UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

                Annual Report Pursuant to Section 13 or 15(d) of
                       the Securities Exchange Act of 1934

                   For the Fiscal Year Ended December 31, 1998
                         Commission File Number 0-11331


                          PERFORMANCE INDUSTRIES, INC.
             ------------------------------------------------------
             (Exact name of Registrant as Specified in its Charter)


            OHIO                                                 34-1334199
 ------------------------------                              ------------------
(State or Other Jurisdiction of                               (I.R.S. Employer
 Incorporation or Organization)                              Identification No.)


                        2701 E. CAMELBACK ROAD, SUITE 210
                             PHOENIX, ARIZONA 85016
              -----------------------------------------------------
              (Address of principal executive offices and zip code)


                                 (602) 912-0100
               --------------------------------------------------
               (Registrant's telephone number including area code)


Securities Registered Pursuant to Section 12(b) of the Act:

                                                           Name of Each Exchange
  Title of Each Class                                       on Which Registered
  -------------------                                       -------------------
        NONE                                                        NONE


          Securities Registered Pursuant to Section 12(g) of the Act:

                         Common Stock, Without Par Value
                         -------------------------------
                                (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  the  registrant's   knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K.  [ ]

The aggregate market value of Registrant's voting stock held by nonaffiliates as
of March 31, 1999 (based upon closing price) was $521,942.


At  March  31,  1999,   2,211,183  shares  of  Registrant's  Common  Stock  were
outstanding.
<PAGE>
                                     PART I

ITEM 1. BUSINESS

In 1997,  the  Company  restructured  its  operations  divesting  itself  of two
businesses,   Factoring  and  Development.   This  will  allow  the  company  to
concentrate on its core  business,  Restaurants.  Management  believes this will
enable  analysts to better  understand  the Company  which may result in greater
stock activity.

PERFORMANCE RESTAURANTS GROUP, INC. (RESTAURANTS)

Restaurants  was  formed  in  1993  to  acquire  six  operating  restaurants  in
California.  Four of the restaurants  operate under the trade name Bobby McGee's
and are full service restaurants/nightclubs. The fifth was converted to a sports
bar-restaurant/nightclub  concept  operating under the trade name McGee's Grill.
In 1996, the Company sold one of the original Bobby McGee's locations.

In 1995, a restaurant was acquired in Scottsdale,  Arizona. It is a full service
restaurant  and bar  operating  under the trade name Buster's  Restaurant  Bar &
Grill.

In 1996,  the Company  acquired two Carlos  Murphy's  restaurants  in San Diego,
California.  In 1998,  the Company  entered into an operating  lease for the two
Carlos Murphy's restaurants with an unrelated third party. Subsequently, one was
closed in 1998, and the other was sold in January 1999.

In October,  1998, the company  purchased  Steamers  Genuine  Seafood.  It is an
upscale seafood restaurant located in the Biltmore Fashion Park in Phoenix, AZ.

The Bobby McGee's concept is a full service  restaurant  using costumed  servers
and a lounge  offering  music and dancing at the same  location.  The restaurant
appeals to a wide range of diners as a special event restaurant.  Diners come to
the restaurant to celebrate  birthdays,  anniversaries,  graduations,  and other
special occasions.

McGee's Grill was opened in 1994. It features pool tables and television screens
for the viewing of sports  events and a limited menu for dinner and lunch in the
sports  bar.  The sports bar is  combined  with the more  traditional  nightclub
offered at other Bobby McGee's restaurants.

Buster's is a full  service  restaurant  offering a variety of dishes  including
seafood,  steak and pasta  dishes.  Buster's  is on the higher end of the casual
dining market.

Steamers  is a full  service  restaurant  offering  a  variety  of  dishes,  but
featuring seafood. Steamers is on the higher end of the casual dining market.

PERFORMANCE FUNDING CORP. (FUNDING)

The Company sold the Factoring  business to a third party related through common
management in August 1997.  The Company  believes the sale to have been on terms
at least as favorable as it would have  received in an arms length  transaction.
The sale allowed the Company to make  available cash for use in the expansion of
its restaurant division when needed.

PERFORMANCE DEVELOPMENT CORP. (DEVELOPMENT)

CAMELBACK PLAZA DEVELOPMENT, L.C.

In  December  of  1997,  the  Company  sold  its  interest  in  Camelback  Plaza
Development,  Inc.  to  Imprimis  Partners  II,  the  minority  partner  in  the
Development. The Company received approximately $700,000. for its interest.

                                       2
<PAGE>
IXTAPA

The Company purchased land for development as a condominium complex. At the time
of purchase, the seller had committed to construction financing for the project.
As discussed further below, the Company has indefinitely delayed the project due
to the continuing financial situation in Mexico.  Currently, the Company has the
property listed for sale with a broker.

A. COMPETITION

The  restaurant  business  is highly  competitive.  Restaurants  competes in the
restaurant   business  with  a  number  of  chains  and  restaurants   owned  by
substantially   larger   companies   with  greater   financial   resources  than
Restaurants.  Restaurants competes on the basis of name recognition,  concept of
restaurants,  location,  quality  of  product  and  other  intangible  elements.
Restaurants  believes  that  the  costume  concept,  along  with  the  adjoining
nightclub,  offers a unique experience for the consumer that has a broad appeal.
Restaurants further believes its present locations offer a competitive advantage
over other areas.

B. TRADEMARKS AND PATENTS

The Company's  registered  trademark for  Restaurants is an important  factor in
marketing  for this  group  due to the high  degree of name  recognition  in its
geographical  area and  general  market.  The name Bobby  McGee's  is  federally
trademarked.

C. ENVIRONMENTAL MATTERS

An  investigation  of  environmental  matters related to facilities and property
owned and leased by the Company was  performed to determine  contingencies  that
may have  affected the  Company's  emergence  from Chapter 11.  Certain  reports
received by the Company have identified areas of environmental contamination and
potential   environmental   contamination.   Management  believes  that  certain
predecessors-in-interest   may  bear  either  full  or  partial   liability  for
remediation of affected areas. Certain predecessors-in-interest and governmental
agencies have been notified by the Company of the related possible  liabilities.
In addition,  the Company  notified its insurance  carriers of potential  claims
under its general liability and property insurance coverage from prior years.

     a)   REYES AVENUE COMPTON, CA

This facility housed the manufacturing  plant of the former Wheel business which
was sold in 1992.

In 1991, possible  contamination at the site was discovered.  The Richter Family
Trust,  the owner of this  facility,  filed an action  against  the  Company and
others in the U.S.  District  Court for the Central  District of California  and
served it on the Company in April 1995.  The Company  responded to the complaint
on its behalf and on behalf of Joe  Hrudka as an  officer  of the  Company.  The
complaint seeks damages of an unspecified amount for environmental contamination
at the  site  under  several  theories.  Currently,  the  action  is  stayed  by
stipulation of the parties,  so that further  testing to determine the extent of
the contamination can be completed.

The Company tendered defense of the action to several  insurance  carriers under
policies in force for the periods when it owned and operated its wheel  division
at the site.  Two insurers  have agreed to pay some legal costs of defending the
action under their policies, although they have reserved the right to ultimately
deny coverage.

ITEM 2. PROPERTIES

As of December  31,  1998,  the Company and its  subsidiaries  leased a total of
approximately 89,050 square feet of restaurant,  office, and other space for its
principal   facilities.   Management   believes   that  the  Company's  and  its
subsidiaries' facilities and equipment are modern and well maintained.

The locations and general  description  of the  principal  properties  owned and
leased by the Company and its subsidiaries are as follows:

                                       3
<PAGE>
                                          APPROXIMATE AREA
LOCATION         PRIMARY FUNCTIONS         IN SQUARE FEET       LEASE EXPIRATION
--------         -----------------         --------------       ----------------
Phoenix,         Office                        2,115               7/31/2000
  Arizona
Scottsdale,      Buster's Restaurant           9,123               4/31/2000
  Arizona         Bar & Grill
Phoenix,         Steamers Genuine Seafood      7,827               5/01/2007
  Arizona
Brea,            Restaurant/Nightclub          11,000              6/30/2005
  California
Burbank,         Restaurant/Nightclub          11,000              6/30/2010
  California
Burlingame,      Restaurant/Nightclub          9,000               12/31/2006
  California
Citrus Heights,  Restaurant/Nightclub          10,600              9/14/2005
  California
San Bernardino,  Restaurant/Nightclub          10,500              11/13/2002
  California
Las Vegas,       Restaurant/Nightclub (1)      9,185               12/31/2005
  Nevada
La Mesa,         Restaurant/Nightclub (2)      8,700               12/31/2005
  California
Ixtapa           Raw Land                      8,748 sq. meters    Owned

(1)  The property is  currently  subleased  to an  unrelated  third  party.  The
     Company is a guarantor of the lease.

(2)  The property was sold on 1/19/99.

ITEM 3. LEGAL PROCEEDINGS

     A.   On January  6th,  1994,  the Company  filed an action in the  Superior
          Court of Arizona for the County of Maricopa to determine the fair cash
          value of its shares held by  shareholders  who dissented from the sale
          of the Exhaust business.  The case was explained in detail in the 1997
          10-K. The case was settled in 1998.

     B.   On January 26,  1994,  an action filed by Murray & Murray in the Court
          of Common Pleas, County of Cuyahoga,  State of Ohio, was served on the
          Company and three former or present  officers and/or  directors of the
          Company;  Joe Hrudka, Tom Hrudka and Howard B. Gardner.  This case was
          settled in 1998.

     C.   In April 1995,  the  Company  was served  with an action  filed by the
          Richter  Family  Trust  in the U.S.  District  Court  for the  Central
          District of California  against the Company and others for unspecified
          damages for the remediation of the site of the Company's  former wheel
          manufacturing  plant.  The  Company  responded  to the suit on its own
          behalf and on behalf of Joe  Hrudka,  an officer  and  director of the
          Company, who was sued personally.  Currently, the case has been stayed
          by  stipulation  of  the  parties,  so  that  further  testing  can be
          conducted on site to determine the extent of the contamination.

          The  Company is  involved in various  other  claims and legal  actions
          arising  in  the  ordinary  course  of  business,   including  product
          liability  claims.  In  the  opinions  of  management,   the  ultimate
          disposition  of these matters will not have a material  adverse effect
          on the Company's consolidated financial condition.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

                                       4
<PAGE>
                                    PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
        MATTERS

The following  table sets forth the range of high and low closing bid prices for
the Company's  common stock as reported by the NASDAQ National Market System for
the past two calendar years: (1)

                                                  BID      ASK
                                                  ---      ---
           1998
           Quarter ended March 31, 1998             1     1 3/8
           Quarter ended June 30, 1998              1     1 3/8
           Quarter ended September 30, 1998         1     1 3/8
           Quarter ended December 31, 1998          1     1 3/8

           1997 (2)
           Quarter ended March 31, 1997           5/8     1 3/8
           Quarter ended June 30, 1997            5/8     1 3/8
           Quarter ended September 30, 1997       3/4     1 5/8
           Quarter ended December 31, 1997        3/4     1 5/8

(1)  All quotations  represent  inter-dealer  prices,  without  retail  mark-up,
     markdown or commission, and may not necessarily represent actual trades.

(2)  Restated to reflect 4 for 1 reverse stock split effective June, 1996.

As of March 26, 1999,  there were 766 holders of record of the Company's  common
stock. No dividends have been declared since December 1984, nor does the Company
anticipate that any dividends will be declared in the foreseeable future.

The Company's shares are traded over the counter.

During 1996,  the Company  effected a 4 for 1 reverse stock split and an odd lot
tender offer. Approximately 8200 shares were tendered to the Company.

ITEM 6. SELECTED FINANCIAL DATA (in thousands, except per share data).
The  Company's  selected  consolidated  financial  data  has  been  prepared  in
accordance with generally accepted accounting  principles  applicable to a going
concern,  which principles,  except as otherwise  disclosed,  assume that assets
will be realized and  liabilities  will be  discharged  in the normal  course of
business.

The  following  table sets forth  selected  consolidated  financial  data of the
Company  for  the  five  years  ended  December  31,  1994  through  1998.  This
information  should be read in  conjunction  with  "Management's  Discussion and
Analysis of Financial  Condition  and Results of  Operations"  and the financial
statements and related notes thereto  included  elsewhere  herein.  The selected
consolidated  financial  data for the years ended December 31, 1994 through 1998
are derived from the audited financial statements of the Company.

YEAR ENDED DECEMBER 31
OPERATING RESULTS:              1994      1995      1996       1997       1998
------------------              ----      ----      ----       ----       ----
Net revenues                  $19,004   $21,598   $22,407    $22,029    $19,456

Net income (loss)             $   435       294   $(3,723)   $(1,606)   $  (483)

Net income (loss) per
 common share                 $   .17       .12   $ (1.50)   $  (.64)   $  (.21)

Weighted average number
 of common stock outstanding    2,458     2,489     2,486      2,472      2,309

                                       5
<PAGE>
YEAR ENDED DECEMBER 31
FINANCIAL POSITION:               1994      1995      1996      1997      1998
-------------------               ----      ----      ----      ----      ----
Working capital
   (deficiency)                 $   574   $ 2,424   $ 1,118   $ 1,194   $  (721)

Total assets                    $24,108   $24,878   $21,971   $10,405   $ 9,397

Long term debt, excluding       $ 5,962   $ 7,345   $ 8,950   $   255   $    58
current installments and
amount subject to compromise

Shareholders' equity            $11,494   $13,061   $ 8,530   $ 6,212   $ 5,214
   (deficiency)

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS

RESULTS OF OPERATION

PERFORMANCE RESTAURANTS GROUP, INC.

Restaurants  Gross  Revenue  were  down in 1998 due to the  closing  and sale of
several  units,  $19,456,000 in 1998 vs.  $22,029,000 in 1997.  Revenue of those
units open for the entire year were up nominally.

The Company had a loss of $483,000  for the period  ending  December 31, 1998 as
compared to a loss of $1,606,000 for the same period in 1997. Included in 1998's
operational loss were losses of $338,000 from three  restaurants,  Las Vegas, La
Mesa and La Jolla all of which were  disposed  of in early 1999 as compared to a
loss on Las Vegas in 1997 of $65,000.

Cash flow from  operating  activities  was $825,000 in 1998 vs. $49,000 in 1997.
Net cash flow was down  $1,329,000  in 1998 because of the purchase of Steamers,
repayment of borrowings and purchase of treasury stock.

LIQUIDITY AND CAPITAL RESOURCES

The Company has sufficient Cash flow to meet its current  operating  needs.  The
slowest  period for  Restaurants  is the late  spring and summer  when sales are
seasonally  slow.  During this  period,  the  Company  will use some of its cash
reserve for operations.  Over the past several years,  tighter costs control has
lessened the Company's reliance on cash reserves during this period.

In late 1998, the Company purchased Steamers Genuine Seafood Restaurant. This is
an upscale seafood  restaurant that management  believe is a concept that can be
expanded.  We are looking at sites in Scottsdale  along with the  possibility of
the  conversion  of our  Bobby  McGee's  restaurant  at the  Embassy  Suites  in
Burlingame, CA to a Steamers.

In the first  quarter of 1999,  the  Company  sold its Las Vegas and its La Mesa
locations,  and closed its La Jolla  location.  It also plans on closing the San
Bernardino  Bobby  McGee's.  The Company did not believe any of these  locations
were worth the investment required to update the restaurants.

In  addition,  the Company is  reviewing  several new concepts for the two Bobby
McGee's in Southern  California  where sales have been trailing the other units.
No  decision  has been  made on the type of  concept,  although  management  has
decided to make a change from its current operations. Several format changes are
being reviewed  including a steakhouse,  an american grill concept and a seafood
restaurant.  A decision  should be made in the second quarter and the conversion
completed by September, 1999.

Management  believes,  but there can be no  assurance,  that the  expense of the
conversion  of these  two  restaurants  can be met from  cash  flow.  Management
believes  that most of the  capital  costs for  expansion  could be met  through

                                       6
<PAGE>
financing by way of loans, seller carry backs and leases for furniture, fixtures
and equipment.  If new restaurants are opened,  the Company will use less of its
cash reserves to open the new restaurant and more financing where available.

Y2K ISSUE

The Company  estimates it will cost  $60,000 to upgrade the register  systems at
the  stores to be Y2K  compliant.  It is  estimated  that it will  cost  another
$20,000 to bring the Corporate  office system in  compliance.  These changes are
expected to be completed before September.

The  Company has been  assured  that its  Payroll  provider  and all credit card
providers meet 2000  standards.  Food and liquor  suppliers that are online have
assured  us they also meet 2000  standards.  The  Company  does not  expect  any
disruptions in its business because of Y2K problems.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The independent  auditors' report on the Consolidated  Financial  Statements and
Schedules listed in the accompanying index are filed as part of this report. See
Index to Audited Consolidated Financial Statements and Schedules on page 13.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH INDEPENDENT AUDITORS ON ACCOUNTING
        AND FINANCIAL DISCLOSURE

None.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The Directors and Executive Officers of the Company as of December 31, 1997 were
as follows:

NAME                                 AGE                  POSITION
----                                 ---                  --------

Joe Hrudka                            60               President

Edmund L. Fochtman, Jr.(1)            61               Vice President/CFO

Allen L. Haire(1)                     56               Director

All Directors are elected annually by the Company's shareholders and hold office
until their successors are duly elected and qualified.

(1) Member of the Audit Committee

Joe Hrudka is the founder and principal  shareholder of the Company.  Since 1981
he has served as the Chairman of the Board and a Director. Mr. Hrudka has served
as Chief  Executive  Officer of the Company  since  November  1993.  In 1997, he
assumed the  additional  position of President.  In 1964, Mr. Hrudka founded the
original Mr.  Gasket  Company and served as Chairman of the Board and  President
until the Company was purchased by W.R. Grace in 1971. He was then employed as a
Vice President of the Automotive Division of W.R. Grace from 1972 to 1974 and as
a consultant to W.R.  Grace during 1975 and 1976.  From 1977 until the formation
of the Company in 1981, Mr. Hrudka was a private investor. Mr. Hrudka had served
as a director of Action  Products,  Inc.,  from 1987, and served as Secretary of
Action  Products,  Inc.,  from  October  1990 to May 1992.  In November  1991, a
receiver was appointed by the Maricopa County Superior Court,  State of Arizona,
to manage  the  assets of Action  Products,  Inc.,  at the  request of a secured
party.  Action's  assets were sold in May 1992 by the  receiver.  Mr. Hrudka has
served as a Director of each of the subsidiaries since they have been formed.

                                       7
<PAGE>
Edmund L.  Fochtman,  Jr.,  has been a Vice  President of the Company from June,
1997.  Prior to this, he was President of the Company from May,  1993. He was an
executive Vice President of the Company since January,  1992. He was Chairman of
the Board of Directors and Chief Executive  Officer of Action Products,  Inc., a
company engaged in manufacture and sale of fiberglass bodied mini-cars and sales
of other promotional products from October 1986 until January 1992. From 1984 to
1986, Mr. Fochtman was a private investor.  From 1976 to 1984, he served as Vice
President of F.W. & Associates,  Inc. In November 1991, a receiver was appointed
by the Maricopa County Superior Court, State of Arizona, to manage the assets of
Action Products,  Inc., at the request of a secured party.  Action's assets were
sold in May 1992 by the  receiver.  Mr.  Fochtman  was elected a Director of the
Company in June 1988 and as a director of each of the subsidiaries since 1993.

Allen L. Haire has been chairman and Chief Executive Officer of Enerco Technical
Products,  a manufacturer of gas-fired  infra-red heating equipment,  since July
1984. He was a  manufacturer's  representative  from 1977 to 1984. Mr. Haire was
elected a Director in June 1988.

ITEM 11. EXECUTIVE COMPENSATION

The information  required by this item is incorporated herein from the Company's
proxy  statement to be filed  pursuant to Regulation  14(a) under the Securities
Exchange Act of 1934, within 120 days from December 31, 1996.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

PRINCIPAL SHAREHOLDERS

The following  tables sets forth the number and  percentage  of the  outstanding
shares of common  stock  beneficially  owned as of March 29,  1999,  by the only
persons known to the Company to own beneficially more than 5% of the outstanding
shares of common stock.

NAME AND ADDRESS                        NUMBER OF SHARES       PERCENT
OF BENEFICIAL OWNER                    BENEFICIALLY OWNED      OF CLASS
-------------------                    ------------------      --------
Joe Hrudka
2701 E. Camelback Rd., Suite 210           1,689,241             76%
Phoenix,  AZ  85016

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Howard  Gardner  Consultants  received  $30,000.  in 1996 from the  Company  for
consulting services on financial and general business matters. Howard B. Gardner
is a former  officer  and  director  of the  Company.  The fees are  included in
selling, general and administrative expenses in the statement of operations.

A former  Director of the Company,  Jonathan  Tratt,  earned a 3%  commission of
$90,000.  from the sale of the Company's stock in its Mexican  subsidiary during
1996. The commission is included in selling, general and administrative expenses
in the accompanying  statement of operations.  Of the commission earned, $45,000
was paid during 1996. During 1997, the Company received a discount of $4,500. on
the commission. The remaining balance of $37,500. was paid during 1997.

In August  1997,  the  Company  sold its  Factoring  division  to a new  company
including two present  directors and officers of the Company,  Joe Hrudka and Ed
Fochtman,  Jr.  The sale was on terms at least as  favorable  as would have been
realized in a sale to unrelated third parties.

                                       8
<PAGE>
In  December of 1997,  the Company  sold its  interest  in the  Camelback  Plaza
Development,  L.C., to the other members of the limited liability  company.  The
Company had tried to sell the development  for over a year and was  unsuccessful
in finding a bona fide purchaser for the entire project. Management believes the
sale to be on terms at least as favorable as would have been  realized in a sale
to unrelated third parties.

In 1997, the Company made two short term loans totaling $55,000.  to Joe Hrudka.
Mr. Hrudka has repaid the loans.

In December,  1997,  the Company  purchased  shares of stock in the Company from
Jonathan Tratt, a former director, for $126,425.

                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-K

     (1)  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS:

          Independent Auditors' Report

          Consolidated Balance Sheets - December 31, 1998 and 1997

          Consolidated  Statements  of  Operations  - Years ended
          December 31, 1998, 1997 and 1996

          Consolidated Statements of Shareholders' Equity - Years
          ended December 31, 1998, 1997 and 1996

          Consolidated  Statements  of Cash  Flows - Years  ended
          December 31, 1998, 1997 and 1996

          Notes  to  Consolidated  Financial  Statements  - Years
          ended December 31, 1998, 1997 and 1996

     (2)  INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULES:

          All schedules have been omitted because the material is
          not  applicable  or is not required as permitted by the
          rules  and  regulations  of  the  Commission,   or  the
          required  information  is  included  in  Notes  to  the
          Consolidated Financial Statements.

     (3)  EXHIBITS:

Exhibit No.
-----------

10.47    The following  documents  related to the sale of the Company's  Exhaust
         Division to Walker Manufacturing Company as filed with Notice of Annual
         Meeting of shareholders dated November 8, 1994 and incorporated  herein
         by reference.

10.48    1993 Stock Option Plan of Performance  Industries,  Inc. filed with the
         Company's  Notice of Annual Meeting of  shareholders  dated November 8,
         1993 and incorporated herein by reference.

10.49    Documents  relating  to its  purchase  of  operating  assets from Bobby
         McGee's USA, Inc.,  effective  December 20, 1993, which were filed with
         the  Company's  report on Form 10-K for the period  ended  December 31,
         1993, and are incorporated herein by reference.

                                       9
<PAGE>
10.50    The  following  documents  relating to the purchase of the ground lease
         for 2671 E. Camelback Road,  Phoenix,  Arizona,  effective December 30,
         1993,  as filed  with the  Company's  report  on Form 10-K for the year
         ended December 31, 1993, and are incorporated herein by reference:

10.51    Lease dated May 9, 1994,  by and between Just for Feet,  Inc.  (Lessee)
         and Camelback Development L.C. (Lessor) dated May 9, 1994 as filed with
         the Company's report on Form 10-K for the year ended December 31, 1994,
         and are incorporated herein by reference.

10.52    Lease dated June 30, 1994,  by and between  Blockbuster  Music  Retail,
         Inc. (Lessee) and Camelback Plaza  Development,  L.C. (Lessor) as filed
         with the Company's  Report on Form 10-K for the year ended December 31,
         1994, and incorporated herein by reference.

10.53    Lease dated  January 17,  1995 by and between  Restaurants  of America,
         Inc. (Lessee) and Camelback Plaza Development,  L.C. (Lessor), as filed
         with the Company's  Report on Form 10-K for the year ended December 31,
         1994, and incorporated herein by reference.

10.54    Design Build Lease  Agreement  dated  December 18, 1992, by and between
         Hard Rock Cafe Investors,  Ltd., XIV (Lessee) and Imprimis  Partners II
         (Lessor) and amendment  thereto dated  September 26, 1994 as filed with
         the Company's  Report on Form 10-K for the year ended December 31, 1994
         and incorporated herein by reference.

10.55    Offer to purchase Buster's Restaurant, Bar and Grill dated February 25,
         1995,  including  a  first  assignment  and  Assumption  of  Lease  and
         landlord's  consent  dated March 15, 1995,  by and between  Mercado Del
         Lago,  L.L.C.,  Buster's & Company,  Inc. and  Performance  Restaurants
         Group,  Inc.,  and lease dated the 20th of November 1989 by and between
         Mercado Project Group,  Inc., and lease dated the 20th of November 1989
         by and between Mercado Project Limited (Lessor) and Buster's & Company,
         Inc. (Lessee), and Bill of Sales dated March 15, 1995.

10.56    Documents  from the Caliber Bank loan dated June 24,  1994,  as amended
         September 21, 1994.

               -    Restaurant  Phase  Construction  Agreement,  dated  June 24,
                    1994.

               -    Restaurant Phase  Promissory  Note. - Irrevocable  Letter of
                    Credit - $1,900,000.

               -    Environmental Indemnification Agreement.

               -    Amendment to Restaurant Phase  Construction  Loan Agreement,
                    Restaurant  Phase Promissory Note, and Restaurant Phase Deed
                    of Trust, dated September 21, 1994.

               -    Restaurant  Phase Leasehold  Construction  Deed of Trust and
                    Security  Agreement  with  Assignment  of Rents and Fixtures
                    Filing.

               -    Assignment of Hard Rock Cafe Lease.

               -    Retail Phase  Construction  Loan  Agreement,  dated June 24,
                    1994.

               -    Retail Phase Promissory Note.

               -    Amendment  to  Retail  Phase  Construction  Loan  Agreement,
                    Retail  Phase  Promissory  note,  and  Retail  Phase Deed of
                    Trust, dated September 21, 1994.

                                       10
<PAGE>
               -    Retail  Phase  Leasehold  Construction  Deed  of  Trust  and
                    Security  Agreement  with  Assignment  of Rents and Fixtures
                    Filing.

               -    Assignment of Retail Leases.

As filed with the  Company's  Report on Form 10-K for the period ended  December
31, 1994 and incorporated herein by reference.

10.57    Line  of  Credit   Agreement  dated  July  19,  1995,  by  and  between
         Performance  Funding Corp. and Capital Factors,  Inc., and Guarantee of
         Performance Industries, Inc. as filed with the Company's Report on Form
         10-K for the year ending December 31, 1995 and  incorporated  herein by
         reference.

10.58    Lease dated  September  1, 1995,  between  Performance  Restaurants  of
         Nevada, Inc. and 1030 East Flamingo, L.L.C. as filed with the Company's
         Report  on Form  10-K  for the  period  ending  December  31,  1995 and
         incorporated herein by reference.

10.59    Second  Amendment to Retail Phase  Construction  Loan  Agreement  dated
         October 31, 1995 by and between Camelback Plaza  Development,  L.C. and
         Norwest  Bank as filed with the  Company's  Report on Form 10-K for the
         year ending December 31, 1995 and incorporated herein by reference.

10.60    Tenth Amendment to Restaurant Phase  Construction  Loan Agreement dated
         October 31, 1995, by and between Camelback Plaza Development,  L.C. and
         Norwest  Bank as filed with the  Company's  Report on Form 10-K for the
         year ending December 31, 1995 and incorporated herein by reference.

10.61    Cash Collateral Agreement by and between Performance Industries,  Inc.,
         and Norwest  Bank dated  October  31, 1995 as filed with the  Company's
         Report  on  Form  10-K  for the  year  ending  December  31,  1995  and
         incorporated herein by reference.

10.62    Promissory  Note, Deed of Trusts,  Assignment of Lease and Rents by and
         between  the  Camelback  Plaza  Development  L.C.  and  Boston  Capital
         Mortgage  dated as of November 1, 1996 for the sum of $7,250,000 on the
         property of the  subsidiary at 2621 E. Camelback  Rd.,  Phoenix,  AZ as
         filed  with the  Company's  Report  on Form  10-K  for the year  ending
         December 31, 1995 and incorporated herein by reference.

10.63    Stock Purchase  Agreement,  dated February 28, 1996,  Letter  Amendment
         there to dated March 20, 1996, Letter Amendment there to dated July 15,
         1996, and Deposit Escrow Agreement between Markwood L.L.C. as Buyer and
         the  Company  as  seller  of  stock  in  its  wholly  owned  subsidiary
         Fabricaciones  Metalicas  Mexicanas - S.A. as filed with the  Company's
         Report  on  Form  10-K  for the  year  ending  December  31,  1995  and
         incorporated herein by reference.

22.      Subsidiaries of the Registrant.

                                       11
<PAGE>
                                   SIGNATURES

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


Dated: April 14, 1999                      Performance Industries, Inc.

                                           By: /s/ Joe Hrudka
                                              ------------------------------
                                                   Joe Hrudka
                                                   President and Director

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on the 14th day of April,  1999, by the following  persons
on behalf of the Registrant in the capacities indicated:


By: /s/ Joe Hrudka                     Chairman of the Board, President
   --------------------------------    and Director
        Joe Hrudka


By: /s/ Edmund L. Fochtman, Jr.        Vice President, CFO and Director
   --------------------------------
        Edmund L. Fochtman, Jr.


By: /s/ Allen L. Haire                 Director
   --------------------------------
        Allen L. Haire

                                       12
<PAGE>
                          PERFORMANCE INDUSTRIES, INC.
                                AND SUBSIDIARIES

                        CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 1998

                                    CONTENTS


                                                             PAGE
                                                             ----

         INDEPENDENT AUDITOR'S REPORT                         14

         CONSOLIDATED FINANCIAL STATEMENTS:

         BALANCE SHEETS                                       15

         STATEMENTS OF OPERATIONS                             16

         STATEMENTS OF SHAREHOLDERS' EQUITY                   17

         STATEMENTS OF CASH FLOW                              18

         NOTES TO FINANCIAL STATEMENTS                        20


                                       13
<PAGE>
Board of Directors and Shareholders
Performance Industries, Inc.
Phoenix, Arizona


                          INDEPENDENT AUDITOR'S REPORT

We have audited the  accompanying  consolidated  balance  sheets of  Performance
Industries,  Inc.  and  subsidiaries  as of  December  31, 1998 and 1997 and the
related  consolidated  statements of operations,  shareholders'  equity and cash
flows for the three years in the period ended December 31, 1998. These financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly,  in  all  material  respects,  the  financial  position  of  Performance
Industries,  Inc. and  subsidiaries  as of December  31, 1998 and 1997,  and the
results of their  operations  and their  cash  flows for the three  years in the
period ended December 31, 1998 in conformity with generally accepted  accounting
principles.


TOBACK CPAs, P.C.
Phoenix, Arizona
March 23, 1999

                                       14
<PAGE>
                          PERFORMANCE INDUSTRIES, INC.
                                AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                             (DOLLARS IN THOUSANDS)
                           DECEMBER 31, 1998 AND 1997

                                     ASSETS
                                                             1998        1997
                                                           --------    --------
Current assets:
  Cash and cash equivalents                               $  1,486     $  2,815
  Accounts and other receivables, less allowance
   for doubtful accounts of $27 and $14,
   respectively (Note 4)                                       333          410
  Receivables from sale of businesses, net of
   allowance (Notes 3 and 4)                                   125          269
  Factored accounts receivable, net of allowance for
    doubtful accounts of $0 and $283, respectively
    (Notes 4 and 13)                                           150          261
  Inventories                                                  289          313
  Prepaid expenses and other current assets                    212          227
  Deferred income taxes (Note 12)                               24           52
  Real estate held for sale (Notes 5 and 8)                    785          785
                                                          --------     --------
      Total current assets                                   3,404        5,132

Deferred income taxes (Note 12)                              1,278        1,239
Property and equipment (Notes 6 and 8)                       3,770        3,097
Other assets (Note 7)                                          945          937
                                                          --------     --------
      Total assets                                        $  9,397     $ 10,405
                                                          ========     ========

                      LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
  Current portion of long-term debt and
   capital lease obligations (Note 8)                     $  1,205     $  1,051
  Accounts payable                                             579          637
  Accrued employment costs                                     530          476
  Accrued expenses and other current liabilities (Note 9)      764          666
  Factored receivables reserve                                  --           61
  Liabilities subject to compromise (Notes 10 and 18)          797          797
  Foreign tax liability                                        250          250
                                                          --------     --------
      Total current liabilities                              4,125        3,938

Long-term debt and capital lease obligations, less
 current portion (Note 8)                                       58          255

Commitments and contingencies (Notes 11, 17, 18 and 20)

Shareholders' equity:
  Preferred stock, par value $1.00 per share;
   authorized 100,000 shares; none issued                       --           --
  Common stock, no par value; authorized 5,000,000
   shares; issued 3,157,332 shares; outstanding
   2,211,183 and 2,377,889, respectively
   (Notes 14 and 15)                                        31,202       31,202
  Accumulated deficit                                      (22,228)     (21,745)
                                                          --------     --------
                                                             8,974        9,457
  Treasury stock at cost (Note 15)                          (3,760)      (3,245)
                                                          --------     --------
    Total shareholders' equity                               5,214        6,212
                                                          --------     --------
     Total liabilities and shareholders' equity           $  9,397     $ 10,405
                                                          ========     ========
                     The accompanying notes are an integral
               part of these consolidated financial statements.

                                       15
<PAGE>
                          PERFORMANCE INDUSTRIES, INC.
                                AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                  (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996


                                           1998          1997          1996
                                        ----------    ----------    ----------
Revenues                                $   19,456    $   22,029    $   20,344

Cost of revenues                           (18,308)      (20,753)      (19,949)
Selling, general and
 administrative expenses
 (Note 19)                                  (1,820)       (2,131)       (2,995)
Interest expense                               (19)         (134)         (156)
Other income (expenses), net                   197           231           132
Loss on closure of restaurants
 (Note 16)                                      --            --        (1,795)
                                        ----------    ----------    ----------
Loss from continuing operations
    before income taxes                       (494)         (758)       (4,419)

Income tax (expense) benefit (Note 12)          11          (318)         (591)
                                        ----------    ----------    ----------

Loss from continuing operations               (483)       (1,076)       (5,010)

Income (loss) from discontinued
 operations (Note 13)                           --          (530)        1,287
                                        ----------    ----------    ----------

Net loss                                $     (483)   $   (1,606)   $   (3,723)
                                        ==========    ==========    ==========
Basic income (loss) per common share:
    Continuing operations               $     (.21)   $     (.44)   $    (2.02)
    Discontinued operations                     --          (.21)          .52
                                        ----------    ----------    ----------

Basic loss per common share             $     (.21)   $     (.65)   $    (1.50)
                                        ==========    ==========    ==========

Average number of shares outstanding     2,309,451     2,472,649     2,486,086
                                        ==========    ==========    ==========

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

                                       16
<PAGE>
                          PERFORMANCE INDUSTRIES, INC.
                                AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                             (DOLLARS IN THOUSANDS)
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
                                   Common Stock          Treasury Stock
                                -------------------    -------------------     Other
                                           Number                 Number    Accumulated  Comprehensive
                                Amount    of shares    Amount    of shares    Deficit       Income
                                ------    ---------    ------    ---------    -------       ------
<S>                           <C>        <C>         <C>         <C>         <C>           <C>
Balance, January 1, 1996       $31,202    3,157,332   $(2,951)    667,802     $(16,416)     $ 1,226
 Net loss                           --           --        --          --       (3,723)          --
 Treasury stock purchased           --           --       (25)      8,266           --           --
 Holding loss on securities
  available for sale, net
  of income taxes of $127           --           --        --          --           --         (783)
                               -------    ---------   -------     -------     --------      -------
Balance, December 31, 1996      31,202    3,157,332    (2,976)    676,068      (20,139)         443
 Net loss                           --           --        --          --       (1,606)          --
 Treasury stock purchased           --           --      (269)    103,375           --           --
 Holding loss on securities
 available for sale, net of
 income taxes of $72                --           --        --          --           --         (443)
                               -------    ---------   -------     -------     --------      -------

Balance, December 31, 1997      31,202    3,157,332    (3,245)    779,443      (21,745)          --
 Net loss                           --           --        --          --         (483)          --
 Treasury stock purchased
 (Note 19)                          --           --      (515)    166,706           --           --
                               -------    ---------   -------     -------     --------      -------
Balance, December 31, 1998     $31,202    3,157,332   $(3,760)    946,149     $(22,228)     $    --
                               =======    =========   =======     =======     ========      =======
</TABLE>

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

                                       17
<PAGE>
                          PERFORMANCE INDUSTRIES, INC.
                                AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996


                                                     1998      1997       1996
                                                     ----      ----       ----
Cash flows from operating activities:
 Net loss                                           $(483)   $(1,606)   $(3,723)
 Adjustments to reconcile net loss to net cash
  provided by (used in) operating activities:
  Depreciation                                        823        699      1,020
  Loss on settlement of receivables from
   sale of business                                    --         88         99
  Impairment loss on real estate held for sale         --        375         --
  Loss on disposal of restaurants                      --         --      1,795
  Gain on sale of Mexican subsidiary                   --         --     (1,219)
  Loss on sale of real estate subsidiary               --        916         --
  Gain on sale of factoring subsidiary                 --         (3)        --
  Loss on investment in preferred stock                --        120         --
  Loss on securities available for sale                --        207         --
  Minority interest in loss from subsidiary            --        (82)       (43)
  Loss on sale of property and equipment               94         92         70
  Provision for allowance for doubtful accounts       131         88        416
  Changes in assets and liabilities
   (net of changes related to discontinued
   operations):
   Accounts receivable                                64       (152)       (94)
   Factored accounts receivable, net of reserve       82         (7)       276
   Inventories                                        24         15         (6)
   Prepaid expenses and other current assets          15       (405)      (305)
   Other assets                                       (8)       477       (321)
   Accounts payable                                  (58)      (359)      (260)
   Accrued employment costs                           54        (15)        --
   Foreign tax liability                              --         --        250
   Other current liabilities, net                     98       (673)       205
   Liabilities subject to compromise                  --         43         --
   Deferred income taxes                             (11)       231        548
                                                    ----     ------    -------
     Net cash provided by (used in)
       operating activities                          825         49     (1,292)
                                                    ----     ------    -------

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

                                       18
<PAGE>
                          PERFORMANCE INDUSTRIES, INC.
                                AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
                             (DOLLARS IN THOUSANDS)
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996


                                                    1998       1997       1996
                                                  -------    -------    -------
Cash flows from investing activities:
  Changes in restricted cash                      $    --    $   409    $ 1,358
  Payments received on receivables from sale
    of businesses                                      50      1,118      1,305
  Investment in real estate                            --         --       (283)
  Purchase of property and equipment                 (213)      (466)    (1,486)
  Net proceeds from sale of:
    Mexican subsidiary                                 --         --        837
    Real estate operations                             --        560         --
    Factoring operations                               --        513         --
    Property and equipment                             23         --        147
    Other assets held for sale                         --         --          6
  Payment for purchase of restaurant assets        (1,100)        --       (240)
  Investment in preferred stock                        --         --       (120)
  Loan to officer                                      --        (55)      (150)
  Repayment of officer loan                            --         55        150
  Other, net                                          (56)       166       (192)
        Net cash (used in) provided by
          investing activities                     (1,296)     2,300      1,332
                                                  -------    -------    -------

Cash flows from financing activities:
  Proceeds from borrowings                             --         --      2,659
  Repayments of borrowings                           (343)      (401)    (1,949)
  Changes in treasury stock                          (515)      (269)       (25)
                                                  -------    -------    -------
        Net cash (used in) provided by
          financing activities                       (858)      (670)       685
                                                  -------    -------    -------

Net increase (decrease) in cash and
 cash equivalents                                  (1,329)     1,679        725

Cash and cash equivalents, beginning
 of year                                            2,815      1,136        411
                                                  -------    -------    -------

Cash and cash equivalents, end of year            $ 1,486    $ 2,815    $ 1,136
                                                  =======    =======    =======

      Supplemental Disclosure of Noncash Investing and Financing Activities
                 See notes to financial statements for noncash
                      investing and financing activities.


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

                                       19
<PAGE>
                          PERFORMANCE INDUSTRIES, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.    ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

      BUSINESS:

      Performance  Industries,  Inc. (the Company) is the parent  company of its
         wholly-owned    subsidiaries   Performance   Restaurant   Group,   Inc.
         (restaurant  company),  Performance Funding Corp.  (factoring company),
         Performance Camelback Development Corp. (real estate company).

      During 1997, Performance Funding Corp., (a factoring company) discontinued
         its  operations.   The  Company  sold  the  majority  of  its  factored
         receivables  to a  related  corporation  (see  Note  20).  The  Company
         accounted  for  the   disposition  of  these  assets  as   discontinued
         operations in 1997 (see Note 14).

      Also during November 1997,  Performance  Camelback  Development Corp. sold
         its 72% interest in Camelback Plaza Development Corp., L.L.C. Camelback
         Plaza  Development  Corp.,  L.L.C.  owns  and  operates  a  retail  and
         restaurant  property in Phoenix,  AZ. The  Company  accounted  for this
         disposition as discontinued operations in 1997 (see Note 14).

      TheCompany's  continuing  operations  consist of  restaurant  locations in
         Arizona and California.

      PRINCIPLES OF CONSOLIDATION:

      The consolidated  financial statements include the accounts of Performance
         Industries,  Inc. and its  wholly-owned  subsidiaries.  All significant
         intercompany balances and transactions are eliminated in consolidation.

      CASH EQUIVALENTS:

      The Company  considers all highly liquid debt  instruments with a maturity
         of three months or less when purchased to be cash equivalents.

      FAIR VALUE OF FINANCIAL INSTRUMENTS:

      The carrying amount of cash and cash equivalents  approximates  fair value
         because of the short maturity of those instruments.

      The carrying  amount of other  financial  instruments  including  accounts
         receivable, receivables from sale of business, factored receivables and
         current  liabilities  approximate  the fair value of these  instruments
         because of the short-term nature of the instruments.

                                       20
<PAGE>
                          PERFORMANCE INDUSTRIES, INC.
                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1.    ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

      FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED:

      The carrying amount of long-term debt  approximates fair value because the
         interest  rates on debt are  comparable to current market rates on debt
         with similar terms.

      ADVERTISING:

      Advertising  costs are  charged to  operations  as  incurred.  The Company
         incurred  advertising expense of approximately  $229,000,  $334,000 and
         $408,000 during 1998, 1997 and 1996, respectively.

      ACCOUNTING ESTIMATES:

      The preparation  of financial  statements  in  conformity  with  generally
         accepted  accounting  principles  requires management to make estimates
         and  assumptions  that  affect  the  reported  amounts  of  assets  and
         liabilities and disclosure of contingent  assets and liabilities at the
         date of the financial  statements and the reported  amounts of revenues
         and expenses during the reporting  period.  Actual results could differ
         from those estimates.

      The Company's significant estimates relate to the realizability of certain
         receivables,  valuation  of  net  deferred  tax  assets,  estimates  of
         liabilities    subject   to   compromise,    and   certain   litigation
         contingencies.

      INVENTORY:

      Inventory is stated at the  lower of cost or  market.  Cost is  determined
         using the first-in, first-out (FIFO) method. Inventory consists of food
         and beverages at restaurant locations.

      PROPERTY AND EQUIPMENT:

      Property  and  equipment  are  stated  at cost and  depreciated  using the
         straight-line   method  over  the  following  estimated  useful  lives;
         buildings,  35 years;  machinery and equipment,  furniture and fixtures
         and vehicles,  5 to 10 years; land  improvements,  10 years.  Leasehold
         improvements are depreciated over the term of the related lease.

                                       21
<PAGE>
                          PERFORMANCE INDUSTRIES, INC.
                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1.    ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

      INCOME TAXES:

      Deferred income taxes are  recognized for the tax  consequences  in future
         years of  differences  between the tax bases of assets and  liabilities
         and their financial reporting amounts at each year end based on enacted
         tax laws and statutory tax rates applicable to the periods in which the
         differences are expected to affect taxable income. Valuation allowances
         are  established  when  necessary to reduce  deferred tax assets to the
         amount expected to be realized. Income tax benefit (expense) is the tax
         receivable (payable) for the period and the change during the period in
         deferred  tax  assets  and  liabilities  excluding  the tax  effect  on
         unrealized holding gains on securities available for sale.

      INVESTMENT IN REAL ESTATE:

      Investment in real  estate and real estate  held for sale  represents  the
         cost of certain real estate held for future development or sale.

      INCOME (LOSS) PER COMMON SHARE:

      Basic income  (loss) per common share is based upon the  weighted  average
         number of shares  outstanding.  The assumed  exercise of employee stock
         options does not result in material dilution.

      RECLASSIFICATIONS:

      Certain  reclassifications  have been made to the financial statements for
         1996 and 1997 to conform to the financial statement classifications for
         1998.

2.    SECURITIES AVAILABLE FOR SALE:

      During 1993,  the  Company  invested  $250,000  in the  common  stock of a
         start-up  airline  company.  In 1995,  a portion  of the  stock  became
         marketable  and was sold by the  Company as a result of a public  stock
         offering by the airline.

      During 1997,  the airline  filed  petitions for relief under Chapter 11 of
         the Federal  bankruptcy  laws.  Subsequent to this filing,  the airline
         converted  the  filing  to a Chapter 7  liquidation.  As a result,  the
         Company realized a loss on the original  investment in the common stock
         of  approximately  $207,000  during  1997,  which is  included in other
         income  (expense)  in  the  accompanying   consolidated  statements  of
         operations.  Also, as a result of this liquidation,  unrealized holding
         gains  associated with the airline stock of $515,000 were eliminated in
         1997.

                                       22
<PAGE>
                          PERFORMANCE INDUSTRIES, INC.
                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3.    RECEIVABLES FROM SALE OF BUSINESSES:

      Receivables from sale of businesses  consist of a note  receivable  from a
         corporation with interest at 10%.  Principal and interest payments were
         due in monthly  installments of approximately  $120,000 through January
         1998.   The   corporation   suspended   payments   on  the  note  until
         clarification  of a certain lease agreement  related to real estate the
         corporation  acquired in the sale is  resolved.  The notes were paid in
         full subsequent to December 31, 1998. (See Note 5)

4.    ALLOWANCES FOR DOUBTFUL ACCOUNTS:

      The  changes in  allowances  for  doubtful  accounts  are as  follows  (in
      thousands):

                                                     1998       1997       1996
                                                    -----      -----      -----

         Balance at beginning of year               $ 297      $ 576      $ 514
         Additions charged to cost and expenses       131         88        416
         Accounts written off                        (401)      (163)      (354)
         Reduction of allowance credited to costs
           and expenses                                --       (204)        --
                                                    -----      -----      -----

         Balance at end of year                     $  27      $ 297      $ 576
                                                    =====      =====      =====

      The allowances for doubtful  accounts include  allowances for accounts and
         other  receivables,  receivables from sale of businesses,  and factored
         accounts receivable.

5.    INVESTMENT IN REAL ESTATE:

      Investment  in real  estate  included  in the 1998  and 1997  consolidated
      balance sheets is as follows:

                                                     1998      1997
                                                     ----      ----
         Real estate held for sale                   $785      $785
                                                     ----      ----

                                                     $785      $785
                                                     ====      ====

                                       23
<PAGE>
                          PERFORMANCE INDUSTRIES, INC.
                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5.    INVESTMENT IN REAL ESTATE, CONTINUED:

      Summaries of real estate transactions and related accumulated depreciation
      are as follows (in thousands):

         REAL ESTATE:                            1998         1997
                                               -------      -------

         Balance at beginning of year          $   785      $ 9,911
                                               -------      -------
           Additions during the year:
             Ground lease fees                      --           --
             Tenant improvements                    --           --
                                               -------      -------
                Total additions                     --           --
                                               -------      -------
                                                   785        9,911
           Reductions during the year:
             Cost of real estate sold               --       (8,735)
             Impairment loss                        --         (375)
             Other                                  --          (16)
                                               -------      -------
             Total reductions                       --       (9,126)
                                               -------      -------
         Balance at end of year                $   785      $   785
                                               =======      =======

         ACCUMULATED DEPRECIATION:               1998         1997        1996
                                               -------      -------     -------
         Balance at beginning of year          $    --      $   430     $ 1,076
           Additions during the year:
             Depreciation                           --          244         320

           Reductions during the year:
             Disposals                              --         (674)       (966)
                                               -------      -------     -------
         Balance at end of year                $    --      $    --     $   430
                                               =======      =======     =======

      Real estate  held for sale as of  December  31,  1998  represents  land in
         Ixtapa, Mexico. The Company plans to sell the land and has discontinued
         making  payments  on a note  payable  secured by the land (see Note 9).
         Because the Company is in default on the note, the carrying cost of the
         land has been reduced to the balance of the note plus accrued interest.
         An impairment loss of $375,000 is included in other income (expense) in
         the   accompanying   December  31,  1997   consolidated   statement  of
         operations.

      The Company's real estate subsidiary  previously owned a 72% interest in a
         retail and  restaurant  project in  Phoenix,  Arizona.  The  subsidiary
         completed  the  project in 1995 and sold its  interest  in the  project
         during 1997.

                                       24
<PAGE>
                          PERFORMANCE INDUSTRIES, INC.
                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5.    INVESTMENT IN REAL ESTATE, CONTINUED:

      During 1996,  the Company  sold its stock in its Mexican  subsidiary.  The
         subsidiary held an ownership interest in rental real estate in Mexico.

      The operating  income and losses and the gains and losses from the sale of
         its real estate  operations are included in discontinued  operations in
         the  accompanying  consolidated  statements of operations  for 1997 and
         1996 (see Note 13).

6.    PROPERTY AND EQUIPMENT:

      The  components  of property and  equipment  consist of the  following (in
      thousands):

                                                      1998            1997
                                                    -------         -------
         Restaurant equipment                       $ 2,068         $ 1,785
         Furniture and fixtures                         765             692
         Transportation equipment                       438             438
         Leasehold improvements                       2,854           1,875
         Equipment held under capital leases            219             219
                                                    -------         -------
                                                      6,344           5,009
         Less accumulated depreciation               (2,574)         (1,912)
                                                    -------         -------
                                                    $ 3,770         $ 3,097
                                                    =======         =======

7.    OTHER ASSETS:

      Other assets consist of the following (in thousands):

                                                      1998           1997
                                                      ----           ----
         Classic automobiles                         $ 206          $ 206
         Deposits and other                            122            136
         Liquor licenses                               176            191
         Restaurant small wares                        441            404
                                                     -----          -----

                                                     $ 945          $ 937
                                                     =====          =====

                                       25
<PAGE>
                          PERFORMANCE INDUSTRIES, INC.
                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8.    LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS:

      Long-term debt and capital lease obligations  consist of the following (in
      thousands):

                                                                1998      1997
                                                              -------   -------

      Note payable,  Mexican  corporation,  with interest at
         prime plus 3-7/8%,  with monthly principal payments
         of $6,000  plus  interest  through  December  2006,
         secured by real  estate  (see Note 6). The  company
         has  discontinued  making the required  payments on
         this note. As a result, the entire note balance has
         been classified as current.                          $   708    $  708

      Unsecured  note  payable,  State of  California,  with
         interest at 6%, with monthly principal  payments of
         $25,000 plus interest through June 1999

                                                                  150       450

      Note payable,  with  interest at 8% due October  1999,
         secured by equipment of restaurant.                      300        --


      Capital lease obligations (Note 11)                         105       148
                                                              -------   -------
                                                                1,263     1,306
      Less current portion                                     (1,205)   (1,051)
                                                              -------   -------
                                                              $    58   $   255
                                                              =======   =======

      Cash paid for interest was approximately  $35,000,  $102,000, and $818,000
         during 1998, 1997 and 1996, respectively.

      All long term debt excluding capital leases is due during 1999.

9.    ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:

      At December  31, 1998 and 1997,  the  components  of accrued  expenses and
         other current liabilities consist of the following (in thousands):

                                                               1998       1997
                                                               ----       ----
         Gift certificates and advance
           customer deposits                                  $ 112      $ 106
         Litigation settlements and estimated
           claims (Note 17)                                     200        117
         Product liability costs                                 69         66
         Sales taxes payable                                    146        145
         Other accruals                                         237        232
                                                              -----      -----

                                                              $ 764      $ 666
                                                              =====      =====

                                       26
<PAGE>
                          PERFORMANCE INDUSTRIES, INC.
                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10.   LIABILITIES SUBJECT TO COMPROMISE:

      From April 21, 1991  through  May 4, 1993,  Performance  Industries,  Inc.
         (formerly Mr. Gasket Company)  operated as  debtor-in-possession  under
         the   supervision  of  the  Bankruptcy   Court.   In  Chapter  11,  the
         shareholders'  interests and  substantially  all  liabilities as of the
         filing date were subject to compromise.

      Additions or deletions to the claims  (liabilities  subject to compromise)
         may arise from the  determination  by the Bankruptcy Court or agreement
         by parties in interest of allowed claims for contingencies and disputed
         collateral and amounts.  The Company continues to negotiate  settlement
         of the final claims  outstanding.  Liabilities subject to compromise at
         December  31,  1998  and  1997  consist   primarily  of   environmental
         remediation and tax liabilities.

11.   LEASES:

      As lessee:

      The Company's  restaurant  subsidiary  leases eight  restaurant  locations
         under  operating  leases  including one  restaurant  location which was
         closed  during 1996.  These leases expire at various dates through 2010
         and require aggregate annual payments of approximately $1,360,000.  The
         leases also contain  provisions for contingent  rental payments ranging
         from 3% to 9% of sales. During 1998 and 1997, the restaurants  incurred
         contingent   rentals   of   approximately    $349,000   and   $331,000,
         respectively.

      The Company's  restaurant  subsidiary also leases certain  equipment under
         capital  leases.  The leases  require  aggregate  monthly  payments  of
         approximately $4,600 through May 2001.

      The Company  and its  subsidiaries  also lease their  office space and two
         warehouse  facilities  under  operating  leases.  These leases  require
         aggregate  monthly  payments  of  approximately  $9,000  and  expire at
         various dates through 2001.

                                       27
<PAGE>
                          PERFORMANCE INDUSTRIES, INC.
                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

11.   LEASES, CONTINUED:

      Future  minimum  lease  payments  for  capital  leases  and  noncancelable
         operating leases as of December 31, 1998 are as follows (in thousands):

                                                        Capital        Operating
                                                        leases           leases
                                                        ------           ------
           1999                                          $  58          $ 1,366
           2000                                             49            1,215
           2001                                              9            1,159
           2002                                             --            1,105
           2003                                             --            1,028
         Thereafter                                         --            3,176
                                                         -----          -------

                                                           116          $ 9,049
                                                                        =======
         Less amount representing interest                 (11)
                                                         -----
         Present value of future minimum lease
           payments on capital leases                    $ 105
                                                         =====

      Rent expense for operating leases was approximately $1,582,000, $1,862,000
         and $1,818,000 for 1998, 1997 and 1996, respectively.

12.   INCOME TAXES:

      The provision for income tax (expense)  benefit  consists of the following
      (in thousands):

                                                   1998       1997       1996
                                                  -----      -----      -----
         Federal:
           Current                                $  --      $  --      $  --
           Deferred                                  10       (231)      (548)
         Foreign                                     --         --       (250)
         State and local                              1         --         (2)
                                                  -----      -----      -----

         Total income tax (expense) benefit       $  11      $(231)     $(800)
                                                  =====      =====      =====
         Allocated to:
           Continuing operations                  $  11      $(318)     $(591)
           Discontinued operations                   --         87       (209)
                                                  -----      -----      -----

                                                  $  11      $(231)     $(800)
                                                  =====      =====      =====

                                       28
<PAGE>
                          PERFORMANCE INDUSTRIES, INC.
                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

12.   INCOME TAXES, CONTINUED:

      Foreign income taxes  represent  an estimate of the Mexican  income tax on
         the sale of the Company's Mexican subsidiary in 1996.

      The following is a reconciliation between the income tax (expense) benefit
         from continuing operations and income taxes calculated at the statutory
         federal  income  tax  rate  of  34%  for   continuing   operations  (in
         thousands):

                                                   1998       1997        1996
                                                 -------    -------     -------

         Income tax benefit at statutory rate     $ 168      $ 247      $ 1,502
         Foreign and state income taxes              20         --         (252)
         Tax effect of valuation allowance
           on deferred tax assets                  (162)      (212)      (1,841)
         Reduction of net operating loss and
           tax credit carryforwards net of
           valuation allowance                      (15)      (353)          --
                                                  -----      -----      -------

         Income tax (expense) benefit from
           continuing operations                  $  11      $(318)     $  (591)
                                                  =====      =====      =======

      Deferred income taxes reflect the net tax effects of temporary differences
         between the carrying  amounts of assets and  liabilities  for financial
         reporting  purposes  and the amounts  used for income tax  purposes and
         operating loss and tax credit carry forwards. Significant components of
         the  Company's  net deferred tax assets  consist of the  following  (in
         thousands):

                                                               1998       1997
                                                             -------    -------
         Current deferred tax assets (liabilities):
           Reserves not currently deductible                 $   168    $   373
           Valuation allowance                                  (144)      (321)
                                                             -------    -------

              Net current deferred tax asset                 $    24    $    52
                                                             =======    =======

         Non-current deferred tax assets (liabilities):
           Difference between book and tax bases of assets   $   967    $   703
           Contribution carryforwards                             27         27
           Capital loss carryforwards                             82         82
           Net operating loss carryforwards                    7,989      7,971
           General business credit carryforwards                  66         66
                                                             -------    -------
                                                               9,131      8,849
           Valuation allowance                                (7,853)    (7,610)
                                                             -------    -------
              Net non-current deferred tax asset             $ 1,278    $ 1,239
                                                             =======    =======

                                       29
<PAGE>
                          PERFORMANCE INDUSTRIES, INC.
                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

12.   INCOME TAXES, CONTINUED:

      The Company  has recorded a net deferred tax asset as of December 31, 1998
         of $1,302,000  primarily  reflecting the benefits of net operating loss
         carryforwards.  Realization  is dependent  upon  generating  sufficient
         taxable income prior to the expiration of the  carryforwards.  Although
         realization is not assured,  management believes it is more likely than
         not that all of the net deferred tax asset will be realized. The amount
         of the  deferred tax asset  considered  realizable,  however,  could be
         reduced in the near term if estimates of future  taxable  income during
         the carryforward period are reduced.  During 1998 and 1997, the Company
         lost  the  benefit  of a  portion  of  its  state  net  operating  loss
         carryforwards   and  general  business  credits  due  to  reaching  the
         expiration date of the carryforwards.

      The Company has available at December 31, 1998, federal net operating loss
         carryforwards  and unused general business  credits,  which may provide
         future tax benefits as follows (in  thousands):

                                      Unused          Unused federal
                                    federal net          general
                  Year of         operating  loss        business
                 expiration        carryforwards         credits
                 ----------       ---------------     --------------
                    2003              $    --              $ 37
                    2005                2,585                --
                    2006                3,866                --
                    2007                7,015                --
                    2008                2,967                --
                    2009                3,917                29
                    2010                1,231                --
                    2011                  489                --
                    2012                  534
                    2013                  691                --
                                      -------              ----

                                      $23,295              $ 66
                                      =======              ====

      The-Company has net operating  carryforwards for state income tax purposes
         of approximately $1,700,000 which expire from 2000 through 2003.

13.   DISCONTINUED OPERATIONS:

      During 1997, the Company sold its real estate operations and its factoring
         business.  As a result, net sales, costs of sales,  income and expenses
         related to those segments have been recorded as discontinued operations
         in the accompanying consolidated statements of operations. The sales of
         the businesses are described below.

                                       30
<PAGE>
                          PERFORMANCE INDUSTRIES, INC.
                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

13.   DISCONTINUED OPERATIONS, CONTINUED:

      REAL ESTATE OPERATIONS:

      In November  1997,  the Company sold its 72%  interest in Camelback  Plaza
         Development Corp., L.L.C., to the minority  shareholders.  The net cash
         sales price for its 72% interest was $709,000.  The significant  assets
         disposed of by the Company for which the  subsidiary  held an ownership
         interest  included rental estate with a carrying value of approximately
         $8,000,000.  Along with the real estate  acquired,  the associated note
         payable of approximately $7,200,000 was assumed by the buyer.

      Camelback  Plaza  Development  had gross rental  revenue of  approximately
         $1,142,000  and  $801,000  for the years  ending  December 31, 1996 and
         1995,  respectively.  For the eleven  months prior to the sale in 1997,
         Camelback  Plaza  Development  had gross  rental  revenues of $934,000.
         Percentage rental income earned was approximately $84,000, $173,000 and
         $80,000 for 1997, 1996 and 1995, respectively.  Any income or loss from
         operations is included in income (loss) from discontinued operations.

      During  1996,  the  Company  sold  its  stock in its  Mexican  subsidiary,
         Fabricaciones Metalicas Mexicanas, S. A. (FMMSA). The total sales price
         for the shares was $3,000,000,  including $1,000,000 in cash and a note
         receivable of $2,000,000 (See Note 4). The significant  assets disposed
         of by the Company for which the subsidiary  held an ownership  interest
         included  rental  real estate  with a carrying  value of  approximately
         $1,500,000.   The  gain  on  the  sale,  net  of  selling  costs,   was
         approximately $1,200,000 for 1996 and is included in income (loss) from
         discontinued operations.

      For the seven  months  prior to the sale in 1996,  FMMSA had gross  rental
         revenue of  approximately  $384,000 and income from  operations  before
         income taxes of approximately  $219,000.  The income from operations is
         included in income (loss) from discontinued operations.

      FACTORING:

      In August  1997,   the  Company   discontinued   operating  its  factoring
         subsidiary  and  sold  substantially  all  of  the  net  assets  of its
         factoring business,  including factored accounts receivable,  equipment
         and  intangible  assets,  to a related  company,  Performance  Funding,
         L.L.C.  (see Note 19).  The buyer also assumed the  obligations  of the
         factoring  business upon sale. The net selling price was  approximately
         $513,000 in the form of cash. At December 31, 1998,  factored  accounts
         receivables remaining were approximately $150,000. The buyer has agreed
         to collect the remaining  receivables  for a 5% collection fee based on
         payments collected.

                                       31
<PAGE>
                          PERFORMANCE INDUSTRIES, INC.
                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

13.   DISCONTINUED OPERATIONS, CONTINUED:

      FACTORING, CONTINUED:

      Revenues of the factoring operation were approximately  $508,000 for 1996.
         Revenues  for  the  eight  months  prior  to  the  sale  in  1997  were
         approximately  $400,000.  The income  (loss) from the  operation of the
         factoring  business  is included  in income  (loss)  from  discontinued
         operations.

      The caption   "Income   (loss)  from   discontinued   operations"  in  the
         accompanying  consolidated statements of operations for the years ended
         December 31, 1997 and 1996 consists of the following (in thousands):

                                                               1997       1996
                                                             -------    -------
         (Loss) income from operations of real estate
           subsidiaries, net of income tax                   $  (118)   $   360

         (Loss) gain on sales of real estate subsidiaries,
           net of income tax                                    (670)     1,053

         Income (loss) from operations of
           factoring subsidiaries, net of income tax             255       (126)

         Gain on the sale of factoring operations                  3         --
                                                             -------    -------

                                                             $  (530)   $ 1,287
                                                             =======    =======
14.   STOCK OPTION PLANS:

      The Company  has a stock  option  plan  which  provides  for a maximum  of
         500,000  shares  of  common  stock  that may be  issued  to  employees,
         directors, or consultants of the Company and its subsidiaries.

      The option  price for  options  granted to eligible  employees  must be at
         least  100% of the  fair  market  value  of the  stock  at the time the
         options  are  granted.   The  option  price  for  options   granted  to
         non-employees is determined by the Board of Directors.  Options granted
         to employees are not exercisable  after ten years.  Restrictions on the
         time to exercise  options given to  non-employees  are set forth in the
         options agreements.

      At December 31, 1998, all outstanding options were exercisable and 200,000
         shares were available for future grant. The weighted average  remaining
         contractual  life of the  outstanding  options is  approximately  seven
         years.

                                       32
<PAGE>
                          PERFORMANCE INDUSTRIES, INC.
                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

14.   STOCK OPTION PLANS, CONTINUED:

      A summary of transactions with respect to the stock option plan follows:

                                      Number      Range of      Weighted average
                                    of shares  exercise prices   exercise price
                                    ---------  ---------------  ----------------
      Balance at January 1, 1997     437,500    $.88 to $.96        $.90
      Issued                              --
      Exercised                           --
      Cancelled                     (137,500)   $.88                $.88
                                     -------

      Balance at December 31, 1998   300,000    $.88 to $.96        $.91
                                     =======
15.   REVERSE STOCK SPLIT:

      During 1996, the Company  approved a  one-for-four  reverse stock split of
         its  issued and  outstanding  common  stock.  In  conjunction  with the
         reverse  stock split,  the Company  also  approved an offer to purchase
         shares of the  Company's  stock held by  shareholders  with holdings of
         less than 100 shares.  The Company  purchased  8,266 treasury shares in
         1996 as a result of the offer.

16.   RESTAURANT CLOSURES:

      During 1996, the Company opened a new restaurant in Las Vegas, Nevada. The
         Company incurred total costs of approximately $1,500,000 related to the
         restaurant, including leasehold improvements,  restaurant equipment and
         pre-opening  costs.  The Company  also has a lease  obligation  for the
         restaurant   building  which   requires   annual   payments   totalling
         approximately  $180,000 per year through  December 2005.  Operations of
         the restaurant  included sales of approximately  $809,000 and losses of
         approximately   $360,000  during  1996.  In  October  1996,  management
         determined that the location could not generate  sufficient  revenue to
         become a profitable  operation and closed the restaurant.  Accordingly,
         the  Company  recorded  a  loss  resulting  from  the  closure  of  the
         restaurant of  approximately  $1,255,000 in 1996. At December 31, 1996,
         management estimated future costs of the disposal for additional rental
         liabilities  to be $80,000.  These costs are  included in the  recorded
         loss on closure of restaurants.  Additional  costs incurred during 1997
         were approximately $100,000 related to the Las Vegas restaurant and are
         included  in  selling,  general  and  administrative  expenses  in  the
         accompanying  consolidated  statement  of  operations.   Subsequent  to
         December 31, 1998,  the Company sold the  remaining  assets  associated
         with the Nevada location for $475,000 which  approximates the remaining
         book value of the assets disposed of (See Note 11).

                                       33
<PAGE>
                          PERFORMANCE INDUSTRIES, INC.
                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

16.   RESTAURANT CLOSURES, CONTINUED:

      The Company entered into a new sublease  agreement for the Nevada location
         subsequent  to year  end.  Approximate  minimum  future  rentals  to be
         received on this sublease are as follows:

              1998                                          $  180,000
              1999                                             180,000
              2000                                             180,000
              2001                                             180,000
              2002                                             180,000
              Thereafter                                       345,000
                                                            ----------

              Total minimum future rentals                  $1,245,000
                                                            ==========

      During 1996, the Company also closed a restaurant in San Ramon, California
         due to the inability of the restaurant  operation to generate  positive
         cash flow. Operations of the restaurant included sales of approximately
         $925,000 and losses of approximately  $144,000 during 1996. The Company
         recorded  a  loss  related  to  the  closure  of  the   restaurant   of
         approximately  $540,000 in 1996.  During  1997,  the  Company  sold its
         interest in the  restaurant  property for $50,000 and the buyer assumed
         the lease commitment related to the property.

17.   LITIGATION:

      In November 1993, certain  shareholders  dissented from the sale of one of
         the Company's  automotive  products business.  As a result, the company
         filed an action to obtain a  determination  of the "fair cash value" of
         shares held by those  shareholders  as of November 28, 1993,  as if the
         sale had not  occurred.  The Company  settled  with the majority of the
         dissenting  shareholders  during 1995 for $.75 a share.  The  remaining
         dissenting  shareholders,  who hold 461,500  shares,  were  entitled to
         payment  of "fair  cash  value"  of the  shares  within  30 days of the
         determination of the value by the court. The Company acquired the stock
         of the remaining dissenting shareholders in 1998 for $458,000.

      In another  matter,  an insurance  carrier has filed an action against the
         Company  alleging  that  Company  representatives  failed to notify the
         insurance carrier of a product liability claim in a timely manner.  The
         accident  occurred  in  1990  and  the  carrier  voluntarily  paid  out
         approximately  $1,700,000  in  benefits  to settle the claim in January
         1996. Management believes the action to be without merit and intends to
         vigorously defend the suit.

      The Company is involved in various other claims and legal actions  arising
         in the ordinary course of business,  including product liability claims
         and employment disputes.

                                       34
<PAGE>
                          PERFORMANCE INDUSTRIES, INC.
                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

17.   LITIGATION, CONTINUED:

      Accrued liabilities at December 31, 1998, include  approximately  $200,000
         for potential litigation settlements on various claims (see Note 9). In
         the opinion of management,  any additional liabilities related to legal
         actions  will not  have a  material  adverse  effect  on the  Company's
         consolidated financial condition.

18.   COMMITMENTS AND CONTINGENCIES:

      ENVIRONMENTAL MATTERS:

      An investigation  of  environmental  matters  related  to  facilities  and
         property  previously  owned and  leased by the  Company  was  performed
         during 1992 to determine  contingencies that would affect the Company's
         emergence  from  Chapter 11.  Certain  reports  received by the Company
         identified   areas  of   environmental   contamination   and  potential
         environmental   contamination.   Management   believes   that   certain
         predecessors-in-interest  may bear either full or partial liability for
         remediation of affected  areas.  Certain  predecessors-in-interest  and
         governmental  agencies  were  notified  by the  Company of the  related
         possible liabilities.  In addition,  the Company notified its insurance
         carriers of potential  claims under its general  liability and property
         insurance coverage from prior years.

      Locations  reviewed for  potential  environmental  liability  included the
         following:

      MANUFACTURING FACILITY IN CALIFORNIA:

      This facility housed the manufacturing  plant of a wheel business formerly
         owned by the  Company.  All assets at this  facility  were sold and the
         buyer vacated the premises in a prior year.

      An environmental  survey was conducted in the fall of 1991.  Two areas for
         further  investigation  were identified.  Further  investigation in the
         spring of 1992 disclosed ground contamination and possible seepage into
         groundwater.  Management  believed  the  contamination  to have existed
         prior to its  purchase  of the  business in 1982 and has  notified  its
         predecessor-in-interest.  The Company has accrued the estimated minimum
         remediation costs of approximately  $500,000.  These costs are included
         in liabilities  subject to compromise in the accompanying  consolidated
         balance sheets.

      All appropriate county, state and federal agencies were notified regarding
         contamination at this site. To management's  knowledge, no response was
         made by any notified governmental agency nor was the facility inspected
         by any such  agency.  However,  the Company  may,  at a later date,  be
         ordered  to  undertake  further  testing  and/or   remediation  at  the
         location.

                                       35
<PAGE>
                          PERFORMANCE INDUSTRIES, INC.
                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

18.   COMMITMENTS AND CONTINGENCIES, CONTINUED:

      WAREHOUSING AND OFFICE FACILITY IN OHIO:

      In 1990,   potential   contamination  was  discovered  at  this  location.
         Consultants  were retained to perform testing and  investigation of the
         site to determine the extent of the  contamination.  In compliance with
         bankruptcy    statutes,    rules   and   regulations    regarding   the
         dischargeability  of claims,  in January 1993, the Company notified the
         Ohio  Environmental  Protection  Agency (EPA) of  contamination  at the
         site. Environmental studies performed determined that the contamination
         is confined to the site with no evidence of migration to groundwater or
         surrounding  properties.  Management estimated the costs of remediation
         to be as  much  as  $5,600,000.  The  Company  believed  that a  former
         owner/operator of the site, which is a Fortune 500 company,  caused the
         contamination.  The Company  negotiated  an  agreement  with the former
         owner/operator regarding  indemnification for the costs of remediation.
         The agreement required that remediation costs be shared by the Company,
         the Fortune 500  company and the  successor  to the Company as owner of
         the  property.  The  Company's   responsibility  with  respect  to  the
         agreement  was to pay  remediation  costs and to  guarantee  payment of
         costs by the successor related to certain clean-up areas. The Company's
         continuing  obligation  is the  guarantee of the payment by the current
         owners of the final clean-up costs.

19.   RELATED PARTY TRANSACTIONS:

      Howard Gardner  Consultants  received $30,000 in 1996 from the Company for
         consulting  services on financial and general business matters.  Howard
         B. Gardner is a former  officer and  director of the Company.  The fees
         are  included in selling,  general and  administrative  expenses in the
         accompanying consolidated statement of operations.

      A Director of the Company  earned a 3% commission of $90,000 from the sale
         of the  Company's  stock in its Mexican  subsidiary  during  1996.  The
         commission is included in selling,  general and administrative expenses
         in  the  accompanying  consolidated  statement  of  operations.  Of the
         commission  earned,  $45,000 was paid during  1996.  During  1997,  the
         Company received a discount of $4,500 on the commission.  The remaining
         balance of $37,500 was paid during 1997.

      During 1997,  the  Company  approved  a short  term loan of $55,000 to the
         principle  shareholder.  The loan was  repaid to the  Company  prior to
         December 31, 1997.  During 1996, the Company approved a short term loan
         of  $150,000  to the  principle  shareholder,  which was  repaid to the
         Company during 1996.

                                       36
<PAGE>
                          PERFORMANCE INDUSTRIES, INC.
                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

19.   RELATED PARTY TRANSACTIONS, CONTINUED:

      As discussed  in Note 14 the  Company  sold the  majority of its assets of
         Performance Funding Corp to Performance Funding,  L.L.C., for a gain of
         approximately $3,000. Members of Performance Funding L.L.C. include the
         Chairman  and  President  of the  Company,  and the Vice  President  of
         Operations  and  CFO.  Additionally,  Performance  Funding,  L.L.C.  is
         subleasing  an office  from the Company on a  month-to-month  basis for
         $180 a month.

      During 1997,  the Company  purchased  approximately  49,000  shares of the
         Company's stock from a Director of the Company for $2.60 per share.

20.   BUSINESS ACQUISITION:

      During September 1998 the Company's restaurant subsidiary acquired the net
         assets of a restaurant located in Phoenix,  Arizona. The purchase price
         of the restaurant was $1,400,000,  of which $1,100,000 was paid in cash
         and the remaining $300,000 in the form of a note payable.  The purchase
         was accounted for using the purchase method of accounting. The purchase
         price in excess of the book value of the assets  acquired was allocated
         to the property and equipment  acquired based upon its fair value.  The
         Company  also  assumed  the  lease   obligation   associated  with  the
         restaurant.

21.   IMPACT OF YEAR 2000 ISSUE (UNAUDITED):

      The Company  has  conducted a review of its  computer  systems to identify
         computer  programs  that could be affected by the Year 2000 issue,  and
         has developed a remediation plan to resolve the problem.

      The issue  is  whether  the  computer  systems  will  properly   recognize
         date-sensitive  information when the year changes to 2000. Systems that
         do not properly  recognize such  information  could generate  erroneous
         data or cause a system to fail.

      Management  estimates the cost of further  remediation to be approximately
         $80,000.

                                       37