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, 1996
                         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.)

                        2425 E. Camelback Road, Suite 620
                             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:

         Title of Each Class          Name of Each Exchange 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, 1997 (based upon closing price) was $1,188,034.

At  March  31,  1997,   2,481,264  shares  of  Registrant's  Common  Stock  were
outstanding.
<PAGE>
PART I

ITEM 1.   BUSINESS
          --------

The Company  currently  operates in three primary business segments for which it
has formed the following subsidiaries;  restaurants,  factoring, and real estate
development.

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
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.

During 1996, the company bought two Carlos Murphy's  Mexican  Restaurants in the
San Diego,  California area.  Carlos Murphy's is in the casual dining restaurant
segment  and  features  an  extensive  menu of  Mexican  Food  choices.  Limited
renovations to these locations is expected.  Part of the renovations  will be to
upgrade the lounge by adding a dance floor and a D.J.  playing  recorded  music.
This will help increase sales in the later hours when their are fewer diners.

Restaurants has developed a franchising  package for its concept domesticaly and
internationally.  The  franchisees  will  pay a fee  for  each  restaurant  they
develop,  plus  a  royalty  based  upon  gross  sales  of  each  location.  Area
Development Agreements will cover multi unit franchises in a specific geographic
area. Restaurants will offer assistance to the franchisee in training employees,
advertising, site selection, and operation of a franchised location. Restaurants
has not actively marketed any franchises.

Performance Funding Corp. (Funding)

This subsidiary was formed in Arizona and is engaged in the factoring  business.
Factoring is the purchase of accounts  receivable at a discount from face value.
All  purchases are full recourse  against the seller.  This means that,  after a
predetermined period, the seller must either repurchase the invoice at full face
value or substitute an invoice for the face value, plus accrued fees.

At the time of  purchase  of the  invoice,  Funding  purchases  the invoice at a
discount from the face value of the invoice.  The discount is set at the maximum
fees possible,  plus a reserve for bad debt. Upon collection of the invoice, the
seller is paid the  difference  between the fee  holdback and earned fees to the
date of payment.  Funding receives a security interest in other  receivable,  of
the seller to further  secure  payment of fees and to secure  performance of the
recourse provision of the contract.
                                       2
<PAGE>
Funding  looks for sellers with annual sales between  $250,000 and  $15,000,000.
The decision to purchase any receivable is based upon the financial condition of
the client,  the  profitability of the seller,  payment terms of the receivable,
and the credit worthiness of the account debtors.

Performance Development Corp. (Development)

Camelback Plaza Development, L.C.

Development was formed in Arizona in 1993 to act as managing member of Camelback
Plaza Development, L.C. with a 71.6% ownership, which was developing and leasing
Camelback Plaza, a retail/restaurant development in Phoenix, Arizona. The retail
phase of the  project  opened in late  1994  with Just for Feet and  Blockbuster
Music as its first tenants.

The restaurant  phase,  consisting of a free standing building for the Hard Rock
Cafe, was constructed in 1995. The Hard Rock Cafe opened for business in October
1995.

In 1996, one of the tenants in the retail area, a full service restaurant opened
and closed,  vacating the  premises.  The company is taking  action  against the
tenant  for  breach of the lease,  while  actively  seeking a new tenant for the
space.

In January 1997,  Blockbuster  Music closed its store and is seeking a subtenant
for the space.  They continue to meet all of their financial  obligations  under
the terms of the lease.

Fabricaciones Metalicas Mexicanas, S.A. (FMMSA)

The company sold the subsidiary in July,  1996 for $1,000,000 and a note payable
to the company for $2,000,000.  The note is to be paid, inclusive of interest in
18 payments of $120,000 each.

Ixtapa

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

A.  Competition

The factoring  business is a niche market for financing.  Funding  competes with
several  companies that have greater financial  resources than Funding.  Funding
competes on the basis of rates, service and market concentration.

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.

The real estate development business is highly competitive. Development competes
with several  other  development  companies in the Phoenix  market that are more
experienced and have greater financial resources. However, Development feels the
location of the  development is highly  desirable to the high volume tenants who
have signed leases.
                                       3
<PAGE>
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 Ave 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.
At the present time, analysis of the potential remediation  alternatives has not
been completed, nor has a plan been submitted for approval by the Ohio EPA.

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 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. 
                                       4
<PAGE>
ITEM 2. PROPERTIES

As of December 31,  1996,  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                               6,314                 7/31/97
   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

San Ramon,                  Restaurant/Nightclub                 9,980                 6/30/2002
   California  (2)

Ixtapa                      Raw Land                             8,748 sq. meters      Owned

Phoenix,                    Development Project                  5 Acres ((1))         Land Lease
   Arizona                                                                             2/28/2052

Las Vegas,                  Restaurant/Nightclub                 9,185                 12/31/2005
   Nevada

La Mesa,                    Restaurant/Nightclub                 8,700                 12/31/2005
   California

La Jolla,                   Restaurant/Nightclub                 9,000                 1/15/2000
   California
</TABLE>
                                       5
<PAGE>
((1))    The real  property  of five (5)  acres is  subject  to a long term land
         lease.  The  subsidiary  has the option to purchase  the real  property
         after the year 2015 at its fair market value without  consideration  of
         value added for any improvements on the property.

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

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  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 Writ 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.

B.       On January 26, 1994, an action filed by Murray & Murray in the Court of
         Common  Please,  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.
                                       6
<PAGE>
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.

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
1996
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

1995 ((2))
Quarter ended March 31, 1995                      2 1/2                   3
Quarter ended June 30, 1995                       2                       2 1/4
Quarter ended September 30, 1995                  1 1/2                   2
Quarter ended December 31, 1995                   3/4                     1 1/4

((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 31, 1997,  there were 790 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 1994, the Company  purchased  approximately  558,500 shares of stock from
dissenters  due  to the  sale  of  the  Company's  Exhaust  division  to  Walker
Manufacturing. In addition, the Company purchased approximately 50,500 shares on
the open market in 1994.
                                       7
<PAGE>
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 DATE (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,  1992  through  1996.  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, 1992 through 1996
are derived from the audited financial statements of the Company.

Year Ended December 31
<TABLE>
<CAPTION>

OPERATING RESULTS:                           1992           1993          1994           1995          1996
------------------                           ----           ----          ----           ----          ----
<S>                                     <C>              <C>           <C>            <C>           <C>     
Net revenues                             $ 78,478        $    360      $ 19,004       $ 21,598      $ 22,407

Net income (loss)                       ($  5,711)       $ 27,623      $    435       $    294        (3,723)

Net income (loss) per                   ($   2.16)       $   9.36      $    .17       $    .12         (1.50)
   common share

Weighted average number of common           2,631           2,947         2,458          2,489         2,486
stock outstanding


Year Ended December 31

FINANCIAL POSITION:                          1992           1993          1994           1995          1996
-------------------                          ----           ----          ----           ----          ----
Working capital
   (deficiency)                         ($ 35,609)       $  2,636      $    574       $  2,424      $  1,344

Total assets                             $ 68,320        $ 23,126      $ 24,108       $ 24,878      $ 21,971

Long term debt, excluding                $    955        $    515      $  5,962       $  7,345      $  8,950
current installments and
amount subject to compromise

Shareholders' equity                    ($ 16,108)       $ 12,824      $ 11,494       $ 13,061       $ 8,530
   (deficiency)
</TABLE>
                                       8
<PAGE>
ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
          AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

Consolidated

For the year ended December 31, 1996,  the Company had a consolidated  loss from
continuing  operations of ($3,723,000)  compared to a loss of ($144,000) for the
same period in 1995.

During 1995 the Company had income from discontinued operations of approximately
$438,000,  as a result of "changes in accounting  estimates," and adjustments to
reserve  accounts  for claims  and bad debt  expense  that  offset the loss from
continuing  operations  yielding  net  income of  $294,000.  There  were no such
adjustments in 1996.

The Company's general, and administrative expenses were $3,465,000,  an increase
of $624,000 from 1995. The increase is a result of nonrecurring  charges for the
closure  of  two  restaurants,  Las  Vegas  and  San  Ramon  (See  note  #17  to
Consolidated  Financial  Statements),  and an  increase  in bad debt  expense of
$139,000.

Interest  expense  was  $754,000 in 1996  compared  to  $533,000  in 1995.  This
increase is  attributable  to the use of the factoring line of credit for a full
year and an increase in borrowing by the parent to meet the cash needs while the
Development  subsidiary  negotiated  a long term third party  financing  for its
project  and  interest  expense  of the  Development  subsidiary  that  had been
capitalized during construction of the project.

The Company has an  investment  in shares of a publicly  traded  stock,  Western
Pacific Airlines. These securities are subject to a restriction on sale limiting
the number of shares that can be sold by the Company  during any  quarter.  As a
result of a change in the  securities  rules  covering  restricted  stock,  this
restriction  should be lifted as of April 29,  1997 and the shares  become  free
trading (see Note 3 to  Consolidated  Notes to the  Financial  Statements).  The
company  realized a net gain of  $387,000  on sale of a portion of this stock in
1995.

Performance Restaurants Group, Inc.

Revenues

Total revenues increased 5 % to $20,344,000 for 1996 compared to $19,357,000 for
1995.  The  increase in revenue is a result of the  addition of two  restaurants
during part of the year.  Same store sales for stores open at least one year did
not increase or decrease significantly.

Stores  closed  during  the  year  accounted  for  revenues  of  $1,734,000  and
$2,115,000 during 1996 and 1995 respectively.

Cost and Expenses

Cost of sales,  consisting of food and beverage cost, increased in 1996 to 28.5%
of sales compared to 27.6% in 1995. This increase is partially attributable to a
higher percentage of sales being food which has a higher cost than beverages.

The restaurant  division  recorded a loss from operations of $2,774,000 for 1996
as  compared  to a loss  from  operations  of  $166,000  for  1995.  The loss is
attributed to higher depreciation charges, increased advertising and for closure
of the Las Vegas and San Ramon  restaurants.  In addition $360,000 is attributed
to  operating  losses  at the Las  Vegas  store  (see  Note #17 to  Consolidated
Financial Statements).
                                       9
<PAGE>
Carlos Murphy's

The Company  purchased two Carlos  Murphy's  restaurants in August and December,
1996.  These are a mid-priced  family  oriented  Mexican Food  restaurant.  Both
restaurants are located in San Diego, California.

The  restaurants  have not been part of the Company's  operations long enough to
contribute  significantly to income.  Some limited renovations have been made to
the  restaurants  to add late night  lounge  business to the regular  restaurant
business.

Restaurant Outlook

The Company has made some changes to the menu at the Bobby  McGee's  restaurants
which are aimed at increasing the per check average of sales. Initial results at
test  restaurants  have been  promising and the Company will expand the new menu
throughout its operations over the next six months.

The  Company  plans  on  expansion   throughout  1996  by  acquiring   operating
restaurants  that could be  converted  to one of its  concepts;  Bobby  McGee's,
McGee's  Grill,  or Carlos  Murphy's;  at minimal  expense.  The Company has the
rights  to Bobby  McGee's  and  McGee's  Grill  nationwide  except  the state of
Arizona,  and to Carlos  Murphy's for San Diego and Los Angeles,  California and
Maricopa County (Phoenix) Arizona.

The Company hopes that the new menu and additional stores will significantly add
to revenues for 1997 and expects to be  profitable by year end,  however,  there
can be no assurance that the Company's strategy will be successful.

Performance Funding Corp. (Funding)

Gross Revenues for the year ended  December 31, 1996 were $623,000  including an
intercompany  charge  for  interest  to  the  Company  which  is  eliminated  in
consolidation, as compared to $896,000 in 1995, a decrease of approximately 30%.
The  decrease  was a result of increased  competition  from banks for  customers
resulting  in a lowering of rates for  factored  accounts  and  directly  from a
reduction from in gross fees of non-performing customers.  Funding has added new
clients during the year, but none with the volume for years past.

Funding had a loss from continuing  operations of $30,000 in 1996 as compared to
net  earnings  before taxes of $676,000 in 1995.  This has  resulted  from lower
volume  of  business  in 1996,  increase  of bad  debt,  and  interest  increase
associated  with  the  use of the  line  of  credit  for a full  year in 1996 as
compared to 5 months in 1995.

At  December  31,  1996,   funding  had   $1,270,000   invested  in  assets  and
approximately  $1,556,000  earning fees compared to $1,697,000  and  $2,070,000,
respectively  in 1995. The decline is based mainly on increased  competition for
quality customers.

Most major banks, in the past year or two, have established  divisions which are
allowed to finance  somewhat  higher  risk  companies.  These are the  companies
Funding  seeks  as  clients.   These  are  companies  that  almost  qualify  for
conventional  financing but may not have enough history or are experiencing fast
paced  growth.  Funding  cannot or will not  compete  with  these  divisions  on
interest  rates.  But Funding can and does compete by offering a close  personal
interest  and  understanding  of the client's  business.  The ability to quickly
respond to the client's  changing  financing  needs has also been a good selling
tool.

In July 1995, Funding obtained a line of credit from a financial  institution in
the  amount of  $2,000,000.  This has  allowed  the  Company  to lessen its cash
investment  in Funding  while  providing  capital for future  growth.  Under the
agreement, the Company must maintain an equity position of $1,000,000.  The line
of credit  expires in July 1997,  and Funding is  negotiating  a reduced line of
credit for the future.  Management believes, but there can be no assurance, that
the line of credit will be renewed in 1997.
                                       10
<PAGE>
Performance Development Corp. (Development)

Gross rent  received for the year ending  December 31, 1996,  was  approximately
$1,142,000 compared to approximately  $770,000 for 1995.  Development recorded a
net loss of  approximately  $153,000 for the year ended  December  31, 1996,  as
compared  to a loss of  $30,000  for  1995.  This  loss  includes  a charge  for
intercompany  interest that is eliminated in consolidation.  The increase in the
loss is  attributable  to  certain  expenses  including  interest  that had been
capitalized  in prior years  during  construction  of the project  which are now
operating expenses.  The rental increase is primarily a result of the opening of
the Hard Rock Cafe in 1995.

In November 1996,  Development refinanced the property. The loan from a mortgage
company was for $7,250,000 amortized over 25 years with a balloon payment due at
the end of 7 years.  Funds from the loan were used to payoff the  mini-permanent
loan,  repay loans from the Company to Development and to meet certain  expenses
for the operation of the Plaza which were due.

One of the  tenants  has  defaulted  on  its  leases  for  restaurant  space.  A
replacement  tenant has signed a lease which will commence on or before  January
1, 1998, at a lower base rent, but with percentage rent clauses.

The Company does not currently have the property listed with a broker for sale.

Ixtapa, Mexico

At the present time the Company has placed the property in Ixtapa, Mexico with a
broker for sale. There are no future plans to develop this property.

Fabricaciones Metalicas Mexicanas, S.A. (FMMSA)

FMMSA had gross rental  income of $384,000 for the year ended  December 31, 1996
as compared to $524,000 for the year ending December 31, 1995. The decrease is a
result of the sale of the  subsidiary  in July,  1996.  Income  from  operations
before income taxes for FMMSA was $219,000 in 1996 compared to $195,000 in 1995.
The increase was a result of lower  expenses due to completion of renovations at
the property in 1995 (see Note #6 to Consolidated Financial Statements).

During 1996, the Company sold the stock it held in FMMSA for  $1,000,000  plus a
promissory note to the Company for $2 million dollars. The Company's net gain on
sale was $1.2  million  dollars  (see Notes #4 and 6 to  Consolidated  Financial
Statements).

Liquidity and Capital Resources

Short Term

The Company's cash and cash equivalents  increased to $1,136,000 at December 31,
1996 from  $411,000  in 1995.  This  increase is  attributed  mainly to the cash
realized  from the sale of the Mexican  subsidiary  and the release of cash from
restricted accounts.  Working Capital decreased significantly from $2,400,000 as
of December 31, 1995 to $1,329,000 at December 1996.  This decrease is primarily
a result of a decrease  in the value of  securities  available  for sale  during
1996.

The Funding line of credit expires in July 1997. The Company is negotiating  for
an  extension  of the line of  credit at a reduced  amount in  keeping  with its
current outlook for the Funding division.  Management  believes but there can be
no assurance that the line of credit will be extended.
                                       11
<PAGE>
The Company has securities available for sale in the market value of $727,000 as
of  December  31,  1996.  Due to a  change  in the Rule  144  regarding  Sale of
Securities,  a  restriction  on the sale of these  securities on the open market
will end on April 29, 1997.

Management  believes  that its  short  term  cash  requirements  can be met with
available cash and cash equivalents.

Long Term

The  Development  subsidiary  obtained a long term loan on the  property  from a
mortgage  broker in 1996.  The  Company  was repaid a portion of its loan to the
subsidiary but is still owed approximately $1.0 Million dollars for loans to the
subsidiary.  The Company  expects that the project will provide  sufficient cash
flow in 1998 to reduce this indebtedness.

The  Restaurant  division is expected  to add  several  locations  over the next
several years. Expansion will be by purchasing operating restaurants that can be
converted into one of the Company's  concepts with minimal renovation and costs.
The  Company  will only  consider  restaurants  which  will  generate  immediate
revenues and where costs  associated  with  conversion  can be  controlled.  The
Restaurant  division is not looking to expand by opening  new  restaurants.  The
Restaurants  division does not expect to incur  material costs in purchasing new
restaurants.

Restaurant  expansion will be completed through cash on hand or by cash provided
by operations.  The Company will seek Seller  financing  where  appropriate  and
available.  It is not anticipated that the Company will need to borrow funds for
expansion of the Restaurant subsidiary.

The Restaurant and Factoring divisions are poised to realize income during 1997.
Management  believes  that,  but there can be no assurance,  that both will show
significantly improved results from operations during the year.

The development subsidiary should meet all of its obligations without a material
increase in the investment by the Company,  although some costs  associated with
Lessee Improvements for a new restaurant tenant may be advanced. The Development
is not expected to have positive cash flow until the restaurant tenant commences
operation in 1998.

Inflation

Management  does not believe that inflation  will have a material  effect on the
results of operations.

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 ___.

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, 1996 were
as follows:
                                       12
<PAGE>
Name                              Age          Position

Joe Hrudka                        58           Chief  Executive Officer

Edmund L. Fochtman, Jr. ((1))     59           President/Director

Allen L. Haire ((1))              54           Director

Jonathan Tratt ((1))              38           Director

James W. Brown ((2))              48           Chief Financial Officer/Director

Robert A. Cassalia                44           Secretary

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

((2)) Mr.  Brown  tendered  his  resignation  as an officer and  director of the
company effective April 4, 1997.

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 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 President of the Company since 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,  her 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.

James W. Brown, a certified public accountant,  has been Chief Financial Officer
and Director since  December  1993.  From 1989 until joining the Company in May,
1993, Mr. Brown was CFO of RACAM Amusements  Group. From 1985 to 1988 he was the
Chief  Operating  Officer of American  Educational  Computers,  Inc., a publicly
traded  software  and video  publisher.  Prior to 1985 he was Vice  President of
                                       13
<PAGE>
Finance of National Zinc Company, a primary metals  manufacturer.  Mr. Brown has
served as a Director of the  subsidiaries  since 1993.  Mr. Brown resigned as an
officer and director effective April 4, 1997.

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,  1996,  by the only
persons known to the Company to own beneficially more than 5% of the outstanding
shares of common stock.

Name and Address                            Number of Shares           Percent
of Beneficial Owner                         Beneficially Owned         of Class
-------------------                         ------------------         --------

Joe Hrudka
9716 N. 71st Street Paradise Valley, AZ 85253      1,689,241             69%

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Reference is made to the  information  contained in Note 19 to the  Consolidated
Financial  Statements  herein,  which  Information  is  incorporated  herein  by
reference.

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, 1996
                           and 1995

                           Consolidated Statements of Operations - Years
                           ended December 31, 1996, 1995 and 1994

                           Consolidated  Statements  of  Shareholders'  Equity -
                           Years ended December 31, 1996, 1995 and 1994

                           Consolidated  Statements  of Cash Flows - Years ended
                           December 31, 1996, 1995 and 1994

                           Notes to  Consolidated  Financial  Statements - Years
                                       14
<PAGE>
                           ended December 31, 1996, 1995 and 1994

                  (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.
                                       15
<PAGE>
10.48             1993 Stock Option Plan of Performance  Industries,  Inc. filed
                  with the Company's  Notice of Annual  Meeting of  shareholders
                  dated November 8, 1993 and incorporated herein by reference.

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

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.  Which were filed with the Company's report on form 10-K
                  for the year ended  December  31,  1994,  and are  incorprated
                  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).  Which were filed with the Company's  report on form
                  10-K for the year ended December 31, 1994, and are incorprated
                  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).  Which were filed with the Company's  report on form
                  10-K for the year ended December 31, 1995, and are incorprated
                  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, 1995. Which were filed with the Company's report
                  on form 10-K for the year ended  December  31,  1995,  and are
                  incorprated 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.  Which were
                  filed  with the  Company's  report  on form  10-K for the year
                  ended  December  31,  1995,  and  are  incorprated  herein  by
                  reference.

10.56             Documents  from the Caliber Bank loan dated June 24, 1994,  as
                  amended   September  21,  1994.  Which  were  filed  with  the
                  Company's  report on form 10-K for the year ended December 31,
                  1995, and are incorprated herein by reference.


                           -        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.
                                       16
<PAGE>
                           -        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.

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

                           -        Assignment of Retail Leases.

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.  Which were filed
                  with the  Company's  report  on form  10-K for the year  ended
                  December 31, 1995, and are incorprated herein by reference.

10.58             Lease dated September 1, 1995, between Performance Restaurants
                  of Nevada,  Inc.  and 1030 East  Flamingo,  L.L.C.  Which were
                  filed  with the  Company's  report  on form  10-K for the year
                  ended  December  31,  1995,  and  are  incorprated  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. Which were filed with the
                  Company's  report on form 10-K for the year ended December 31,
                  1995, and are incorprated 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.  Which were filed
                  with the  Company's  report  on form  10-K for the year  ended
                  December 31, 1995, and are incorprated herein by reference.

10.61             Cash   Collateral   Agreement   by  and  between   Performance
                  Industries,  Inc.,  and Norwest  Bank dated  October 31, 1995.
                  Which were filed  with the  Company's  report on form 10-K for
                  the year ended December 31, 1995, and are  incorprated  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.

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.

22.               Subsidiaries  of the  Registrant.  Which  were  filed with the
                  Company's  report on form 10-K for the year ended December 31,
                  1995, and are incorprated herein by reference.
                                       17
<PAGE>
SIGNATURES

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

Dated:   April 14, 1997                      Performance Industries, Inc.

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

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on the 29th day of March,  1996, by the following  persons
on behalf of the Registrant in the capacities indicated:

/s/ Joe Hrudka                            Chairman of the Board and Director
Joe Hrudka                                (Chief Executive Officer)

/s/ Edmund L. Fochtman, Jr.               President and Director
Edmund L. Fochtman, Jr.

/s/ Allen L. Haire                                 Director
Allen L. Haire

/s/ Jonathan Tratt                                 Director
Jonathan Tratt

/s/ James W. Brown                        Chief Financial Officer and Director
James W. Brown                            (principal Accounting Officer)

/s/ Robert A. Cassalia                    Secretary
Robert A. Cassalia
                                       18
<PAGE>
                          PERFORMANCE INDUSTRIES, INC.
                                AND SUBSIDIARIES

                        CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 1996


                                       19
<PAGE>
                          PERFORMANCE INDUSTRIES, INC.
                                AND SUBSIDIARIES

                        CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 1996

                                    CONTENTS

                                                               Page

Independent auditor's report                                   21

Consolidated financial statements:

         Balance sheets                                        22

         Statements of operations                              23

         Statements of shareholders' equity                    24

         Statements of cash flow                               25 - 26

         Notes to financial statements                         27 - 48

                                       20
<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, 1996 and 1995
and the related consolidated statements of operations,  shareholders' equity and
cash flows for the three years in the period  ended  December  31,  1996.  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, 1996 and 1995,
and the results of their  operations and their cash flows for the three years in
the period  ended  December  31,  1996 in  conformity  with  generally  accepted
accounting principles.




TOBACK CPAs, P.C.
Phoenix, Arizona
March 26, 1997
                                       21
<PAGE>
                          PERFORMANCE INDUSTRIES, INC.
                                AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                             (DOLLARS IN THOUSANDS)

                           DECEMBER 31, 1996 AND 1995


<TABLE>
<CAPTION>
                                                       ASSETS
                                                                                          1996           1995
                                                                                    --------------  -------------
<S>                                                                                 <C>             <C>          
Current assets:
    Cash and cash equivalents                                                       $        1,136  $         411
    Restricted cash (Note 2)                                                                   409          1,267
    Securities available for sale (Note 3)                                                     727          1,783
    Accounts and other receivables, less allowance for
       doubtful accounts of $25 and $25, respectively (Note 5)                                 503            416
    Current portion of receivables from sale of businesses,
       net of allowance (Notes 4 and 5)                                                      1,356            480
    Factored accounts receivable, net of allowance for
       doubtful accounts of $417 and $201, respectively (Notes 5 and 9)                      1,139          1,868
    Inventories                                                                                328            293
    Prepaid expenses and other current assets                                                  192            322
    Other assets held for sale                                                                 206            212
                                                                                    --------------  -------------
           Total current assets                                                              5,996          7,052

Receivables from sale of businesses, less current portion,
    net of allowance (Notes 4 and 5)                                                           119            520
Investment in real estate (Notes 6 and 9)                                                    9,481         11,073
Deferred income taxes (Note 13)                                                              1,460          1,734
Property and equipment (Notes 7 and 9)                                                       3,084          3,578
Other assets (Notes 8 and 9)                                                                 1,831            921
                                                                                    --------------  -------------
           Total assets                                                             $       21,971  $      24,878
                                                                                    ==============  =============

                                        LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
    Current portion of long-term debt and capital lease obligations (Note 9)        $          547  $         594
    Accounts payable                                                                         1,000          1,260
    Accrued employment costs                                                                   491            288
    Accrued expenses and other current liabilities (Note 10)                                 1,339          1,366
    Factored receivables reserve                                                               286            390
    Liabilities subject to compromise (Note 11)                                                754            754
    Foreign tax liability                                                                      250              -
                                                                                    --------------  ------------
           Total current liabilities                                                         4,667          4,652

Long-term debt and capital lease obligations, less current portion (Note 9)                  8,403          6,751
Commitments and contingencies (Notes 12, 18, 19 and 20)
Minority interest (Notes 6, 12 and 19)                                                         371            414
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 2,481,264
           and 2,489,530, respectively (Notes 15 and 16)                                    31,202         31,202
    Accumulated deficit                                                                    (20,139)       (16,416)
    Unrealized holding gains on securities available for sale,
        net of income taxes (Note 3)                                                           443          1,226
                                                                                    --------------  -------------
                                                                                            11,506         16,012
    Treasury stock at cost (Note 16)                                                        (2,976)        (2,951)
                                                                                    --------------  -------------
       Total shareholders' equity                                                            8,530         13,061
                                                                                    --------------  -------------
           Total liabilities and shareholders' equity                               $       21,971  $      24,878
                                                                                    ==============  =============
</TABLE>
                     The accompanying notes are an integral
               part of these consolidated financial statements.               22
<PAGE>
                          PERFORMANCE INDUSTRIES, INC.

                                AND SUBSIDIARIES

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

                  YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994



<TABLE>
<CAPTION>
                                                                          1996           1995            1994
                                                                      -------------  --------------  ------------
<S>                                                                   <C>            <C>            <C>          
Revenues                                                              $      22,407  $       21,598 $      19,004

Cost of revenues                                                            (20,715)        (19,403)      (16,356)
Selling, general and administrative expenses (Note 21)                       (3,465)         (2,841)       (3,500)
Interest expense                                                               (754)           (533)          (18)
Other income (expenses), net                                                    132           1,012           420
Gain on sale of subsidiary (Note 6)                                           1,224               -             -
Loss on closure of restaurants (Note 17)                                     (1,795)              -             -
                                                                      -------------  -------------- -------------

Loss from continuing operations
    before income taxes                                                      (2,966)           (167)         (450)

Income tax (expense) benefit (Note 13)                                         (800)             21           161
                                                                      -------------- -------------- -------------

Loss from continuing operations before minority interest                     (3,766)           (146)         (289)

Minority interest in loss from subsidiary                                        43               2             -
                                                                      -------------  -------------- -------------

Loss from continuing operations                                              (3,723)           (144)         (289)

Income from discontinued operations (Note 14)                                     -             438           724
                                                                      -------------  -------------- -------------

Net (loss) income                                                     $      (3,723) $          294 $         435
                                                                      =============  ============== =============

Income (loss) per common share:
    Continuing operations                                             $      (1.50)           (.06) $        (.12)
    Discontinued operations                                                      -             .18            .29
                                                                      ------------   -------------  -------------

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

Average number of shares outstanding                                     2,486,086       2,489,530      2,458,280
                                                                      ============   =============  =============
</TABLE>
                     The accompanying notes are an integral
               part of these consolidated financial statements.               23
<PAGE>
                          PERFORMANCE INDUSTRIES, INC.
                                AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                             (DOLLARS IN THOUSANDS)
                  YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<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, 1994                    $  31,202   3,157,332   $  (1,233)      89,939    $ (17,145)   $    --
   Net income                                    --          --          --           --            435         --
   Treasury stock purchased                      --          --        (1,765)     609,113         --           --
                                            ---------   ---------   ---------    ---------    ---------    ---------
Balance, December 31, 1994                     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                      --          --           (25)       8,266         --           --
   Holding loss on securities
   available for sale, net of               
   income taxes (Note 3)                         --          --          --           --           --           (783)
                                            ---------   ---------   ---------    ---------    ---------    --------- 
Balance, December 31, 1996                  $  31,202   3,157,332   $  (2,976)     676,068    $ (20,139)   $     443
                                            =========   =========   =========    =========    =========    =========
</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.              24
<PAGE>
                          PERFORMANCE INDUSTRIES, INC.
                                AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)

                  YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

<TABLE>
<CAPTION>
                                                                     1996             1995              1994
                                                                ---------------  --------------   ---------------
Cash flows from operating activities:
<S>                                                             <C>              <C>              <C>            
    Net income (loss)                                           $        (3,723) $          294   $           435
    Adjustments to reconcile net income (loss) to net
      cash (used in) provided by operating activities:
         Depreciation                                                     1,020             788               348
         Gain on sale of securities available for sale                        -            (343)                -
         Loss on settlement of receivables from sale of
           business                                                          99               -                 -
         Loss on disposal of restaurants                                  1,795               -                 -
         Gain on sale of Mexican subsidiary                              (1,219)              -                 -
         Minority interest in loss from subsidiary                          (43)             (2)                -
         Adjustments and changes in estimates for
           receivables related to previously
           discontinued businesses                                            -            (480)           (1,225)
         (Gain) loss on sale of property and equipment                       70               -               (93)
         Provision for allowance for doubtful accounts                      408             133               113
         Changes in:
           Accounts receivable                                              (86)            (62)              258
           Factored accounts receivable, net of reserve                     276           1,836            (3,310)
           Refundable income taxes                                            -               -               100
           Inventories                                                       (6)            (17)              (35)
           Prepaid expenses and other current assets                       (305)           (121)              114
           Other assets held for sale                                         -              19                 -
           Other assets                                                    (321)            (94)               57
           Accounts payable                                                (260)           (214)              366
           Foreign tax liability                                            250               -                 -
           Other current liabilities, net                                   205          (1,450)           (1,408)
           Deferred income taxes                                            548               3               317
                                                                ---------------  --------------   ---------------
             Net cash (used in)
                provided by operating activities                         (1,292)            290            (3,963)
                                                                --------------- ---------------   ---------------
</TABLE>
                     The accompanying notes are an integral
               part of these consolidated financial statements.              25
<PAGE>
                          PERFORMANCE INDUSTRIES, INC.
                                AND SUBSIDIARIES

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

                  YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

<TABLE>
<CAPTION>
                                                                     1996             1995              1994
                                                                ---------------  --------------   ---------------
<S>                                                             <C>              <C>              <C>             
Cash flows from investing activities:
    Changes in restricted cash                                  $         1,358  $        1,633   $        (2,900)
    Payments received on receivables from sale
      of businesses                                                       1,305             709             4,153
    Proceeds from sale of securities available for sale                       -             387                 -
    Investment in real estate                                              (283)         (3,250)           (3,684)
    Purchase of property and equipment                                   (1,486)           (960)           (1,666)
    Net proceeds from sale of:
      Mexican subsidiary                                                    837               -                 -
      Property and equipment                                                147               -             2,206
      Other assets held for sale                                              6               -                34
    Payment for purchase of restaurant assets                              (240)           (450)                -
    Investment in preferred stock                                          (120)              -                 -
    Loan to officer                                                        (150)              -                 -
    Repayment of officer loan                                               150               -                 -
    Other, net                                                             (192)             (5)             (250)
                                                                ---------------  --------------   ---------------
           Net cash provided by (used in)
             investing activities                                         1,332          (1,936)           (2,107)
                                                                ---------------  --------------   ---------------

Cash flows from financing activities:
    Proceeds from borrowings                                              2,659           1,115             4,151
    Repayments of borrowings                                             (1,949)           (247)             (185)
    Changes in treasury stock                                               (25)             47            (1,765)
                                                                ---------------  --------------   ---------------
           Net cash provided by
              financing activities                                          685             915             2,201
                                                                ---------------  --------------   ---------------

Net increase (decrease) in cash and cash equivalents                        725            (731)           (3,869)

Cash and cash equivalents, beginning of year                                411           1,142             5,011
                                                                ---------------  --------------   ---------------

Cash and cash equivalents, end of year                          $         1,136  $          411   $         1,142
                                                                ===============  ==============   ===============
</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.              26
<PAGE>
                          PERFORMANCE INDUSTRIES , INC.

                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



 1.   Organization and summary of significant accounting policies:

      Business:

      Performance Industries, Inc. has three primary subsidiaries:

           o Performance Restaurants Group, Inc. (restaurant operations)
           o Performance Funding Corp. (receivable factoring)
           o Performance Camelback Development Corp. (real estate operations)

      These subsidiaries conduct business primarily in Arizona and California.

      Prior to 1994,  Performance  Industries,  Inc. operated in the general and
         specialty  automotive  parts and  accessory  businesses  as Mr.  Gasket
         Company.  During 1993, the Company  completed the  disposition of those
         operations.  Any gains,  losses or activity related to these operations
         have been accounted for as income from discontinued operations.

      Performance  Camelback  Development Corp. has a 72% ownership  interest in
         Camelback Plaza Development Corp., L.L.C., an Arizona limited liability
         company.

      Principles of consolidation:

      The consolidated financial  statements include the accounts of Performance
         Industries,  Inc., 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 values 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.

      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.
                                                                              27
<PAGE>
                          PERFORMANCE INDUSTRIES , INC.

                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



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

      Advertising:

      Advertising costs are charged to operations as incurred.

      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.
                                                                              28
<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.

      Factoring operations:

      The Company recognizes  fees based upon a percentage of the gross factored
         receivables. The Company makes advances of up to 80% of the face amount
         of factored receivables. The remaining balance is held as a reserve for
         fees and charge-backs for uncollected receivables.  Management's policy
         is to obtain a security  interest  in all  borrowers'  receivables  and
         obtain personal guarantees, when deemed necessary.
                                                                              29
<PAGE>
                          PERFORMANCE INDUSTRIES , INC.

                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



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

      Investment in real estate:

         Rental real estate:

        Rental real estate is stated at cost, which principally  represents land
           lease costs,  capitalized  carrying costs,  offsite  improvements and
           building  construction costs. Rental real estate is being depreciated
           using the straight-line  method over the estimated useful life of the
           properties of approximately 35 years.

        Rental income is recognized on the straight-line  basis over the life of
           the related leases.  Lease incentives are recognized as reductions of
           rental income over the terms of the related leases.

        Undeveloped real estate:

      Undeveloped  real estate  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
         1995 and 1994 to conform to the financial statement classifications for
         1996.

 2.   Restricted cash:

      In November 1996, the Company  entered into an agreement with the minority
         shareholders  in the Camelback Plaza  Development,  L.C. (see Note 19).
         The agreement  contains a provision that restricts the use of a portion
         of the proceeds from the  refinancing of the real estate  project.  The
         cash is to be used to fund  operating  expenses and  shortfalls  of the
         project, if necessary.

      The restrictions are  partially  released on February 1, 1997 and entirely
         released on April 1, 1997.
                                                                              30
<PAGE>
                          PERFORMANCE INDUSTRIES , INC.

                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



 3.   Securities available for sale:

      During 1995, the Company  implemented SFAS No. 115, Accounting for Certain
         Investments  in Debt and Equity  Securities,  related to the  Company's
         investment in certain equity securities.

      In 1995, a portion of the  securities  became  marketable as a result of a
         public  stock  offering,  and  were  sold  for a gain of  approximately
         $343,000.  The remaining  securities  became available for sale in May,
         1996  subject to certain  SEC  limitations.  As a result,  the  Company
         considers  its  investments  in  marketable  equity  securities  to  be
         available for sale as of December 31, 1996.

      At December 31, 1996, the aggregate fair value of securities available for
         sale was  approximately  $727,000,  with  unrealized  holding  gains of
         $516,000 and a cost basis of $211,000.

      Unrealized  holding  gains  decreased in 1996 by  $783,000,  net of income
         taxes of approximately $274,000.

4.    Receivables from sale of businesses:

      Receivables  from  sale  of  businesses   consist  of  the  following  (in
         thousands):

                                                                1996     1995
                                                               ------   ------

        Note  receivable,   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 (See
           Note 6)                                              1,475       -

        Note receivable,  former employee,  interest at 12.5%,
           principal  and  interest  payments  due in  monthly
           installments of approximately  $6,600 through July,
           1998,  unsecured.  During 1996 the former  employee
           stopped  making  payments on the note.  The note is
           fully  allowed for in the  allowance  for  doubtful
           accounts as of December 31, 1996.                      123      126 
                                                                
        Notes settled during 1996                                   -    1,154
                                                               ------   ------
                                                                1,598    1,280
        Less allowance for doubtful accounts                     (123)    (280)
                                                               ------   ------
                                                               $1,475   $1,000
                                                               ======   ======
                                                                              31
<PAGE>
                          PERFORMANCE INDUSTRIES , INC.

                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



4.    Receivables from sale of businesses:

      Approximate  future  maturities of receivables  from sale of businesses at
December 31, 1996 are as follows (in thousands):

             1997                              $         1,433
             1998                                          165

 5.   Allowances for doubtful accounts:

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

<TABLE>
<CAPTION>
                                                                    1996             1995              1994
                                                                ------------     ------------     ---------
<S>                                                             <C>              <C>              <C>         
         Balance at beginning of year                           $        506     $      1,016     $      4,186
         Additions charged to cost and expenses                          408              133              113
         Reduction of estimated allowances from
           discontinued operations                                         -             (480)          (1,225)
         Accounts written off                                           (349)            (163)          (2,058)
                                                                ------------     ------------     ------------

         Balance at end of year                                 $        565     $        506     $      1,016
                                                                ============     ============     ============
</TABLE>

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

6.    Investment in real estate:

      Investment in real estate  included in the 1996 and 1995 balance sheets is
         as follows:
                                              1996                 1995
                                        -----------------    ----------------
         Rental real estate                    $    8,742    $         10,980
         Less accumulated depreciation               (430)             (1,076)
                                        -----------------    ----------------
                                                    8,312               9,904

         Undeveloped real estate                    1,169               1,169
                                        -----------------    ----------------

                                        $           9,481    $         11,073
                                        =================    ================
                                                                              32
<PAGE>
                          PERFORMANCE INDUSTRIES , INC.

                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



6.    Investment in real estate, continued:

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

         Real estate:                           
<TABLE>
<CAPTION>
                                                1996                 1995
                                          -----------------    ----------------
<S>                                       <C>                  <C>             
         Balance at beginning of year     $          12,149    $          8,435
                                          -----------------    ----------------
           Additions during the year:                                         -
             Construction costs                           -               3,663
             Ground lease fees                           99                   -
             Tenant improvements                        291                   -
             Other                                        -                  51
                                          -----------------    ----------------
                Total additions                         390               3,714
                                          -----------------    ----------------

           Reductions during the year:
             Cost of real estate sold                (2,619)                  -
             Other                                       (9)                  -
                                          -----------------    ----------------
                Total reductions                     (2,628)                  -
                                          -----------------    ----------------
         Balance at end of year           $           9,911    $         12,149
                                          =================    ================

         Accumulated depreciation:              1996                 1995                1994
                                          -----------------    ----------------    ----------------
         Balance at beginning of year     $           1,076    $            862    $            887
           Additions during the year:
             Depreciation                               320                 214                  68

           Reductions during the year:
             Disposals                                 (966)                  -                 (93)
                                          -----------------    ----------------    ----------------
         Balance at end of year           $             430    $          1,076    $            862
                                          =================    ================    ================
</TABLE>

      The Company's real estate subsidiary owns a retail and restaurant  project
         in Phoenix,  Arizona. The subsidiary completed the project in 1995. The
         subsidiary has entered into lease  agreements  with the various tenants
         of the project (see Note 12).

      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.
                                                                              33
<PAGE>
                          PERFORMANCE INDUSTRIES , INC.

                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



6.    Investment in real estate, continued:

      FMMSA had gross rental revenues of approximately $524,000 and $544,000 and
         net income of  approximately  $195,000 and $20,000 for the years ending
         December 31, 1995 and 1994, respectively. 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.

 7.   Property and equipment:

      The components of property  and  equipment  consist of the  following  (in
         thousands):
<TABLE>
<CAPTION>
                                                                                      1996              1995
                                                                                 --------------   ---------------
<S>                                                                              <C>              <C>            
           Machinery and equipment                                               $        1,315   $         1,222
           Furniture and fixtures                                                           678               684
           Transportation equipment                                                         400               493
           Leasehold improvements                                                         1,783             1,958
           Equipment held under capital leases                                              219               134
                                                                                 --------------   ---------------
                                                                                          4,395             4,491
           Less accumulated depreciation                                                 (1,311)             (913)
                                                                                 ---------------  ---------------
                                                                                 $        3,084   $         3,578
                                                                                 ==============   ===============
</TABLE>

8.    Other assets:
      Other assets consist of the following (in thousands):
<TABLE>
<CAPTION>
                                                                                      1996              1995
                                                                                 --------------   ---------------
<S>                                                                              <C>              <C>            
           Deposits and other                                                    $          309   $           232
           Investment in preferred stock                                                    120                 -
           Lease incentives, net of accumulated
             amortization of $9                                                             117                 -
           Liquor licenses                                                                  191               183
           Loan acquisition costs, net of accumulated
             amortization of $87 and $26, respectively                                      360                79
           Restaurant small wares                                                           404               425
           Restaurant equipment available for sale                                          330                 2
                                                                                 --------------   ---------------
                                                                                 $        1,831   $           921
                                                                                 ==============   ===============
</TABLE>
      During 1996,  the Company  invested  $120,000 in the preferred  stock of a
        closely held regional  airline.  There currently is no public market for
        the preferred stock. The investment is recorded at cost.

      Loan acquisition  costs are being  amortized over the 84 month term of the
         debt and are shown net of accumulated amortization.
                                                                              34
<PAGE>
                          PERFORMANCE INDUSTRIES , INC.

                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



 9.   Long-term debt and capital lease obligations:
      Long-term debt and capital lease obligations  consist of the following (in
thousands):
<TABLE>
<CAPTION>
                                                                                                 1996               1995
                                                                                           ---------------    --------------
<S>                                                                                        <C>                <C>           
        Note payable, limited partnership, non-recourse, with interest at 8.86%,
            principal and interest due in monthly  installments of approximately
            $60,000 with a final balloon payment of approximately $6,500,000 due
            November, 2003, secured by rental real estate.                                 $         7,243    $            -

        Note payable,  Mexican  corporation, with interest at prime plus 3-7/8%,
            with  monthly  principal  payments of $6,000 plus  interest  through
            December, 2006, secured by undeveloped real estate.                                        720               792

        Unsecured note payable,  State of California,  with interest at 6%, with
            monthly  principal  payments of $25,000 plus interest  through June,
            1999                                                                                       750             1,050

        Revolving line of credit,  finance company,  allows for advances up to $
            2,000,000,  with  interest at prime plus 4% (12.25% at December  31,
            1996),  payable monthly,  maturing July,  1997,  secured by factored
            receivables  and a personal  guarantee  of the  Company's  principal
            shareholder.                                                                                 -               367

        Note payable, unrelated corporation, with interest at 10%, principal and
            interest due April,  1997,  secured by  restaurant  assets and other
            assets held for sale                                                                        50                 -

        Capital lease obligations (Note 12)                                                            187               130

        Notes paid in full during 1996                                                                   -             5,006
                                                                                                                         
                                                                                           ---------------    --------------
                                                                                                     8,950             7,345
        Less current portion                                                                          (547)             (594)
                                                                                           ---------------    --------------
                                                                                           $         8,403    $        6,751
                                                                                           ===============    ==============
</TABLE>
      Cash paid for interest was approximately  $818,000,  $700,000, and $70,000
         during 1996, 1995 and 1994, respectively.

      Approximately  $273,000 of interest costs were capitalized as construction
         period interest on the real estate project during 1995.
                                                                              35
<PAGE>
                          PERFORMANCE INDUSTRIES , INC.

                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



9.    Long-term debt and capital lease obligations:

      Approximate future  maturities of long-term debt,  excluding capital lease
         obligations,  for the next five years as of  December  31,  1996 are as
         follows (in thousands):
            1997                     $505
            1998                      463
            1999                      321
            2000                      181
            2001                      191

10. Accrued expenses and other current liabilities:

      At December  31, 1996 and 1995,  the  components  of accrued  expenses and
other current liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>

                                                                                      1996              1995
                                                                                 --------------   ---------------
<S>                                                                              <C>              <C>            
            Gift certificates and advance
               customer deposits                                                 $           86   $            83
            Litigation settlements and estimated claims (Note 18)                           619                60
            Product liability costs                                                          85               350
            Reserve for environmental remediation
               and property restoration                                                       -               261
            Sales taxes payable                                                             133               156
            Deferred rental income                                                            -               150
            Other accruals                                                                  416               306
                                                                                 --------------   ---------------

                                                                                 $        1,339   $         1,366
                                                                                 ==============   ===============
</TABLE>
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  consist  primarily  of  environmental  remediation  and tax
         liabilities.
                                                                              36
<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 prior
         to year end.  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 5% to 9% of sales. During 1996 and 1995, the restaurants  incurred
         contingent   rentals   of   approximately    $358,000   and   $332,000,
         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's real estate subsidiary leases land under an operating lease.
         The lease requires annual payments of  approximately  $200,000  through
         2052.

      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  $15,000  and expire at
         various dates through 1997.

      Future  minimum  lease  payments  for  capital  leases and  noncancellable
         operating leases as of December 31, 1996 are as follows (in thousands):

                                                   Capital        Operating
                                                   leases          leases
                                                 ------------   -------------
            1997                                 $         56   $       1,704
            1998                                           56           1,621
            1999                                           56           1,506
            2000                                           47           1,381
            2001                                            9           1,359
          Thereafter                                        -          14,932
                                                 ------------   -------------

                                                          224   $      22,503
                                                                =============
          Less amount representing interest               (37)
                                                 ------------  

          Present value of future minimum lease
            payments on capital leases           $        187
                                                 ============

      Rent expense for operating leases was approximately $1,818,000, $1,723,000
         and $1,398,000 for 1996, 1995 and 1994, respectively.
                                                                              37
<PAGE>
                          PERFORMANCE INDUSTRIES , INC.

                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



12. Leases, continued:

      As lessor:
      ----------

      The Company's real estate subsidiary has entered into operating leases for
         its rental real estate with four primary  tenants.  The leases call for
         aggregate monthly rental payments of approximately  $78,000. The leases
         are for periods of 5 to 25 years and include  rent  escalation  clauses
         every 3 to 5 years tied to the  consumer  price index.  Certain  leases
         also include  percentage  rent charges  based on gross  revenues of the
         tenants.

      Aggregate minimum future rentals under the lease agreements as of December
         31, 1996 are as follows (in thousands):

             1997                                                   932
             1998                                                   932
             1999                                                   942
             2000                                                 1,036
             2001                                                 1,086
           Thereafter                                            12,654
                                                         --------------
                                                         $       17,582
                                                         ==============

      Percentage rental income earned was approximately $173,000 and $80,000 for
         1996 and 1995,  respectively.  There was no  percentage  rental  income
         earned in 1994.

13. Income taxes:

      The Company adopted Statement of Financial  Accounting  Standards No. 109,
         Accounting  for  Income  Taxes as of  January  1,  1994.  There  was no
         cumulative  effect on prior  years  from the change in  accounting  for
         income taxes.
                                                                              38
<PAGE>
                          PERFORMANCE INDUSTRIES , INC.

                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



13. Income taxes, continued:

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

<TABLE>
<CAPTION>
                                                                     1996             1995              1994
                                                                ---------------  --------------   ---------------
<S>                                                             <C>              <C>              <C>            
         Federal:
           Current                                              $             -  $            -   $             -
           Deferred                                                        (548)             (3)             (317)
         Foreign                                                           (250)            (16)              (23)
         State and local                                                     (2)             (2)                -
                                                                ---------------- --------------   ---------------

                                                                $          (800) $          (21)  $          (340)
                                                                ================ ==============   ===============
         Allocated to:
           Continuing operations                                $          (800) $           21   $           161
           Discontinued operations                                            -             (42)             (501)
                                                                ---------------  --------------   ---------------

                                                                $          (800) $          (21)  $          (340)
                                                                ================ ==============   ===============
</TABLE>
      Foreign income taxes  represent  an estimate of the Mexican  income tax on
         the sale of the Company's Mexican subsidiary.

      The following is a reconciliation between the income tax (expense) benefit
         from continuing operations and income taxes calculated at the statutory
         federal  income  tax  rate  of  34%  for   continuing   operations  (in
         thousands):
<TABLE>
<CAPTION>
                                                                         1996             1995           1994
                                                                     -------------   -------------  -------------
<S>                                                                  <C>             <C>            <C>          
           Income tax benefit at statutory rate                      $       1,008   $          58  $         158
           Foreign and state income taxes                                     (252)            (18)           (23)
           Tax effect of change in valuation
             allowance on deferred tax assets                               (1,556)            (25)            26
           Other                                                                 -               6              -
                                                                     -------------   -------------  -------------

           Income tax (expense) benefit from
             continuing operations                                   $        (800)  $          21  $         161
                                                                     =============   =============  =============
</TABLE>
                                                                              39
<PAGE>
                          PERFORMANCE INDUSTRIES , INC.

                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



13. Income taxes, continued:

      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):

<TABLE>
<CAPTION>
                                                                                      1996              1995
                                                                                ---------------   ---------------
<S>                                                                             <C>               <C>            
           Current deferred tax assets (liabilities):
             Reserves not currently deductible                                  $           332   $           552
             Unrealized holding gain on investment                                          (72)             (346)
             Valuation allowance                                                           (260)             (206)
                                                                                ----------------  ---------------
                Net current deferred tax asset                                  $             -   $             -
                                                                                ===============   ===============

           Non-current deferred tax assets (liabilities):
             Difference between book and tax bases of assets                    $           255   $          (144)
             Capital loss and contribution carryforwards                                     24                 9
             Net operating loss carryforwards                                             9,477             8,662
             General business credit carryforwards                                          414               444
                                                                                ---------------   ---------------
                                                                                         10,170             8,971
             Valuation allowance                                                         (8,710)           (7,237)
                                                                                ----------------  ---------------
                Net non-current deferred tax asset                              $         1,460   $         1,734
                                                                                ===============   ===============
</TABLE>

      The deferred income tax liability  related to unrealized  holding gains on
         securities  available for sale  decreased by $274,000  during 1996 as a
         result of a decrease in the unrealized holding gain during 1996.

      The Company has recorded a net deferred tax asset as of December 31, 1996,
         of $1,460,000  primarily  reflecting  the benefit 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.
                                                                              40
<PAGE>
                          PERFORMANCE INDUSTRIES , INC.

                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



13. Income taxes, continued:

      The Company has available at December 31, 1996, 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
                --------------------   -----------------     ----------------
                        1997           $               -     $            318
                        1998                           -                    -
                        2003                           -                   37
                        2005                       2,585                    -
                        2006                       3,866                    -
                        2007                       7,015                    -
                        2008                       2,997                    -
                        2009                       3,257                   29
                        2010                       1,862                   30
                        2011                       3,790                    -
                                       -----------------     ----------------

                                       $          25,372     $            414
                                       =================     ================

      The Company has net operating  carryforwards for state income tax purposes
         of approximately $14,000,000 which expire through 2001.

14. Discontinued operations:

      Income from discontinued  operations consists of adjustments for estimated
         allowances  and reserves on receivables  and  liabilities of previously
         discontinued business segments, net of income taxes.

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.
                                                                              41
<PAGE>
                          PERFORMANCE INDUSTRIES , INC.

                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



15. Stock option plans:

      At December 31, 1996, all outstanding options were exercisable and 192,500
         shares were available for future grant. All outstanding  options expire
         through 2005.

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

<TABLE>
<CAPTION>
                                                            Number           Range of        Weighted average
                                                           of shares      exercise prices      exercise price
                                                          -------------   ---------------    ----------------
<S>                                                       <C>            <C>                          <C>
               Balance at January 1, 1996                       438,750   $  .88 to $.96                 .90
               Issued                                                 -
               Exercised                                              -
               Cancelled                                       (131,250)  $  .88 to $.96                 .88
                                                          -------------

               Balance at December 31, 1996                     307,500   $  .88 to $.96     .           .90
                                                          =============
</TABLE>
16. Reverse stock split:

      During the year, 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  ultimately  purchased 8,266 treasury
         shares as a result of the offer.

17. Restaurant closures:

      During the year, 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  has 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 balance sheet for 1996.
                                                                              42
<PAGE>
                          PERFORMANCE INDUSTRIES , INC.

                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



17. Restaurant closures:

      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  and  $2,257,000  during 1995 and 1994,
         respectively.   Losses  from   operations   of  the   restaurant   were
         approximately  $9,000 and $10,000  during 1995 and 1994,  respectively.
         Subsequent to year end, 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 1994 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.

      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
         1995. 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, 1996, include  approximately  $600,000
         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.
                                                                              43
<PAGE>
                          PERFORMANCE INDUSTRIES , INC.

                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



19. Commitments:

      During 1993,  Performance  Restaurant  Group,  Inc.  (PRG)  entered into a
         consulting  agreement  with the previous  owner of six  restaurants  in
         California.  The  agreement  provides for payments of $90,000  annually
         through 1999. The agreement  also  restricts  disclosure of information
         and includes restrictive competition clauses.

      During 1996,  Camelback  Plaza  Development  Corp.,  L.C.  entered into an
         agreement  with a  property  manager to direct  the  operations  of the
         Company's Camelback rental real estate property. The agreement requires
         a monthly  payment  of the  greater  of  $1,600 or 2% of gross  revenue
         collected.  The agreement is effective  through  July,  1997 with a one
         year renewal option.

      The Company entered into a Purchase and Sale and Settlement Agreement with
         the minority members of Camelback Plaza Development, L.C. The agreement
         provides that the minority members can purchase the Company's  interest
         in the L.C. for $1,150,000 which approximates the net carrying value of
         the assets of the L.C. The agreement also contains provisions to settle
         certain disputes between the parties.  The agreement  terminates if the
         sale of the Company's interest is not completed by April 1, 1997.

20. 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.
                                                                              44
<PAGE>
                          PERFORMANCE INDUSTRIES , INC.

                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



20. Contingencies, continued:

         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
         as liabilities  subject to compromise in the accompanying  consolidated
         balance sheets.

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

         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 clean-up  areas pursuant to a "Final
         Closure Plan" approved by the Ohio EPA. The "Closure Plan" was approved
         by Ohio EPA in  February,  1995.  The  Company  incurred  approximately
         $170,000 of costs related to this clean-up in 1994.
                                                                              45
<PAGE>
                          PERFORMANCE INDUSTRIES , INC.

                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



21. Related party transactions:

      The Company leased two buildings in Cleveland,  Ohio,  used  predominately
         for manufacturing, from Joe Hrudka, the Company's principal shareholder
         and Chairman of the Board,  as  successor in interest to Hrudka  Realty
         Company.  The buildings were vacated as of May, 1992.  Under the lease,
         the Company was required to return the building in essentially the same
         state of repair as the  building  was in upon the signing of the lease.
         The Company expended approximately $137,000 for repairs in 1994.

      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 and the  remaining  $45,000 is included in
         accounts payable on the accompanying balance sheet for 1996.

      During 1996,  the  Company  approved a short term loan of  $150,000 to the
         principal  shareholder.  The loan was  repaid to the  Company  prior to
         December 31, 1996.
                                                                              46
<PAGE>
                          PERFORMANCE INDUSTRIES , INC.

                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



22. Principal business segments:

      The Company  has three  primary   business   segments,   its   restaurant,
         factoring, and real estate operations.

      Operating  income by segment  represents  revenues less costs of revenues,
         selling,  general and administrative  expenses,  interest expense, plus
         other  income,   net  before   allocation  of  corporate   general  and
         administrative expense, interest and other corporate income.

<TABLE>
<CAPTION>
                                                                                 (In thousands)
                                                                     1996             1995              1994
                                                                ---------------  --------------   ---------------
<S>                                                             <C>              <C>              <C>            
             Revenues:
                Restaurants                                     $        20,344  $       19,357   $        17,350
                Factoring                                                   623             896             1,065
                Real estate                                               1,555           1,345               589
                                                                ---------------  --------------   ---------------

                                                                $        22,522  $       21,598   $        19,004
                                                                ===============  ==============   ===============

              Operating income (loss):
                Restaurants                                     $        (2,774) $         (166)  $           105
                Factoring                                                   (31)            676               895
                Real estate                                                 374             221               291
                                                                ---------------  --------------   ---------------

                Total principal business segments                        (2,431)            731             1,291

              Unallocated corporate general and
                administrative expenses                                    (535)           (898)           (1,741)
                                                                ---------------  --------------   ---------------

                                                                $        (2,966) $         (167)  $          (450)
                                                                ===============  ==============   ===============

              Depreciation:
                Restaurants                                     $           651  $          506   $           194
                Factoring                                                     -               -                 -
                Real estate                                                 313             214                67
                Corporate and other                                          56              68                87
                                                                ---------------  --------------   ---------------

                                                                $         1,020  $          788   $           348
                                                                ===============  ==============   ===============
</TABLE>

      Revenues for factoring for 1996 include approximately $115,000 of interest
         revenue from other segments.
                                                                              47
<PAGE>
                          PERFORMANCE INDUSTRIES , INC.

                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



22. Principal business segments, continued:

<TABLE>
<CAPTION>
                                                                                 (In thousands)
                                                                     1996             1995              1994
                                                                ---------------  --------------   ---------------
<S>                                                             <C>              <C>              <C>            
              Capital expenditures:
                Restaurants                                     $         1,830  $        1,441   $         1,652
                Factoring                                                     -               -                 -
                Real estate                                                 283           3,448             4,548
                Corporate and other                                           9               5                14
                                                                ---------------  --------------   ---------------

                                                                $         2,122  $        4,894   $         6,214
                                                                ===============  ==============   ===============

              Identifiable assets:
                Restaurants                                     $         4,805  $        4,932
                Factoring                                                 1,191           1,978
                Real estate                                               9,285          12,418
                Corporate and other                                       6,690           5,550
                                                                ---------------  --------------

                                                                $        21,971  $       24,878
                                                                ===============  ==============
</TABLE>

      The Company's  restaurant subsidiary  incurred   approximately   $408,000,
         $425,000 and $334,000 of  advertising  expense in 1996,  1995 and 1994,
         respectively.                  
                                                                              48