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, 1997
                         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, 1998 (based upon closing price) was $890,575.


At  March  31,  1998,   2,481,264  shares  of  Registrant's  Common  Stock  were
outstanding.
                                       1
<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/nightclub  concept  operating under the trade name McGee's Grill. In 1995, a
sixth  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,  with rights to open other Carlos Murphy's Restaurants in the
San Diego and Los Angeles  Metropolitan areas and Maricopa County,  Arizona.  In
1998, the Company  entered into an operating  lease for the two Carlos  Murphy's
restaurants  with an unrelated third party. In 1996, the Company sold one of the
original Bobby McGee's locations.

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.


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.

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.
                                       2
<PAGE>
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.

b)  Warehousing and Office Facility in Ohio
    ---------------------------------------

In 1990, potential contamination was discovered at this location.  Environmental
studies  performed to date have determined that the contamination is confined to
the site with no evidence of migration to groundwater or surrounding properties.

As part of the sale of the  Performance  Division to Echlin,  Inc.,  the Company
entered into an indemnity agreement with a predecessor-in-interest  at the site.
The  predecessor-in-interest  and the  buyer of the  Performance  division  have
agreed to pay for the remediation of the major known environmental contamination
at the site.  However,  the Company was required to guarantee the obligations of
the purchaser.

The  Company  had to  agree  to  remove  two  above  ground  storage  tanks,  an
underground  storage tank,  and to submit a closure plan to the State for a drum
storage  area.  In March,  1995,  the State of Ohio EPA accepted  the  company's
closure of the drum  storage  area as being in  compliance  with the  previously
filed closure plan. This was the last  requirement for the release of the escrow
funds held by Echlin, Inc., from
                                       3
<PAGE>
the sale proceeds of the Brookpark Road facility. The Company had also completed
the removal of an  underground  storage tank at the  Brookpark  Road facility in
1994.  With this  closure,  the Company  believes it has no further  expense for
environmental contamination related to the Brookpark Road facility.


ITEM 2.   PROPERTIES
          ----------

As of December 31,  1997,  the Company and its  subsidiaries  owned and leased a
total of  approximately  104,402  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:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
                                                         Approximate Area
 Location             Primary Functions                  in Square Feet        Lease Expiration
 
-------------------------------------------------------------------------------------------------
<S>                   <C>                                <C>                   <C> 
 Phoenix,             Office                             2,115                 7/31/2000
    Arizona
-------------------------------------------------------------------------------------------------
 Scottsdale,          Buster's Restaurant Bar & Grill    9,123                 4/31/2000
    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
-------------------------------------------------------------------------------------------------
 Ixtapa               Raw Land                           8,748 sq. meters      Owned
 
-------------------------------------------------------------------------------------------------
 Las Vegas,           Restaurant/Nightclub               9,185                 12/31/2005
    Nevada      (1)
-------------------------------------------------------------------------------------------------
 La Mesa,             Restaurant/Nightclub               8,700                 12/31/2005
    California  (1)
-------------------------------------------------------------------------------------------------
 La Jolla,            Restaurant/Nightclub               9,000                 1/15/2000
    California  (1)
-------------------------------------------------------------------------------------------------
</TABLE>

(1)  These  properties are currently  subleased to unrelated third parties.  The
     Company is a guarantor of the leases.


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 dissenting  shareholders are as follows:  Ecco Sales, Inc.,
      Defined Benefit Plan and Mr. David E. Miller, its trustee; Murray & Murray
      Co.,  L.P.A.  Profit-Sharing  Plan and Trust and  Dennis E.  Murray.,  its
      trustee;  and Murray and Murray  Co.,  L.P.A.  - Dennis  Murray  Voluntary
      Account and Dennis E. Murray, Sr., its trustee;  Monumental Life Insurance
      Company, a Maryland  Corporation;  Ince & Co., a foreign Corporation;  The
      Travelers  Corporation,  a foreign  corporation;  The Travelers  Insurance
      Company,  a  Connecticut  Corporation;  Provident  Mutual  Life  Insurance
      Company, a foreign 
                                       4
<PAGE>
      corporation;  New England Mutual Life Insurance  Company,  a Massachusetts
      Corporation;  Angelo M.  Alesci,  an  individual;  William R.  Bagger,  an
      individual:

      All of the dissenting shareholders, except Ecco Sales and Murray & Murray,
      LPA,  agreed to accept  and were paid $.75 per share,  as the fair  market
      value, for their stock.

      Two of the dissenting  shareholders made a special appearance by Motion to
      Dismiss for lack of  personal  jurisdiction,  Murray & Murray Co.,  L.P.A.
      Profit Sharing Plan, and Murray & Murray Co., L.P.A. After the remand from
      the Arizona Court of Appeals,  the Maricopa  County Superior Court held it
      had  jurisdiction  over the  defendants in February,  1995. The defendants
      appealed  the trial court  decision to the Arizona  Court of Appeals.  The
      court again upheld the trial court decision.  The defendants then appealed
      to the Arizona Supreme Court, which upheld the Court of Appeals' decision.
      The  defendants  sought  review by the U.S.  Supreme Court under a Writ of
      Certiorari. The was denied in February 1996.

      The matter will now  proceed to  establish  the fair  market  value of the
      defendants'  shares  as of the  date of  their  dissent.  The  matter  was
      remanded to the Superior  Court  County of Maricopa,  State of Arizona for
      further  proceedings in the Fall,  1996.  The Company  requested a hearing
      pursuant  to statute to  determine  if the  shareholders  are  entitled to
      receive the fair cash value of their shares and to appoint an appraiser(s)
      to determine the fair cash value.

      The Court held a status conference with all parties in January,  1997. The
      Court  requested  that each side submit the lists of appraisers  from whom
      the Court could appoint two appraisers. All other matters before the Court
      were taken under advisement.

      In the  Second  Quarter  1997,  the  court  appointed  two  appraisers  to
      determine  the fair market value of the stock.  One appraisal has not been
      completed to the date of this report.

   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.  The action against the Company
      seeks declaratory  judgment holding that the fair cash value determination
      be heard in the  State of Ohio.  The  action  against  the  directors  and
      officers  alleges a breach of fiduciary duty involving the  negotiation of
      consulting and non-competition agreements in connection with the Company's
      sale of its former  businesses.  The Company has filed a motion to dismiss
      the action which motion has not yet been decided.

      In March,  1998 the Court of Common Pleas issued an order  dismissing  the
      action  as to  all  counts.  The  Plaintiffs  have  appealed  the  Court's
      decision.

   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.
                                       5
<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
    1997
    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
    
    1996 (2)
    Quarter ended March 31, 1996                            5/8     1 3/8
    Quarter ended June 30, 1996                             5/8     1 3/8
    Quarter ended September 30, 1996                        5/8     1 3/8
    Quarter ended December 31, 1996                         3/4     1 3/8
    
-----------------------------------------------------------------------------

(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, 1998,  there were 774 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,  1993  through  1997.  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, 1993 through 1997
are derived from the audited financial statements of the Company.
                                       6
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------------------------------------------------------------------------
 OPERATING RESULTS:                                1993         1994        1995       1996         1997
 ------------------                                ----         ----        ----       ----         ----
<S>                                             <C>          <C>         <C>        <C>          <C>    
 Net revenues                                   $   360      $19,004     $21,598    $22,407      $22,029
 
 Net income (loss)                              $27,623      $   435     $   294    $(3,723)     $(1,606)
 
 Net income (loss) per common share             $  9.36      $   .17     $   .12    $ (1.50)     $  (.64)
                                                      
 Weighted average number of common
 stock outstanding                                2,947        2,458       2,489      2,486        2,472
                                                      
-----------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------------------------------------------------------------------
 FINANCIAL POSITION:                              1993        1994        1995         1996        1997
 -------------------                              ----        ----        ----         ----        ----
<S>                                            <C>         <C>         <C>          <C>         <C>
 Working capital
    (deficiency)                               $ 2,636     $   574     $ 2,424      $ 1,118     $ 1,206
 
 Total assets                                  $23,126     $24,108     $24,878      $21,971     $10,405
 
 Long term debt, excluding                     $   515     $ 5,962     $ 7,345      $ 8,950     $   255
 current installments and
 amount subject to compromise
 
 Shareholders' equity                          $12,824     $11,494     $13,061      $ 8,530     $ 6,212
    (deficiency)
--------------------------------------------------------------------------------------------------------
</TABLE>

ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS
          ------------------------------------

RESULTS OF OPERATION

The  Company has sold two of its  divisions  in 1997.  Most of the  Management's
discussion  and  analysis  will  concern  the  remaining  operational  division,
Restaurants.

Consolidated

The Company had a loss of $1,606,000 for the period ending  December 31, 1997 as
compared to a loss of $3,723,000  for the same period in 1996.  Selling  General
and Administrative  expenses have been reduced to $2,131,000 for the year ending
December  31,  1997 or by 28% from  $2,995,000  for the same  period  last year.
Management  believes further savings are possible but will not be as significant
as in prior years.

There were several  extraordinary  losses recorded by the Company this year. The
Company had  invested in a low fare  airline and its  subsidiary  in 1995.  Both
filed for protection under the U.S. Bankruptcy laws in 1997 and the value of the
stock was written down to nothing this year. The Company had previously recorded
a gain on sale of a portion of the securities in 1995.

Also,  the Company loss  $916,000 on the sale of its interest in the Real Estate
development  subsidiary.  Management  felt that the  prospects  of  selling  the
Development for a profit both on a long term and short term basis were small. By
selling to its minority  investors in the project,  the Company was able to stop
the operational losses it had suffered in the Development.
                                       7
<PAGE>
Cash flow from operating  activities  improved from the year earlier period. But
for the one time charges set forth above,  the Company would have had a positive
cash flow from operations. Cash flow for investing activities was also positive.
However,  a  majority  of  this  cash  flow  was  provided  by  sale  of the two
subsidiaries and payments on the sale of the Mexican subsidiary in a prior year.
The Company does not expect a significant contribution from investing activities
in the future as it has returned to a core business.

Performance Restaurants Group, Inc.

Restaurants  Gross  Revenue rose  $1,686,000  or 8% in 1997 as compared to 1996.
This increase is  attributed  to the addition of units in 1997.  Sales at stores
open at least one year were approximately the same for both years.

Restaurant earnings,  which are not adjusted to include corporate overhead, were
$907,000  for  the  year  ending  December  31,  1997 as  compared  to a loss of
$2,774,497 for restaurants  for the year ending  December 31, 1996.  There was a
one  time  charge  of  $1,795,054  in 1996  for  the  closure  of the Las  Vegas
restaurant.  Without the charge,  Restaurants  would have had a loss of $979,443
for the year ending December 31, 1996. The cost cutting  measures  undertaken in
1996 have helped the Restaurant  division become a profitable  operation for the
Company.

In January,  1998, the Company  signed an  operational  lease for the two Carlos
Murphy's Restaurants in San Diego with an unrelated Third Party. Under the terms
of the lease the company will receive $345,000 as rental in 1998 and $360,000 in
1999.  The  lessee  will pay all  operational  expense  for  those  restaurants.
Management  believes  that the  operating  lease will provide  greater cash flow
through rental income than anticipated  earnings for the upcoming year for these
restaurants.

The Company expects  restaurant  earnings to remain strong throughout 1998 as it
continues to monitor cost at the restaurant  level.  The Company has reduced its
costs at the  corporate  level  throughout  the past two  years.  Further,  cost
cutting may be possible  but will not offer as great a potential  for savings as
in years past.

Cash  Flow  for  Restaurants  was  sufficient  over  the  past  year to meet the
operating needs of the restaurant. Any expansion will call for additional funds.
The Company  would use its cash  reserves,  leases of  furniture,  fixtures  and
equipment,  owner funded  improvements to real property and bank  financing,  if
available, for any expansion.

Performance Funding Corp.

The Company  operated  its Funding  subsidiary  through its sale in August 1997.
Funding's  earnings were down as a result of the loss of its marketing person in
the spring of 1997.  The  Company  was  unable to find a  suitable  replacement.
Revenues  for the partial year 1997 were  approximately  $400,000 as compared to
$623,000  for the full year in 1996.  The 1997  revenues  include  approximately
$200,000  received  in payment  for an  account  reserved  for as bad debt.  The
decrease was attributable to the loss of clients during the year.

Performance Camelback Development Inc.

The  Company  sold its  interest in  December  1997 to the other  members of the
Limited  Liability  Company.  Prior to the sale the  Development had been nearly
covering  all of its  operating  cost.  The Company  did  advance  monies on two
occasions but was repaid any sums advanced in the year. The Company had hoped to
sell the  Development  to  recoup  its  investment  but no bona  fide  buyer was
located.


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.  During
1997, the
                                       8
<PAGE>
Company has reviewed  several  proposals  for new locations or  restaurants  for
purchase.  After  review,  none of the  proposed  locations  met  the  Company's
criteria  for  expansion.  The  Company  is  still  seeking  new  locations  for
expansion.

In addition, the Company is contemplating changes at some of its underperforming
units. Recently, the Company signed operating leases for its two Carlos Murphy's
Restaurants in Southern California. Under the lease, the Lessee pays a rental of
$360,000 per year for the two  locations and pays all  operating  expenses.  The
result is positive  cash flow in excess of  projected  profits from these stores
for the two years of the lease.

In addition,  the Company is reviewing several new concepts for two of the Bobby
McGee's  in  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, 1998.

Management  believes that most of the capital  costs for expansion  could be met
through 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.

The Company sold its interest in Camelback Plaza  Development in late 1997. As a
result,  the Company  suffered a loss on the sale. The Company had hoped to sell
this  investment  upon  completion of  construction.  However,  no sale was ever
completed.  The short term prospect of selling the  development for a profit was
reduced when two tenants vacated the premises.  While one of the spaces has been
leased  again,  it requires a  significant  cash outlay for tenant  improvements
prior to rental income being realized.  Further, while the negative cash flow of
the project had been significantly  reduced,  there was a possibility of further
investment of capital until new tenants were in place and paying rent.


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 16.


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                          59         PRESIDENT
    
    EDMUND L. FOCHTMAN, JR. (1)         60         VICE PRESIDENT/CFO
    
    ALLEN L. HAIRE (1)                  55         DIRECTOR
    
    JONATHAN TRATT (1)                  39         DIRECTOR
    
    ROBERT A. CASSALIA                  45         SECRETARY
--------------------------------------------------------------------------------
                                       9
<PAGE>
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.

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.

Jonathan Tratt has been President and Director of Industrial Brokerage, Inc., an
investment and commercial  real estate  brokerage  company since 1992.  Prior to
1992,  Jonathan  Tratt was a general  investor and real estate agent in Phoenix,
Arizona. Mr. Tratt was elected a director of the Company in May, 1993.

Robert A. Cassalia was hired by the Company as Assistant  Secretary,  in January
of 1991. On May 4, 1993, he was elected  Secretary.  Before  joining the Company
Mr.  Cassalia was General  Counsel of Action  Products,  Inc., a manufacturer of
fiberglass bodied mini-cars.  Since October, 1986, he was in private practice in
Phoenix, Arizona and Syracuse, New York.


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,  1997,  by the only
persons known to the Company to own beneficially more than 5% of the outstanding
shares of common stock.
                                       10
<PAGE>
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              69%

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 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
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.

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 of 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 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' Reports


     Consolidated Balance Sheets - December 31, 1997 and 1996

     Consolidated Statements of Operations - Years ended December 31, 1997, 1996
     and 1995

     Consolidated  Statements of Shareholders' Equity - Years ended December 31,
     1997, 1996 and 1995

     Consolidated Statements of Cash Flows - Years ended December 31, 1997, 1996
     and 1995

     Notes to Consolidated Financial Statements - Years ended December 31, 1997,
     1996 and 1995
                                       11
<PAGE>
(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.

2.1       Disclosure Statement and Plan of Reorganization filed on July 21, 1992
          by the Official Creditors' Committee. Incorporated by reference to the
          Company's Report on Form 10-Q filed on August 12, 1992.

2.2       Amended Plan of Reorganization filed by the Company on August 3, 1992.
          Incorporated  by reference to the Company's  Report on Form 10-Q filed
          on august 12, 1992.

2.3       Amended Disclosure  Statement including a Joint Plan of Reorganization
          approved  by the Court to be  distributed  to  interested  parties  on
          October 27, 1992. Incorporated by reference to the Company's Report on
          Form 10-Q filed on November 10, 1992.

2.4       The  Confirmed  Joint Plan of  Reorganization,  approved by the United
          States Bankruptcy  Court,  Central District of California on April 21,
          1993, as filed with the  Company's  report on Form 10-Q for the period
          ended March 31, 1993.

2.5       Notice of satisfaction to all conditions  precedent to  implementation
          of Option "A" of the Joint Plan of Reorganization  dated September 30,
          1992, as filed with the  Company's  report on Form 10-Q for the period
          ended March 31, 1993.

3.3       Amended  and  Restated  Articles  of  Incorporation  of  the  Company.
          Incorporated  by  reference  to Exhibit  3.3 of the  Company's  Annual
          Report on Form 10-K, dated March 29, 1988.

3.4       Revised Code of Regulations, as amended, of the Company.  Incorporated
          by reference  to Exhibit 3.4 of the  Company's  Annual  Report on Form
          10-K, dated March 29, 1988.

10.45     Asset purchase  agreements  relating to the sale of the Wheel and Tire
          business  dated  December 31, 1992 by and between  Cragar  Industries,
          Inc.,  and the Company.  Incorporated  by  reference to the  Company's
          report on Form 8-K filed on January 12, 1993.

10.46     The following exhibits relate to the sale of the Performance  business
          on May 4, 1993 as filed with the Company's report on Form 10-Q for the
          period ended March 31, 1995 and incorporated herein by reference:

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.
                                       12
<PAGE>
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.

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

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.
                                       13
<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 year  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  ended  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 year ended  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 ended 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 ended 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 ended  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  ended
          December 31, 1996, and are 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 ended  December  31, 1996,
          and by reference incorporated herein.

22.       Subsidiaries of the Registrant.
                                       14
<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 7, 1998                        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 7th day of April, 1998, 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


By: /s/ Jonathan Tratt                      Director
   -----------------------------
    Jonathan Tratt
                                       15
<PAGE>
                          PERFORMANCE INDUSTRIES, INC.
                                AND SUBSIDIARIES

                        CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 1997


--------------------------------------------------------------------------------
                                    CONTENTS
--------------------------------------------------------------------------------



                                                             PAGE

         INDEPENDENT AUDITOR'S REPORT                         17


         CONSOLIDATED FINANCIAL STATEMENTS:
         ----------------------------------

         BALANCE SHEETS                                       18


         STATEMENTS OF OPERATIONS                             19


         STATEMENTS OF SHAREHOLDERS' EQUITY                   20


         STATEMENTS OF CASH FLOW                              21


         NOTES TO FINANCIAL STATEMENTS                        23
                                       16
<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, 1997 and 1996
and the related consolidated statements of operations,  shareholders' equity and
cash flows for the three years in the period  ended  December  31,  1997.  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, 1997 and 1996,
and the results of their  operations and their cash flows for the three years in
the period  ended  December  31,  1997 in  conformity  with  generally  accepted
accounting principles.




TOBACK CPAs, P.C.
Phoenix, Arizona
March 20, 1998
                                       17
<PAGE>
                          PERFORMANCE INDUSTRIES, INC.
                                AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                             (DOLLARS IN THOUSANDS)

                           DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
                                             ASSETS
                                                                                 1997        1996
                                                                               --------    --------
Current assets:
<S>                                                                            <C>         <C>     
    Cash and cash equivalents                                                  $  2,815    $  1,136
    Restricted cash (Note 2)                                                       --           409
    Securities available for sale (Note 3)                                         --           722
    Accounts and other receivables, less allowance for
       doubtful accounts of $14 and $36, respectively (Note 5)                      410         503
    Current portion of receivables from sale of businesses,
       net of allowance (Notes 4 and 5)                                             269       1,356
    Factored accounts receivable, net of allowance for
       doubtful accounts of $283 and $417, respectively (Notes 5 and 14)            261       1,139
    Inventories                                                                     313         328
    Prepaid expenses and other current assets                                       227         192
    Deferred income taxes (Note 13)                                                  64        --
    Real estate held for sale (Notes 6 and 9)                                       785        --
                                                                               --------    --------
           Total current assets                                                   5,144       5,785

Receivables from sale of businesses, less current portion,
    net of allowance (Notes 4 and 5)                                               --           119
Investment in real estate (Notes 6, 9, and 14)                                     --         9,481
Deferred income taxes (Note 13)                                                   1,227       1,460
Property and equipment (Notes 7 and 9)                                            2,757       3,084
Other assets (Note 8)                                                             1,277       2,042
                                                                               --------    --------
           Total assets                                                        $ 10,405    $ 21,971
                                                                               ========    ========

                                        LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
    Current portion of long-term debt and capital lease obligations (Note 9)   $  1,051    $    547
    Accounts payable                                                                637       1,000
    Accrued employment costs                                                        476         491
    Accrued expenses and other current liabilities (Note 10)                        666       1,339
    Factored receivables reserve                                                     61         286
    Liabilities subject to compromise (Notes 11 and 19)                             797         754
    Foreign tax liability                                                           250         250
                                                                               --------    --------
           Total current liabilities                                              3,938       4,667

Long-term debt and capital lease obligations, less current portion (Note 9)         255       8,403
Commitments and contingencies (Notes 12, 18, 19 and 21)
Minority interest (Notes 6 and 14)                                                 --           371
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 2,377,889
       and 2,481,264, respectively (Notes 15 and 16)                             31,202      31,202
    Accumulated deficit                                                         (21,745)    (20,139)
    Unrealized holding gains on securities available for sale,
        net of income taxes (Note 3)                                               --           443
                                                                               --------    --------
                                                                                  9,457      11,506
    Treasury stock at cost (Note 16)                                             (3,245)     (2,976)
                                                                               --------    --------
       Total shareholders' equity                                                 6,212       8,530
                                                                               --------    --------
           Total liabilities and shareholders' equity                          $ 10,405    $ 21,971
                                                                               ========    ========
</TABLE>
                     The accompanying notes are an integral
               part of these consolidated financial statements. 
                                       18
<PAGE>
                          PERFORMANCE INDUSTRIES, INC.
                                AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                  (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
                                                             1997           1996           1995
                                                         -----------    -----------    -----------
<S>                                                      <C>            <C>            <C>        
Revenues                                                 $    22,029    $    20,344    $    19,357

Cost of revenues                                             (20,753)       (19,949)       (18,668)
Selling, general and administrative expenses (Note 20)        (2,131)        (2,995)        (2,672)
Interest expense                                                (134)          (156)           (93)
Other income (expenses), net                                     231            132          1,012
Loss on closure of restaurants (Note 17)                        --           (1,795)          --
                                                         -----------    -----------    -----------

Loss from continuing operations
    before income taxes                                         (758)        (4,419)        (1,064)

Income tax (expense) benefit (Note 13)                          (318)          (591)           148
                                                         -----------    -----------    -----------

Loss from continuing operations                               (1,076)        (5,010)          (916)

Income (loss) from discontinued operations (Note 14)            (530)         1,287          1,210
                                                         -----------    -----------    -----------

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

Income (loss) per common share:
    Continuing operations                                $      (.44)   $     (2.02)   $      (.36)
    Discontinued operations                                     (.21)           .52            .48
                                                         -----------    -----------    -----------

Net income (loss) per common share                       $      (.65)   $     (1.50)   $       .12
                                                         ===========    ===========    ===========

Average number of shares outstanding                       2,472,649      2,486,086      2,489,530
                                                         ===========    ===========    ===========
</TABLE>
                     The accompanying notes are an integral
                part of these consolidated financial statements.
                                       19
<PAGE>
                          PERFORMANCE INDUSTRIES, INC.
                                AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                             (DOLLARS IN THOUSANDS)
                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
                                                              Common                 Treasury                         Unrealized
                                                               Stock                   Stock                       holding gains on
                                                       ---------------------   ----------------------                 securities
                                                                     Number                  Number     Accumulated  available for
                                                        Amount     of shares    Amount      of shares     Deficit        sale
                                                       ---------   ---------   ---------    ---------    ---------    ---------
<S>                                                    <C>         <C>         <C>            <C>        <C>          <C>    
Balance, January 1, 1995                               $  31,202   3,157,332   $  (2,998)     699,052    $ (16,710)   $    --
   Net income                                               --          --          --           --            294         --
   Adjustment to treasury stock purchased
                                                            --          --            47      (31,250)        --           --
   Holding gain on securities available
       for sale, net of income taxes
                                                            --          --          --           --           --          1,226
                                                       ---------   ---------   ---------    ---------    ---------    ---------
Balance, December 31, 1995                                31,202   3,157,332      (2,951)     667,802      (16,416)       1,226
   Net loss                                                 --          --          --           --         (3,723)        --
   Treasury stock purchased (Note 16)                       --          --           (25)       8,266         --           --
   Holding loss on securities
   available for sale, net of                               --          --          --           --           --           (783)
                                                       ---------   ---------   ---------    ---------    ---------    ---------
   income taxes
Balance, December 31, 1996                                31,202   3,157,332      (2,976)     676,068      (20,139)         443
   Net loss                                                 --          --          --           --         (1,606)        --
   Treasury stock purchased (Note 20)                       --          --          (269)     103,375         --           --
   Holding loss on securities
   available for sale, net of                               --          --          --           --           --           (443)
                                                       ---------   ---------   ---------    ---------    ---------    ---------
   income taxes (Note 3)
Balance, December 31, 1997                             $  31,202   3,157,332   $  (3,245)     779,443    $ (21,745)   $    --
                                                       =========   =========   =========    =========    =========    =========
</TABLE>
See Note 16 regarding a one-for-four reverse stock split which occurred in 1996.

                     The accompanying notes are an integral
                part of these consolidated financial statements.
                                       20
<PAGE>
                          PERFORMANCE INDUSTRIES, INC.
                                AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)

                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
                                                               1997       1996       1995
                                                             -------    -------    -------
<S>                                                          <C>        <C>        <C>    
Cash flows from operating activities:
    Net income (loss)                                        $(1,606)   $(3,723)   $   294
    Adjustments to reconcile net (loss) income to net
      cash (used in) provided by operating activities:
         Depreciation                                            699      1,020        788
         Gain on sale of securities available for sale          --         --         (343)
         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)        (2)
         Adjustments and changes in estimates for
           receivables related to previously
           discontinued businesses                              --         --         (480)
         Loss on sale of property and equipment                   92         70       --
         Provision for allowance for doubtful accounts            88        416        133
         Changes in assets and liabilities (net of changes
           related to discontinued operations):
           Accounts receivable                                  (152)       (94)       (62)
           Factored accounts receivable, net of reserve           (7)       276      1,836
           Inventories                                            15         (6)       (17)
           Prepaid expenses and other current assets            (405)      (305)      (121)
           Other assets                                          477       (321)       (75)
           Accounts payable                                     (359)      (260)      (214)
           Accrued employment costs                              (15)      --         --
           Foreign tax liability                                --          250       --
           Other current liabilities, net                       (673)       205     (1,450)
           Liabilities subject to compromise                      43       --         --
           Deferred income taxes                                 231        548          3
                                                             -------    -------    -------
             Net cash (used in)
                provided by operating activities                  49     (1,292)       290
                                                             -------    -------    -------
</TABLE>
                     The accompanying notes are an integral
                part of these consolidated financial statements.
                                       21
<PAGE>
                          PERFORMANCE INDUSTRIES, INC.
                                AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
                             (DOLLARS IN THOUSANDS)

                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
                                                           1997       1996       1995
                                                          -------    -------    -------
<S>                                                       <C>        <C>        <C>    
Cash flows from investing activities:
    Changes in restricted cash                            $   409    $ 1,358    $ 1,633
    Payments received on receivables from sale
      of businesses                                         1,118      1,305        709
    Proceeds from sale of securities available for sale      --         --          387
    Investment in real estate                                --         (283)    (3,250)
    Purchase of property and equipment                       (466)    (1,486)      (960)
    Net proceeds from sale of:
      Mexican subsidiary                                     --          837       --
      Real estate operations                                  560       --         --
      Factoring operations                                    513       --         --
      Property and equipment                                 --          147       --
      Other assets held for sale                             --            6       --
    Payment for purchase of restaurant assets                --         (240)      (450)
    Investment in preferred stock                            --         (120)      --
    Loan to officer                                           (55)      (150)      --
    Repayment of officer loan                                  55        150       --
    Other, net                                                166       (192)        (5)
                                                          -------    -------    -------
           Net cash provided by (used in)
             investing activities                           2,300      1,332     (1,936)
                                                          -------    -------    -------

Cash flows from financing activities:
    Proceeds from borrowings                                 --        2,659      1,115
    Repayments of borrowings                                 (401)    (1,949)      (247)
    Changes in treasury stock                                (269)       (25)        47
                                                          -------    -------    -------
           Net cash (used in) provided by
              financing activities                           (670)       685        915
                                                          -------    -------    -------

Net increase (decrease) in cash and cash equivalents        1,679        725       (731)

Cash and cash equivalents, beginning of year                1,136        411      1,142
                                                          -------    -------    -------

Cash and cash equivalents, end of year                    $ 2,815    $ 1,136    $   411
                                                          =======    =======    =======
</TABLE>
      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.
                                       22
<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).
         Performance  Camelback  Development  had a 72%  ownership  interest  in
         Camelback  Plaza  Development  Corp.,   L..L.C.,   an  Arizona  Limited
         Liability Company during 1996 and 1995.

      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 has
         accounted  for  the   disposition  of  these  assets  as   discontinued
         operations (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 has accounted for this
         disposition as discontinued operations (see Note 14).

      At December 31, 1997,  the Company is primarily a restaurant  company with
         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  and its majority
         owned  real  estate  limited   liability   company.   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.
                                       23
<PAGE>
                          PERFORMANCE INDUSTRIES, INC.
                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


1.    Organization and summary of significant accounting policies, 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  $334,000,  $408,000 and
         $425,000 during 1997, 1996 and 1995, 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.

      Restaurant equipment available for sale:

      Restaurant  equipment  available for sale  represents  assets removed from
         closed  restaurants  and is reported at the lower of carrying amount or
         fair value less costs of disposal.
                                       24
<PAGE>
                          PERFORMANCE INDUSTRIES, INC.
                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


1.    Organization and summary of significant accounting policies, continued:

      Securities available for sale:

      Securities  available  for sale are  reported  at fair  value.  Unrealized
         holding gains, net of income tax, on securities  available for sale are
         reported  as a net  amount in a  separate  component  of  shareholders'
         equity until realized.

      Gains and  losses  on the  sale  of  securities  available  for  sale  are
         determined using the specific identification method.

      Fair values for securities  available for sale are determined using quoted
         market prices.

      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:

      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 1995 to conform to the financial statement classifications for
         1997.
                                       25
<PAGE>
                          PERFORMANCE INDUSTRIES, INC.
                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


2.    Restricted cash:

      In November 1996, the Company  entered into an agreement with the minority
         shareholders in the Camelback Plaza Development,  L.L.C. for the rights
         to  purchase  the  Company's  interest  in  the  L.L.C.  The  agreement
         contained  a  provision  that  restricted  the use of a portion  of the
         proceeds from the refinancing of the real estate project.  The cash was
         used to fund operating  expenses of the project.  The restrictions were
         entirely released on April 1, 1997.

3.    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 as a result of a public
         stock offering by the airline. The common stock that was marketable was
         sold  for a gain of  approximately  $343,000  in  1995.  The  remaining
         securities became available for sale in May 1997 subject to certain SEC
         limitations.

      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.

4. Receivables from sale of businesses:

      Receivables  from  sale  of  businesses   consist  of  the  following  (in
         thousands):
<TABLE>
<CAPTION>
                                                                1997      1996
                                                                ----      ----
<S>                                                             <C>       <C>   
      Note   receivable,   corporation,   interest  at  10%,
         principal  and  interest  payments  due in  monthly
         installments  of  approximately   $120,000  through
         January  1998,  secured by stock of former  Mexican
         subsidiary. The corporation has currently suspended
         payments  on  the  note  until  clarification  of a
         certain lease agreement  related to real estate the
         corporation  acquired  in  the  sale  is  resolved.
         Management  believes  that the note will be paid in
         full in 1998. (See Note 6)

                                                                $ 269     $1,475

</TABLE>
                                       26
<PAGE>
                          PERFORMANCE INDUSTRIES, INC.
                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


4.    Receivables from sale of businesses, continued:

                                                              1997        1996
                                                            -------     -------

      Notes settled during 1997                                --           123
                                                            -------     -------
                                                                269       1,598
      Less allowance for doubtful accounts                     --          (123)
                                                            -------     -------
                                                                269       1,475
      Less current portion                                     (269)     (1,356)
                                                            -------     -------
                                                            $  --       $   119
                                                            =======     =======

5.    Allowances for doubtful accounts:

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


                                                   1997       1996       1995
                                                  -------    -------    -------

      Balance at beginning of year                $   576    $   514    $ 1,016
      Additions charged to cost and expenses           88        416        133
      Reduction of estimated allowances from
        discontinued operations                      --         --         (480)
      Accounts written off                           (163)      (354)      (163)
      Reduction of allowance credited to costs
        and expenses                                 (204)      --         --
                                                  -------    -------    -------
      Balance at end of year                      $   297    $   576    $   506
                                                  =======    =======    =======

      The allowances for doubtful accounts  include  allowances for accounts and
         other  receivables,  receivables from sale of businesses,  and factored
         accounts receivable.
                                       27
<PAGE>
                          PERFORMANCE INDUSTRIES, INC.
                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


6.    Investment in real estate:

      Investment  in real  estate  included  in the 1997  and 1996  consolidated
         balance sheets is as follows:

                                                1997      1996
                                               -------   -------
         Rental real estate                    $  --     $ 8,751
         Less accumulated depreciation            --        (430)
                                               -------   -------
                                                  --       8,321

         Real estate held for sale                 785     1,160
                                               -------   -------

                                               $   785   $ 9,481
                                               =======   =======

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

         Real estate:                            1997        1996
                                               --------    --------

         Balance at beginning of year          $  9,911    $ 12,149
                                               --------    --------
           Additions during the year:
             Ground lease fees                     --            99
             Tenant improvements                   --           291
                                               --------    --------
                Total additions                    --           390
                                               --------    --------
                                                  9,911      12,539
           Reductions during the year:
             Cost of real estate sold            (8,735)     (2,619)
             Impairment loss                       (375)       --
             Other                                  (16)         (9)
                                               --------    --------
             Total reductions                    (9,126)     (2,628)
                                               --------    --------
         Balance at end of year                $    785    $  9,911
                                               ========    ========

         Accumulated depreciation:               1997        1996       1995
                                               --------    --------   --------
         Balance at beginning of year          $    430    $  1,076   $    862
           Additions during the year:
             Depreciation                           244         320        214

           Reductions during the year:
             Disposals                             (674)       (966)      --
                                               --------    --------    --------
         Balance at end of year                $   --      $    430    $  1,076
                                               ========    ========    ========
                                       28
<PAGE>
                          PERFORMANCE INDUSTRIES, INC.
                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


6.    Investment in real estate, continued:

      Real estate  held for sale as of  December  31,  1997  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.
         The  impairment  loss  included  in  other  income   (expense)  in  the
         accompanying December 31, 1997 consolidated  statement of operations is
         approximately $375,000.

      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.

      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 (see Note 14).

7.    Property and equipment:

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

                                                   1997       1996
                                                 -------    -------
           Restaurant equipment                  $ 1,445    $ 1,315
           Furniture and fixtures                    692        678
           Transportation equipment                  438        400
           Leasehold improvements                  1,875      1,783
           Equipment held under capital leases       219        219
                                                 -------    -------
                                                   4,669      4,395
           Less accumulated depreciation          (1,912)    (1,311)
                                                 -------    -------
                                                 $ 2,757    $ 3,084
                                                 =======    =======
                                       29
<PAGE>
                          PERFORMANCE INDUSTRIES, INC.
                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


8.    Other assets:

      Other assets consist of the following (in thousands):

                                                          1997     1996
                                                        ------   ------
           Classic automobiles                          $  206   $  206
           Deposits and other                              136      314
           Investment in preferred stock                  --        120
           Lease incentives, net of accumulated
             amortization of $9 for 1996 (Note 14)        --        117
           Liquor licenses                                 191      191
           Loan acquisition costs, net of accumulated
             amortization of $87 for 1996 (Note 14)       --        360
           Restaurant small wares                          404      404
           Restaurant equipment available for sale         340      330
                                                        ------   ------
                                                        $1,277   $2,042
                                                        ======   ======

      During 1996,  the Company  invested  $120,000 in the preferred  stock of a
        closely held regional  airline.  The  investment  was written off during
        1997 as the airline  ceased  operations  and filed  petitions for relief
        under Chapter 11 of the Federal bankruptcy laws. The loss is included in
        other income (expenses) on the accompanying  consolidated  statements of
        operations.

9.    Long-term debt and capital lease obligations:

      Long-term debt and capital lease obligations  consist of the following (in
         thousands):
<TABLE>
<CAPTION>
                                                                                   1997       1996
                                                                                 -------    -------
<S>                                                                              <C>        <C>    
      Notepayable,  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    $   720
      
      Unsecured note payable,  State of California,  with interest at 6%, with
          monthly  principal  payments of $25,000 plus  interest  through June
          1999
                                                                                     450        750
      
      Capital lease obligations (Note 12)                                            148        187
      
      Notes settled during 1997 (Note 14)                                           --        7,293
                                                                                 -------    -------
                                                                                   1,306      8,950
      Less current portion                                                        (1,051)      (547)
                                                                                 -------    -------
                                                                                 $   255    $ 8,403
                                                                                 =======    =======
</TABLE>
                                       30
<PAGE>
                          PERFORMANCE INDUSTRIES, INC.
                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


9.    Long-term debt and capital lease obligations, continued:

      Cash paid for interest was approximately $102,000,  $818,000, and $700,000
         during 1997, 1996 and 1995, respectively.

      Approximate future  maturities of long-term debt,  excluding capital lease
         obligations,  for the next five years as of  December  31,  1997 are as
         follows (in thousands):

            1998                                        $        1,008
            1999                                                   150

10.   Accrued expenses and other current liabilities:

      At December  31, 1997 and 1996,  the  components  of accrued  expenses and
         other current liabilities consist of the following (in thousands):

                                                              1997     1996
                                                             ------   ------

      Gift certificates and advance
         customer deposits                                   $  106   $   86
      Litigation settlements and estimated claims  (Note 18)    117      619
      Product liability costs                                    66       85
      Sales taxes payable                                       145      133
      Other accruals                                            232      416
                                                             ------   ------ 
 
                                                             $  666   $1,339
                                                             ======   ======

11.   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 is in the process of  negotiating
         settlements  of the final claims  outstanding.  Liabilities  subject to
         compromise  at December  31, 1997 consist  primarily  of  environmental
         remediation and tax liabilities.
                                       31
<PAGE>
                          PERFORMANCE INDUSTRIES, INC.
                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


12.   Leases:

      As lessee:
      ---------

      The Company's restaurant  subsidiary leases ten restaurant locations under
         operating leases including one restaurant  location which closed during
         1996.  These leases  expire at various  dates  through 2010 and require
         aggregate annual payments of approximately $1,400,000.  The leases also
         contain provisions for contingent rental payments ranging from 3% to 9%
         of sales.  During 1997 and 1996, the  restaurants  incurred  contingent
         rentals of approximately $331,000 and $358,000, 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 2000.

      Future  minimum  lease  payments  for  capital  leases  and  noncancelable
         operating leases as of December 31, 1997 are as follows (in thousands):

                                                           Capital  Operating
                                                            leases    leases
                                                            ------    ------

            1998                                           $    56   $ 1,489
            1999                                                56     1,329
            2000                                                47     1,183
            2001                                                 9     1,134
            2002                                                 -     1,123
          Thereafter                                             -     3,713
                                                           -------   -------

                                                               168   $ 9,971
                                                                     =======
          Less amount representing interest                    (20)
                                                               --- 

          Present value of future minimum lease
            payments on capital leases                     $   148
                                                           =======

      Rent expense for operating leases was approximately $1,862,000, $1,818,000
         and $1,723,000 for 1997, 1996 and 1995, respectively.
                                       32
<PAGE>
                          PERFORMANCE INDUSTRIES, INC.
                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


12.   Leases, continued:

      Subsequent to December 31, 1997,  the Company has  subleased  three of its
         restaurant  locations to unrelated  restaurant  companies in California
         and Nevada (see Note 21). The subleases provide for monthly payments of
         approximately  $45,000  beginning in February and April 1998 and expire
         from January 2000 through  December  2005.  Approximate  minimum future
         rentals to be received on noncancelable  subleases for each of the next
         five years are as follows:

                           1998                                   $  442,000
                           1999                                      540,000
                           2000                                      210,000
                           2001                                      180,000
                           2002                                      180,000
                           Thereafter                                525,000
                                                                  ----------

                           Total minimum future rentals           $2,077,000
                                                                  ==========

13.   Income taxes:

      The Company adopted Statement of Financial  Accounting  Standards No. 109,
         Accounting  for  Income  Taxes as of  January  1,  1995.  There  was no
         cumulative  effect on prior  years  from the change in  accounting  for
         income taxes.

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

                                           1997     1996     1995
                                          -----    -----    -----
              Federal:
                Current                   $--      $--      $--
                Deferred                   (231)    (548)      (3)
              Foreign                      --       (250)     (16)
              State and local              --         (2)      (2)
                                          -----    -----    -----

              Total income tax expense    $(231)   $(800)   $ (21)
                                          =====    =====    =====

              Allocated to:
                Continuing operations     $(318)   $(591)   $ 148
                Discontinued operations      87     (209)    (169)
                                          -----    -----    -----

                                          $(231)   $(800)   $ (21)
                                          =====    =====    =====

      Foreign  income taxes  represent an estimate of the Mexican  income tax on
the sale of the Company's Mexican subsidiary in 1996.
                                       33
<PAGE>
                          PERFORMANCE INDUSTRIES, INC.
                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


13.   Income taxes, continued:

      Thefollowing 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):

                                                      1997       1996     1995
                                                     -----    -------    -----
     
           Income tax benefit at statutory rate      $ 247    $ 1,502    $ 362
           Foreign and state income taxes             --         (252)     (18)
           Tax effect of valuation allowance
             on deferred tax assets                   (212)    (1,841)    (202)
           Reduction of net operating loss and tax
             credit carryforwards net of valuation
             allowance                                (353)      --       --
           Other                                      --         --          6
                                                     -----    -------    -----
     
           Income tax (expense) benefit from
             continuing operations                   $(318)   $  (591)   $ 148
                                                     =====    =======    =====
     
      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):

                                                             1997        1996
                                                           --------    --------
        Current deferred tax assets (liabilities):
          Reserves not currently deductible                $    373    $    332
          Unrealized holding losses (gains) on investment        82         (72)
                                                           --------    --------
                                                                455         260
          Valuation allowance                                  (391)       (260)
                                                           --------    --------
     
             Net current deferred tax asset                $     64    $   --
                                                           ========    ========
     
        Non-current deferred tax assets (liabilities):
          Difference between book and tax bases of assets  $    703    $    255
          Contribution carryforwards                             27          24
          Net operating loss carryforwards                    7,971       9,477
          General business credit carryforwards                  66         414
                                                           --------    --------
                                                              8,767      10,170
          Valuation allowance                                (7,540)     (8,710)
                                                           --------    --------
             Net non-current deferred tax asset            $  1,227    $  1,460
                                                           ========    ========
                                       34
<PAGE>
                          PERFORMANCE INDUSTRIES, INC.
                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


13.   Income taxes, continued:

      The deferred income tax liability  related to unrealized  holding gains on
         securities  available for sale  decreased by $72,000  during 1997 and a
         deferred tax asset was recognized as a result of the loss recognized on
         the Company's investment in securities available for sale.

      The Company has recorded a net  deferred tax asset as of December 31, 1997
         of $1,291,000  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 1997, the Company lost the
         benefit  of a  portion  of its net  operating  loss  carryforwards  and
         general  business  credits due to reaching the  expiration  date of the
         carryforwards.

      The Company has available at December 31, 1997, 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                 30
                      2011               489               --
                      2012               986
                                     -------              -----
          
                                     $23,056              $  96
                                     =======              =====

      The Company has net operating carryforwards  for state income tax purposes
         of approximately $4,000,000 which expire through 2002.
                                       35
<PAGE>
                          PERFORMANCE INDUSTRIES, INC.
                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


14.   Discontinued operations:

      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.

      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.

      FMMSA had gross rental revenues of  approximately  $524,000 and net income
         of  approximately  $195,000 for the year ending  December 31, 1995. 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.
                                       36
<PAGE>
                          PERFORMANCE INDUSTRIES, INC.
                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


14.   Discontinued operations, continued:

      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 20).  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, 1997,  factored  accounts
         receivables remaining were approximately  $260,000, net of an allowance
         for doubtful accounts of approximately  $345,000.  The buyer has agreed
         to collect the remaining  receivables  for a 5% collection fee based on
         payments collected.

      Revenues  of the  factoring  operation  were  approximately  $508,000  and
         $1,024,000  for 1996 and  1995,  respectively.  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, consists of the following (in thousands):
<TABLE>
<CAPTION>
                                                                1997                    1996                   1995
                                                             -----------             -----------             ----------
<S>                                                          <C>                     <C>                     <C>       
(Loss) income from operations of real estate
  subsidiaries, net of income tax                            $  (118,000)            $   360,000             $  191,000

(Loss) gain on sales of real estate subsidiaries,
  net of income tax                                             (670,000)              1,053,000                   --

Income (loss) from operations of
  factoring subsidiaries, net of income tax                      255,000                (126,000)               581,000

Gain on the sale of factoring operations                           3,000                    --                     --

Adjustments to reserves from previously
  discontinued automotive operations net
  of income tax                                                     --                      --                  438,000
                                                             -----------             -----------             ----------

                                                             $  (530,000)            $ 1,287,000             $1,210,000
                                                             ===========             ===========             ==========
</TABLE>
                                       37
<PAGE>
                          PERFORMANCE INDUSTRIES, INC.
                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


15.   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, 1997, all outstanding  options were exercisable and 62,500
         shares were available for future grant. The weighted average  remaining
         contractual  life of the  outstanding  options  is  approximately  nine
         years.

      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          307,500   $.88 to $.96       $   .90
Issued                              167,500   $.88 to $.96       $   .89
Exercised                              --
Cancelled                           (37,500)  $.88               $   .88
                                   -------- 

Balance at December 31, 1997        437,500   $.88 to $.96       $   .90
                                   ======== 

16.   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.
                                       38
<PAGE>
                          PERFORMANCE INDUSTRIES, INC.
                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


17.   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  and in  accrued  expenses  and other
         current liabilities on the accompanying  consolidated balance sheet for
         1996. 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.  Management  does not  anticipate  significant
         costs of disposal at December 31, 1997 (see Note 21).

      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.  Sales from the San Ramon  restaurant
         were  approximately  $2,116,000  during 1995. Losses from operations of
         the restaurant were approximately  $9,000 during 1995. 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.

18.   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,  are  entitled to
         payment  of "fair  cash  value"  of the  shares  within  30 days of the
         determination of the value by the court.

      During 1993, two of the remaining dissenting  shareholders filed an action
         against the Company and certain current and former directors,  alleging
         that certain  actions taken by the Company and management  have lowered
         the value of the Company's stock.  Management is aggressively defending
         this  action  and does not  currently  expect  to  incur  any  material
         liability at its conclusion.
                                       39
<PAGE>
                          PERFORMANCE INDUSTRIES, INC.
                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


18.   Litigation, continued:

      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.

      Accrued liabilities at December 31, 1997, include  approximately  $100,000
         for potential  litigation  settlements on various claims (see Note 10).
         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.

19.   Commitments and contingencies:

      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.
                                       40
<PAGE>
                          PERFORMANCE INDUSTRIES, INC.
                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


19.   Commitments and contingencies, continued:

      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.

      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.

20.   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.
                                       41
<PAGE>
                          PERFORMANCE INDUSTRIES, INC.
                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


20.   Related party transactions, continued:

      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.

      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.

21.   Subsequent events:

      In January  1998,  the  Company  entered  into a lease  agreement  with an
         individual to sublease two of the Company's  restaurants  in California
         for $30,000 per month through  January 2000. At the end of the sublease
         term,  the  lessee  has the  option  to  purchase  the  assets  of each
         restaurant for $250,000 per  restaurant.  The sublease  includes all of
         the  operating  assets of the  restaurants,  as well as the  restaurant
         name. The lessee is responsible for all operating  expenses,  including
         the base and percentage rent of the original  lease.  The Company would
         remain liable upon default by the lessee.

      In January,  1998,  the Company  entered  into an  agreement to assign the
         lease of its  former  Las Vegas  restaurant  location  to a  restaurant
         company  in Nevada,  effective  April 1, 1998.  The  Company  remains a
         guarantor of the lease.