ITEM 1.   CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note K – Fair Value Measurements

GAAP defines fair value, establishes a framework for measuring fair value and requires certain disclosures about fair value measurements. In addition, GAAP establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value.  Level 1 inputs are quoted prices in active markets for identical assets or liabilities.  Level 2 inputs are inputs other than quoted prices included in Level 1 that are directly or indirectly observable for the asset or liability.  Such inputs include quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, or inputs derived principally from or corroborated by observable market data by correlation or other means.  Level 3 inputs are unobservable inputs for the asset or liability. Such inputs are used to measure fair value when observable inputs are not available.

The Company’s assets measured at fair value on a recurring basis at March 31, 2012, were as follows:

The Company’s assets measured at fair value on a recurring basis at December 31, 2011, were as follows:

There were no transfers into or out of Level 1, Level 2 or Level 3.

Foreign currency forward contracts are measured at fair value using models based on observable market inputs such as foreign currency exchange rates; therefore, they are classified within Level 2 of the valuation hierarchy. The fair value of the Company's investments in municipal bonds and bank guaranteed investment contracts is measured using Level 2 inputs. For these investments, fair value is not materially different than amortized cost.

Note L – Stock-Based Compensation

PT has stock options outstanding from two stock-based employee compensation plans: the 2001 Incentive Stock Option Plan and the 2003 Omnibus Incentive Plan.  The 2001 Plan expired during 2011 and during the first quarter 2012, the Company’s Board of Directors approved the establishment of the 2012 Omnibus Incentive Plan, subject to stockholder approval.  If approved by PT’s stockholders, the 2012 Omnibus Incentive Plan will provide for an additional 1,500,000 shares to be available for future grants of equity-based incentive awards to selected employees, directors and consultants.

PT recognizes compensation expense in the financial statements for stock option awards based on the grant date fair value of those awards, estimated using the Black-Scholes-Merton option pricing model.  The table below summarizes the impact of outstanding stock options on the results of operations for the three month periods ended March 31, 2012 and 2011.

For arrangements with multiple deliverables, the arrangement consideration is allocated at the inception of an arrangement to all deliverables using the relative selling price method, using a selling price hierarchy for determining the selling price of a deliverable, which includes: (1) vendor-specific objective evidence (“VSOE”) if available; (2) third-party evidence (“TPE”) if vendor-specific objective evidence is not available; and (3) best estimated selling price (“BESP”) if neither vendor-specific nor third-party evidence is available. Our multiple deliverable arrangements generally include a combination of our telecommunications hardware and software products, services including installation and training, and support services.  These arrangements typically have both software and non-software components that function together to deliver the product’s essential functionality. Our arrangements generally do not include any provisions for cancellation, termination, or refunds that would significantly impact recognized revenue.

For substantially all of our multiple deliverable arrangements, whereby equipment and software are combined with other elements, such as software and maintenance, we defer support and services revenue, and recognize revenue for delivered products in an arrangement when persuasive evidence of an arrangement exists and delivery of the last product has occurred, provided the fee is fixed or determinable, and collection is deemed probable. In instances where final acceptance of the product is based on customer specific criteria, revenue is deferred until the earlier of the receipt of customer acceptance or the expiration of acceptance period.  Support revenue is recognized ratably over the term of the support period.  Services revenue is typically recognized upon completion of the services for fixed-fee service arrangements, as these services are relatively short-term in nature (typically several weeks, or in limited cases, several months). For service arrangements that are billed on a time and material basis, we recognize revenue as the services are performed.

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

The accounting estimate related to revenue recognition is considered a “critical accounting estimate” because terms of sale can vary, and judgment is exercised in determining whether to defer revenue recognition. Such judgments may materially affect net sales for any period. Judgment is exercised 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 collectibility is reasonably assured.

Software Development Costs: All software development costs incurred in establishing the technological feasibility of computer software products to be sold are charged to expense as 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, using the straight-line method or using the ratio of current revenues to current and anticipated revenues from such product, whichever provides greater amortization. If the technological feasibility for a particular project is judged not to have been met or recoverability of amounts capitalized is in doubt, project costs are expensed as research and development or charged to cost of goods sold, as applicable. The accounting estimate related to software development costs is considered a “critical accounting estimate” because judgment is exercised 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. Judgment is exercised 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. Inventory includes purchased parts and components, work in process and finished goods. Provisions for excess, obsolete or slow moving inventory are recorded after periodic evaluation of historical sales, current economic trends, forecasted sales, estimated product life cycles and estimated inventory levels. Purchasing practices, electronic component obsolescence, accuracy of sales and production forecasts, introduction of new products, product life cycles, product support and foreign regulations governing hazardous materials are the factors that contribute to inventory valuation risks.

Exposure to inventory valuation risks is managed 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 accounting estimate related to valuation of inventories is considered 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 life cycles differ from estimates, 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: PT provides deferred income tax assets and liabilities based on the estimated future tax effects of differences between the financial and tax bases of assets and liabilities based on currently enacted tax laws. A valuation allowance is established for deferred tax assets in amounts for which realization is not considered more likely than not to occur. The accounting estimate related to income taxes is considered a “critical accounting estimate” because judgment is exercised in estimating future taxable income, including prudent and feasible tax planning strategies, and in assessing the need for any valuation allowance. If it should be determined that all or part of a net deferred tax asset is not able to be realized in the future, an adjustment to the valuation allowance would be charged to income in the period such determination was made. Likewise, in the event that it should be determined that all or part of a deferred tax asset in the future is in excess of the net recorded amount, an adjustment to the valuation allowance would increase income to be recognized in the period such determination was made.

PT operates within multiple taxing jurisdictions worldwide and is subject to audit in these jurisdictions. Such audits can involve complex issues, which may require an extended period of time for resolution. Although management believes that adequate provision has been made for such issues, there is the possibility that the ultimate resolution of such issues could have an adverse effect on the earnings of PT. Conversely, if these issues are resolved favorably in the future, the related provisions would be reduced, thus having a positive impact on earnings.

In addition, the calculation of PT’s tax liabilities involves dealing with uncertainties in the application of complex tax regulations. PT recognizes liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step requires PT to estimate and measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as this requires PT to determine the probability of various possible outcomes. PT re-evaluates its uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit, and new audit activity. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision in the period.  At March 31, 2012, there are no tax uncertainties that PT has determined are required to be recognized.

Finally, the value of PT’s deferred tax assets is dependent upon PT’s ability to generate future taxable income in the jurisdictions in which PT operates. These assets consist of research credit carry-forwards, capital and net operating loss carry-forwards, and the future tax effect of temporary differences between balances recorded for financial statement purposes and for tax return purposes. It will require future pre-tax earnings of in excess of $23 million in order to fully realize the value of the Company's deferred tax assets. Due to the uncertainty of PT’s ability to realize its deferred tax assets, a valuation allowance has been recorded against substantially the full value of its U.S. deferred tax assets. 

PT is a global supplier of advanced network communications solutions to service providers, government, and OEM markets.  The industry-leading Monterey 8000™  MicroTCA and IPnexus^® Platforms anchor a growing portfolio of PT solutions. OEMs and application developers, including PT itself, leverage the robust carrier grade Linux^® development environment and rich suite of communications protocols (PT’s NexusWare^®) of our Application-Ready Platforms as a cornerstone component of their end product value proposition. PT’s SEGway™  Signaling Solutions provide affordable, high density signaling, advanced routing for LTE and IMS applications, IP migration, gateway capabilities, SIP bridging, and core-to-edge distributed intelligence, as well as features such as Number Portability and SMS Spam Defense. The Company’s Xpress™  NGN applications enable evolving Mobile 2.0, Multi-media, and IMS-based revenue-generating services. 

PT is headquartered in Rochester, New York and maintains direct sales and marketing offices in the U.S. in Raleigh, North Carolina and Chicago, Illinois and international offices in London, England and Shanghai, China, and has centers of engineering excellence in San Diego, California, and Kanata, Ontario, Canada, in addition to Rochester, New York.

PT’s business addresses one industry segment – Communications, and globally targets two primary vertical markets for its network communications products:  telecommunications, and military, aerospace and government systems. 

The telecommunications market, historically our largest vertical market, is fundamentally driven by investments in network infrastructure by carriers and service providers.  Telecommunications market revenues derived from our Application-Ready Platforms, which are sold to OEMs, depend primarily on broad, multi-year deployments of next-generation telecommunications infrastructure.  Telecommunications market revenues generated from service providers purchasing our SEGway and Xpress product lines result from investments necessary to support existing and evolving service demands such as text messaging and the transition to Internet-based communications networks. 

Sales into the military, aerospace and government systems market are typically to prime contractors and system integrators and reflect investment levels by various government agencies and military branches in specific programs and projects requiring enhanced communications capabilities.  Military, aerospace and government systems budgets are currently under pressure and shipments are subject to project deployment schedules, which are often unpredictable.   

Strategy

PT’s strategy is to maximize the value proposition of our products by leveraging its field-proven systems, software and hardware technologies.  Management believes the tightly integrated combination of these technologies provides considerable benefits to PT’s customers including a compelling return-on-investment proposition, significant development risk mitigation and a substantially accelerated time-to-market opportunity.

Management is focused on building on the momentum generated in 2011 and will continue to concentrate on the four network communications-focused initiatives established in 2010 to construct a solid foundation for long-term growth.  These initiatives include further strengthening our SEGway Signaling Systems product line, continued evolution and enhancement of our open-standards based Application-Ready Platforms for mission critical communications applications, intensifying our market diversification efforts in government systems markets, and identifying forward-looking network communications growth opportunities, such as our Xpress portfolio of SIP-based applications and enabling infrastructure, that we can pursue with our own end product solutions.  For more information regarding these initiatives, see ITEM 1 Business – Strategy in our Annual Report on Form 10-K  for the year ended December 31, 2011 filed with the Securities and Exchange Commission.

While our SEGway signaling product portfolio generates strong customer interest on a global basis, management believes that the Company’s relative size and financial resources have constrained our ability to more deeply penetrate the service provider market.  During 2011, management shifted the Company’s signaling sales and marketing strategy to become more heavily focused on working with large channel partners as our primary vehicle to expand our global and emerging market reach. In January 2011, GENBAND became a major signaling channel partner and during the third quarter 2011, Kapsch CarrierCom AG was added as a signaling channel partner.  We also continue to work closely under our established relationship with Alcatel-Lucent as another major channel partner for our signaling products.  The advantages of the channel partner strategy include the validation of our products by these large, creditable resellers, access to their customer base including much larger service providers than we are generally able to engage with and significant expansion of the global reach for our products through their direct sales organizations.  The notable disadvantages of this strategy are the lack of direct customer account control and visibility on closing sales transactions. 

In an effort to substantially reduce our operating expenses, during the first quarter 2011, management consolidated the Company’s San Luis Obispo, California engineering operation with its Rochester, New York engineering group and also reduced its sales and marketing staff.  Management believes that while it was necessary to make these reductions for financial reasons, the significant strategic investments made during 2010 were important in underpinning a solid foundation for long-term future growth.

There are identifiable risks associated with PT’s strategy in the current economic climate.  While management believes that its network communications market focus offers opportunities for growth in the long term, network infrastructure investments by carriers are very sluggish; the total available market for traditional SS7-based signaling products is declining and the market for SIP-based next-generation network products is not yet growing as rapidly as anticipated.  Despite the current economic climate, which may involve new risks not currently identified, management believes the outlook for the Company’s profitability is improving because expenses have been better aligned with projected revenues and our new channel partners are engaged in selling our products. 

Financial Overview

Revenue: 

Revenue in the first quarter 2012 amounted to $8.4 million, compared to $9.7 million in the first quarter 2011.  The decrease in revenue in the first quarter 2012 was primarily attributable to the non-recurrence of a significant 2011 shipment to a government systems customer, and a decrease in sales to PT’s traditionally largest customer as they begin to transition away from using PT’s IPnexus platforms in some of their products, partially offset by a significant increase in sales to our channel partners.  Shipments to customers outside of the United States represented 53% of sales in the first quarter of both 2012 and 2011.

Net Income (loss): 

Net income in the first quarter 2012 amounted to $.3 million, or $.03 per diluted share, including stock-based compensation expense of $.1 million, or $.01 per share and amortization of purchased intangible assets of $.3 million, or $.03 per share, based on 11.1 million shares outstanding.  PT incurred a net loss in the first quarter 2011 in the amount of ($1.1 million), or ($.10) per basic share, including a restructuring charge of $.1 million, or $.01 per share, and stock-based compensation expense of $.1 million, or $.01 per share, based on 11.1 million shares outstanding. 

Liquidity: 

Cash, cash equivalents and long-term investments amounted to $15.5 million and $15.8 million at March 31, 2012 and December 31, 2011, respectively.  The Company had no long-term debt at either date.  In the first quarter 2012, the Company made the final payment of $1.0 million relating to its 2011 agreement to acquire equipment, inventory and intellectual property including signaling software products from GENBAND.

Accounts receivable at March 31, 2012 amounted to $6.2 million, compared to $5.6 million at the end of 2011.  The higher level of accounts receivable is primarily related to increased sales occurring during the latter part of the first quarter and longer payment cycles for certain overseas customers.

Inventories decreased by $.5 million, to $4.9 million at March 31, 2012, from December 31, 2011.  The decrease in inventory is primarily attributable to the Company’s ongoing efforts to manage inventory levels and work down the inventory build-up during the transition to outsourcing the manufacture of our printed circuit boards to a contract manufacturer during 2010.     

Cash provided by operating activities amounted to $1.4 million in the three months ended March 31, 2012, as compared to cash used in operating activities of $3.4 million in the three months ended March 31, 2011.  The large swing in cash provided by (used) in operating activities was due to net income in 2012 as compared to a loss in the first quarter 2011, a significantly smaller increase in accounts receivable in 2012 as compared with 2011, and a $.5 million increase in accounts payable, accrued expenses and deferred revenue in 2012, as compared to a $.6 million decrease in the corresponding accounts in 2011.

Key Performance Indicator: 

PT believes that a key indicator for its business is the trend for the volume of orders received from customers.  The economy appears to be continuing an uneven recovery around the world and current business conditions continue to remain very challenging in the telecommunications equipment market. The telecommunications market, historically our largest vertical market, is fundamentally driven by investments in network infrastructure by carriers and service providers.  Telecommunications market revenues derived from our Monterey and IPnexus Application-Ready Platforms depend primarily on broad, multi-year deployments of next-generation telecommunications infrastructure.  The new norm in this OEM business appears to be that OEM customers place orders for product only when they have orders in hand from their customers and expect almost immediate delivery. Revenue from our OEM customers declined by $1.7 million year-over-year during the first quarter.  The most significant driver of this decline was lower shipments to our traditionally largest customer, which decreased by $1.0 million year-over-year, as they begin to transition away from using PT’s IPnexus platforms in some of their products. Telecommunications market revenues generated from Service Providers result from investments necessary to support existing and evolving service demands such as the ongoing worldwide growth in text messaging and the transition to Internet-based communications networks.  Revenues from service providers increased by $1.9 million year-over-year during the first quarter, including a substantial increase in sales to our channel partners.  Due to government delays beyond PT’s or our customer’s control, a meaningful portion of the revenue associated with our signaling systems installation in Nigeria remains unrecognized.  PT expects to complete that installation and recognize revenue later in 2012 or in early 2013.  

Shipments to customers outside of the United States represented 53% of PT’s sales during the first quarter of both 2012 and 2011.  Total shipments to customers in the United Kingdom represented 17% of sales in the first quarter 2012, compared to 25% of sales in the first quarter 2011.  One U.K. customer represented 16% and 24% of sales in the first quarter 2012 and 2011, respectively. 

Management is focused on selling PT’s products into two primary vertical markets within one segment, communications.  Revenue from each vertical market is expressed as a percentage of sales for the periods indicated:

Telecommunications market:

Revenue from the telecommunications market amounted to $7.1 million and $6.8 million in the first quarter 2012 and 2011, respectively. This increase of $.3 million, or 4%, was largely due to an increase in signaling shipments, including a $1.1 million increase in sales to one channel partner, offset by a $1.0 million decrease in shipments to the Company’s traditionally largest customer. 

Military, Aerospace and Government Systems market:

Our Government Systems group continues to work with numerous prime contractors to incorporate PT’s COTS-based, application ready systems into specific programs and projects requiring enhanced communications capabilities.

Military, aerospace and government systems products revenue amounted to $1.2 million and $2.9 million in the first quarter 2012 and 2011, respectively. This decrease of $1.7 million, or 59%, was primarily attributable to a $1.6 million order shipped to one government systems customer in the first quarter 2011, which did not recur in 2012.

Gross profit.  Gross profit consists of sales, less cost of goods sold including material costs, manufacturing expenses, depreciation, amortization of software development costs, amortization of purchased intangible assets, and expenses associated with engineering contracts and the technical support function.  Gross profit and gross margin percentage amounted to $4.6 million and 54.6% of sales in the first quarter 2012, compared to $4.5 million and 46.4% of sales for the first quarter 2011.  The significant improvement in gross margin percentage was primarily attributable to a substantially more favorable sales mix, slightly lower manufacturing costs and a decreased level of amortization expenses associated with capitalized software development costs and purchased intangible assets.

Total Operating Expenses.  Total operating expenses amounted to $4.2 million in the first quarter 2012, as compared to $5.7 million in the first quarter 2011.

Selling and marketing expenses were $1.5 million and $1.9 million for the first quarter 2012 and 2011, respectively.  The decrease of $.4 million, or 21%, primarily relates to a reduction in sales and marketing headcount and lower sales commissions.

Research and development expenses were $1.6 million and $2.2 million in the first quarter 2012 and 2011, respectively. PT capitalizes certain software development costs, which reduces the amount of software development charged to operating expenses.  Amounts capitalized were $.6 million during the first quarter of both 2012 and 2011.  Gross expenditures amounted to $2.2 million and $2.8 million in the first quarter 2012 and 2011, respectively.  The decrease in research and development expenses is due primarily to the closure of the Company’s San Luis Obispo, California engineering center, which was completed in the second quarter 2011.

General and administrative expenses were $1.1 million and $1.5 million in the first quarter 2012 and 2011, respectively.  This decrease of $.4 million, or 27%, primarily relates to significant litigation expenses incurred in the first quarter 2011.  The litigation for which these expenses were incurred was ended in May 2011 when the parties voluntarily agreed to dismiss all of their respective claims and defenses without prejudice.

Restructuring expenses associated with the closure of the Company’s San Luis Obispo, California engineering center were $.1 million in the first quarter of 2011.

Other (expense) income, net. Other income consists primarily of interest income.  PT’s funds continue to be invested in high-quality corporate and government bonds, and guaranteed investment contracts and money market funds.  Other expense, net, amounted to $.03 million for the first quarter 2012, while other income, net, amounted to $.07 million for the first quarter 2011.  Other (expense) income includes a $.06 million out-of-period charge to adjust the recorded balance of accumulated other comprehensive income.

Income taxes.  The Company’s effective income tax rates differ from the statutory rates primarily due to a full valuation allowance provided against its U.S. deferred tax assets, income taxes on foreign income and refundable income tax credits that differ from the U.S. income tax rate, and permanent income tax differences including Canadian research activities.

PT’s income tax benefit for the first quarter 2012 amounted to $.02 million, compared to a benefit of $.05 million for the first quarter 2011.  For the first quarter 2012, PT’s annual estimated effective income tax rate is -8%, as compared to an estimated effective income tax rate of 5% for the first quarter 2011.  The expected annual effective income tax rate in the first quarter 2012 is different than in the corresponding quarter in 2011 primarily due to increased refundable Canadian provincial tax credits the Company expects to receive for 2012 and a change in the Company’s projected profitability for the full year.

Liquidity and Capital Resources

PT’s primary sources of liquidity are cash, cash equivalents and long-term investments, which totaled $15.5 million at March 31, 2012 and $15.8 million at December 31, 2011.  The Company had working capital of $19.6 million and $18.3 million at March 31, 2012 and December 31, 2011, respectively.  The decrease in cash, cash equivalents and long-term investments during the first quarter 2011 was primarily due to the Company’s final payment of $1.0 million to GENBAND in connection with the Company’s 2011 purchase of equipment, inventory and intellectual property including signaling software products, and the Company’s investment of $.6 million in capitalized software projects, offset partially by net cash provided by operations.

For the first quarter 2012, cash provided by operating activities amounted to $1.4 million.  This amount included net income of $.3 million, depreciation and amortization charges of $.7 million, amortization of purchased intangible assets of $.3 million, and stock-based compensation expense of $.1 million.  Changes in operating assets and liabilities included an increase of accounts receivable of $.8 million, a decrease in inventories of $.5 million and the net change in accounts payable, accrued expenses and deferred revenue totaling $.4 million.  The increase in accounts receivable was primarily due to the higher level of sales in March 2012, compared to December 2011.   

Cash used by investing activities during the first quarter 2012 totaled $3.6 million including the final payment for the purchase of assets from GENBAND which amounted to $1.0 million, capitalized software development costs amounting to $.6 million, capital expenditures of $.1 million, and purchases of investments which totaled $2.0 million.

Off-Balance Sheet Arrangements:

On February 3, 2012, the Company executed a lease agreement for its new corporate headquarters facility.  The new facility, which has approximately 32,000 square feet of office and warehouse space, is located in Rochester, New York.  This facility will replace PT’s existing corporate headquarters facility and will house executive offices, along with sales, marketing, engineering and manufacturing operations.  PT expects to occupy the new premises during the second quarter 2012.

The new lease is effective as of January 1, 2012 and has a sixty-six month term for approximately two-thirds of the space and a thirty-eight month term for the remaining space.  The initial rent payments for the new facility will total approximately $352,000 annually and will escalate by approximately 1.3% each year.  In addition, PT will be responsible for payment of the utilities, real estate taxes, insurance and maintenance on this property.

In addition, PT entered into a termination of lease agreement with the Landlord, also effective as of January 1, 2012, for its existing corporate headquarters facility.  This agreement waives PT’s remaining obligations for the payment of rent and real estate taxes through the expiration date of its current lease. 

Current Position:

Assuming there is no significant change in the business, management believes that PT’s current cash, cash equivalents and investments, together with cash generated from operations will be sufficient to meet our anticipated cash requirements, including working capital and capital expenditure requirements, for at least the next twelve months. 

Recent Accounting Pronouncements

Comprehensive Income:

In June 2011, the FASB issued authoritative guidance on the presentation of comprehensive income that eliminates the option to present the components of other comprehensive income as part of the statement of equity and requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  This guidance became effective as of January 1, 2012 for the Company.  The guidance requires changes in financial statement presentation only and has no impact on the Company's financial position or results of operations.  The Company has chosen the two-statement approach, and the Statement of Comprehensive Income is presented on page 5.

Fair Value Measurement and Disclosures:

In May 2011, the FASB issued authoritative guidance that amends current fair value measurement and disclosure guidance to include increased transparency around valuation inputs and investment categorization.  The Company has adopted this guidance as of January 1, 2012.  

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995

The Private Securities Litigation Reform Act of 1995 (the "Reform Act") provides a "safe harbor" for forward-looking statements. Certain written and oral statements made by management of Performance Technologies, Incorporated and its subsidiaries (collectively "PT") include forward-looking statements intended to qualify for the safe harbor from liability established by the Reform Act. These forward-looking statements generally can be identified by words such as "believes," "expects," "anticipates," "projects," "foresees," "forecasts," "estimates" or other words or phrases of similar import. Words such as the "Company," "PT," "management," "we," "us," or "our," mean Performance Technologies, Incorporated and its subsidiaries. All statements herein that describe PT's business strategy, outlook, objectives, plans, intentions, goals or similar projections are also forward-looking statements within the meaning of the Reform Act. Forward-looking statements should be read in conjunction with the audited Consolidated Financial Statements, the Notes thereto, and Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company as contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2011, and other documents filed with the Securities and Exchange Commission.

All such forward-looking statements are subject to certain risks and uncertainties and should be evaluated in light of important risk factors.  These risk factors include, but are not limited to, the following as well as those that are described in “Risk Factors” under Item 1A and elsewhere in the Annual Report on Form 10-K:  business and economic conditions, rapid technological changes accompanied by frequent new product introductions, competitive pressures, dependence on key customers, inability to gauge order flows from customers, fluctuations in quarterly and annual results, the reliance on a limited number of third party suppliers, limitations of the Company’s manufacturing capacity and arrangements, the protection of the Company’s proprietary technology, errors or defects in our products, the effects of pending or threatened litigation, the dependence on key personnel, changes in critical accounting estimates, potential impairments related to investments, foreign regulations, possible loss or significant curtailment of significant government contracts or subcontracts and potential material weaknesses in internal control over financial reporting. In addition, during weak or uncertain 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.

Any of these factors could cause PT’s actual results to differ materially from its anticipated results.  For a more detailed discussion of these factors, see the "Risk Factors" discussion in Item 1A in the Annual Report on Form 10-K.  The Company cautions readers to carefully consider such factors.  Many of these factors are beyond the Company’s control.

ITEM 3.        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 investments and management believes PT’s exposure to such risk is minimal.  PT’s investments are made in accordance with PT’s investment policy and primarily consist of money market funds, highly-rated corporate and quasi-government bonds, certificates of deposit and bank guaranteed contracts.  The Company is also subject to foreign currency exchange risks related to its operations in Kanata, Ontario, Canada, and in the United Kingdom. The Company believes that its balance sheet exposure to foreign currency exchange risks is minimal, as generally all revenues and accounts receivable are denominated in U.S. dollars.  However, PT’s expenses at these locations are denominated in the local currency and PT’s results of operations are influenced by changes in the exchange rates between the United States and Canada and the United Kingdom.  Both the Canadian dollar and British Pound strengthened against the U.S. dollar during the first quarter 2012, resulting in higher levels of expense denominated in U.S. dollars.