registrant's Registration Statement
on Form S-8 filed June 3, 2002 (Registration No. 333-89636).
(7) Incorporated by reference to the Quarterly Report on Form 10-Q filed
Augusy 14, 2001.
(8) Incorporated by reference to the Current Report on Form 8-K filed
October 17, 2002.
(9) Incorporated by reference to the Registrant's Registration Statement
on Form S-8 filed March 5, 2004 (Registration No. 333-113330).
(10) Incorporated by reference to the Current Report on Form 8-K/A filed
February 3, 2004.
(*) Filed with this Form 10-K.

(4) Reports on Form 8-K

There were no reports on Form 8-K filed during the three-month period ended
December 31, 2003.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

PERFORMANCE TECHNOLOGIES, INCORPORATED

Date: March 30, 2004 By:/s/ DONALD L. TURRELL
------------------------
Donald L. Turrell
President and
Chief Executive Officer

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

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

Signature Title Date

/s/JOHN M. SLUSSER Chairman of the Board, Chief March 30, 2004
- ------------------ Strategic Officer and Director
John M. Slusser

/s/DONALD L. TURRELL President, Chief Executive March 30, 2004
- -------------------- Officer and Director
Donald L. Turrell

/s/DORRANCE W. LAMB Chief Financial Officer and March 30, 2004
- ------------------- Vice President of Finance
Dorrance W. Lamb

/s/BERNARD KOZEL Director March 30, 2004
- ----------------
Bernard Kozel

/s/CHARLES E. MAGINNESS Director March 30, 2004
- -----------------------
Charles E. Maginness

/s/STUART B. MEISENZAHL Director March 30, 2004
- -----------------------
Stuart B. Meisenzahl

/s/JOHN E. MOONEY Director March 30, 2004
- -----------------
John E. Mooney

/s/ROBERT L. TILLMAN Director March 30, 2004
- --------------------
Robert L. Tillman

/s/E. MARK RAJKOWSKI Director March 30, 2004
- --------------------
E. Mark Rajkowski

Exhibit 21

Subsidiaries

PTI Virgin Islands Company, Ltd., a foreign sales corporation

UconX Corporation, a Delaware corporation doing business in California as UconX

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

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

PT North Carolina Corporation (formerly MicroLegend Telecom, Inc.), a Delaware
corporation

PTI California Corporation (formerly Ziatech Corporation), a California
corporation

Exhibit 23.1

Consent of Independent Accountants

We hereby consent to the incorporation by reference in the Registration
Statements on Form S-3 (No. 333-113650) and Form S-8 (Nos. 333-32421, 333-39834,
333-89636 and 333-113330) of Performance Technologies, Incorporated of our
report dated February 5, 2004, except for the second paragraph of Note U as to
which the date is February 18, 2004, relating to the financial statements and
financial statement schedule, which appears in this Form 10-K.

/s/ PricewaterhouseCoopers LLP

Rochester, New York
March 30, 2004

Exhibit 31.1

Certification of Chief Executive Officer

I, Donald L. Turrell certify that:

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

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

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

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

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

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

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

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

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

a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and

b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal control over financial reporting.

Date: March 30, 2004 By:/s/ Donald L. Turrell
--------------------------------
Donald L. Turrell
President and
Chief Executive Officer

Exhibit 31.2

Certification of Chief Financial Officer

I, Dorrance W. Lamb, certify that:

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

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

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

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

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

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

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

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

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

a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and

b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal control over financial reporting.

Date: March 30, 2004 By:/s/ Dorrance W. Lamb
--------------------------------
Dorrance W. Lamb
Chief Financial Officer
and Vice President
of Finance

Exhibit 32.1

Section 1350 Certification

Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 ("Section 906"), Donald L. Turrell and Dorrance W.
Lamb, the Chief Executive Officer and Chief Financial Officer, respectively, of
Performance Technologies, Incorporated, certify that (i) the Annual Report on
Form 10-K for the year ended December 31, 2003 fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934
and (ii) the information contained in such report fairly presents, in all
material respects, the financial condition and results of operations of
Performance Technologies, Incorporated.

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

Date: March 30, 2004 By:/s/ Donald L. Turrell
------------------------------
Donald L. Turrell
President and
Chief Executive Officer

Date: March 30, 2004 By:/s/ Dorrance W. Lamb
------------------------------
Dorrance W. Lamb
Chief Financial Officer
and Vice President of Finance