U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

(Mark One)

[X]      ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT
         OF 1934

                   For the fiscal year ended December 31, 1997

[ ]      TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE
         ACT OF 1934

             For the transition period from ________ to ___________

                    Commission File Number: 1-14556; 0-21857

                              POORE BROTHERS, INC.
                 (Name of Small Business issuer in its charter)
<TABLE>
<S>                                                                <C>
                           Delaware                                             86-0786101
(State or other jurisdiction of incorporation or organization)     (I.R.S. Employer Identification No.)
</TABLE>


                           3500 South La Cometa Drive
                             Goodyear, Arizona 85338
                                 (602) 932-6200
     (Address, zip code and telephone number of principal executive offices)

                           ---------------------------

                 Securities registered pursuant to Section 12(b)
                                  of the Act:
                                      None
           Securities registered pursuant to Section 12(g) of the Act:
                          Common Stock, $.01 par value
                                (Title of class)

         Check whether the Registrant (1) filed all reports required to be filed
by  Section  13 or 15(d) of the  Exchange  Act during the past 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______

         Check if  disclosure  of  delinquent  filers in response to Item 405 of
Regulation  S-B is not  contained  in  this  form,  and no  disclosure  will  be
contained,  to the  best of  Registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]

         The  Registrant's  revenues  for  the  most  recent  fiscal  year  were
$15,731,796.

         At March 24,  1998,  the  aggregate  market  value of the  Registrant's
common  stock  held  by  non-affiliates  of  the  Registrant  was  approximately
$8,089,619.

         At March 24,  1998,  the  number of issued  and  outstanding  shares of
common stock of the Registrant was 7,126,657.

         Transitional Small Business Disclosure Format (check one):
                                                             Yes _____ No __X___
<PAGE>
                       DOCUMENTS INCORPORATED BY REFERENCE

         Portions of the definitive proxy statement relating to the Registrant's
1998 Annual Meeting of  Stockholders,  which the Registrant  anticipates  filing
with the Securities and Exchange Commission (the "Commission") on or about April
10, 1998,  are  incorporated  by reference in Part III of this Annual  Report on
Form 10-KSB.

                           FORWARD-LOOKING STATEMENTS

         This Annual Report on Form 10-KSB, including all documents incorporated
by  reference,  includes  "forward-looking"  statements  within  the  meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and
Section 12E of the Securities Exchange Act of 1934, as amended,  and the Private
Securities  Litigation  Reform  Act of  1995,  and  Poore  Brothers,  Inc.  (the
"Company")  desires to take advantage of the "safe harbor"  provisions  thereof.
Therefore,  the Company is including this  statement for the express  purpose of
availing  itself of the  protections  of the safe harbor with  respect to all of
such forward-looking statements. In this Annual Report on Form 10-KSB, the words
"anticipates,"  "believes," "expects," "intends," "estimates," "projects," "will
likely  result,"  "will  continue,"  "future" and similar terms and  expressions
identify  forward-looking  statements.  The  forward-looking  statements in this
Annual Report on Form 10-KSB reflect the Company's current views with respect to
future events and financial  performance.  These forward-looking  statements are
subject to certain risks and uncertainties, including specifically the Company's
brief  operating   history  and  significant   operating  losses  to  date,  the
probability  that the Company will need  additional  financing  due to continued
operating  losses or in order to  implement  the  Company's  business  strategy,
significant competition,  volatility of the market price of the Common Stock and
those other risks and uncertainties  discussed  herein,  that could cause actual
results to differ materially from historical  results or those  anticipated.  In
light of these  risks  and  uncertainties,  there can be no  assurance  that the
forward-looking  information contained in this Annual Report on Form 10-KSB will
in fact transpire or prove to be accurate. Readers are cautioned to consider the
specific risk factors  described  herein and in "Risk Factors," and not to place
undue reliance on the forward-looking  statements  contained herein, which speak
only as of the date hereof.  The Company  undertakes  no  obligation to publicly
revise these forward-looking  statements to reflect events or circumstances that
may arise after the date hereof. All subsequent written or oral  forward-looking
statements  attributable  to the  Company  or  persons  acting on its behalf are
expressly qualified in their entirety by this section.
                                       2
<PAGE>
Item 1.  Description of Business

Business

         Poore  Brothers,  Inc. (the  "Company")  is engaged in the  production,
marketing and  distribution of salty snack food products that are sold primarily
throughout the southwestern  United States.  The Company  manufactures and sells
its own brand of potato  chips  under the Poore  BrothersTM  logo,  manufactures
private label potato chips for grocery store chains,  and distributes snack food
products that are manufactured by others.  For the year ended December 31, 1997,
revenues totaled  $15,731,796.  Approximately  64% of sales were attributable to
the Company's Poore  BrothersTM brand potato chips;  approximately  29% of sales
were  attributable  to the  distribution  by the Company of snack food  products
manufactured by other companies; and approximately 7% of sales were attributable
to potato  chips  produced by the  Company for sale under the private  labels of
customers.  The  Company  generally  sells its  products  to  retailers  through
independent distributors.

         Poore Brothers (TM) brand potato chips are produced with a batch frying
process  that the  Company  believes  results  in  potato  chips  with  enhanced
crispness and flavor. They are currently offered in ten flavors:  Original, Salt
& Vinegar,  Jalapeno,  Barbecue,  Parmesan & Garlic, Cajun, Dill Pickle, Grilled
Steak & Onion, Tangy Calypso and Unsalted.  The Company also manufactures potato
chips for sale on a private label basis using a continuous  frying process.  The
Company currently has one California and two Arizona grocery chains as customers
for its private label potato chips. See "Products."

         The  Company's  business  objective  is to  become a  leading  regional
manufacturer  and  distributor  of branded  premium potato chips and other salty
snack foods by providing high quality  products at  competitive  prices that are
superior in taste to comparable  products.  The Company plans to achieve  growth
primarily through  increased  distribution and sales volume in existing markets,
development of new products and acquisitions. See "Business Strategy."

         The Company, a Delaware corporation,  was organized in February 1995 as
a holding  company to acquire,  on May 31, 1995,  (i)  substantially  all of the
assets,  subject to certain  liabilities,  of Poore Brothers'  Foods,  Inc. ("PB
Foods"); (ii) a 100% equity interest in Poore Brothers  Distributing,  Inc. ("PB
Distributing");  and (iii) an equity interest  (which,  with related  purchases,
constituted 80%) in Poore Brothers of Texas, Inc. ("PB Texas"). The Company also
acquired   substantially  all  of  the  outstanding  shares  of  Poore  Brothers
Southeast,   Inc.  ("PB  Southeast")  in  an  exchange  transaction  consummated
concurrently  with the acquisition of PB Foods,  PB  Distributing  and PB Texas.
Such  acquisitions  are  sometimes  referred to  collectively  herein as the "PB
Acquisition."

         As a result of the  consummation  of the PB  Acquisition,  the  Company
became a holding  company with two  manufacturing  subsidiaries,  Poore Brothers
Arizona, Inc. ("PB Arizona"),  which had acquired the assets of PB Foods, and PB
Southeast,  as well as two  distribution  subsidiaries,  PB Distributing  and PB
Texas.  Subsequent to the PB  Acquisition,  the Company  purchased the remaining
equity of PB Texas,  increasing  its equity  ownership  to 100%.  Prior to their
acquisition by the Company,  PB Foods, PB  Distributing  and PB Texas were owned
and  operated  by  Donald  and  James  Poore   (since   1986,   1990  and  1991,
respectively).  The Company,  PB Arizona,  PB Southeast,  PB Distributing and PB
Texas are hereinafter sometimes collectively referred to as the "PB Companies."

         In December 1996, the Company  completed an initial public  offering of
its Common Stock. See "Company History" and "Item 6. Management's Discussion and
Analysis of Results of Operations and Financial Condition."

         In June 1997, the Company sold the operations of PB Texas. In September
1997, the Company closed the PB Southeast  manufacturing  operation in LaVergne,
Tennessee and consolidated all of the Company's manufacturing  operations into a
new  facility  in  Goodyear,  Arizona.  The land  and  building  comprising  the
Company's new Arizona facility is owned by a wholly owned subsidiary,  La Cometa
Properties, Inc., which was formed by the Company in May 1997.

         As used herein,  the term "Company" refers to Poore Brothers,  Inc. and
its subsidiaries, except where the context indicates otherwise.

         The  Company's  executive  offices  are located at 3500 South La Cometa
Drive, Goodyear, Arizona 85338, and its telephone number is (602) 932-6200.

Risk Factors

         Brief  Operating  History;  Significant  Losses  to  Date;  Accumulated
Deficit.  Although  certain of the PB Companies have operated for several years,
the Company as a whole has a relatively  brief  operating  history upon which an
evaluation  of its  prospects  can be made.  Such  prospects  are subject to the
substantial  risks,  expenses and  difficulties  frequently  encountered  in the
establishment and growth of a new business in the snack food industry,  which is
characterized   by  a  significant   number  of  market   entrants  and  intense
competition.  The Company has had significant  operating  losses to date and has
never made a profit.  The Company incurred losses of $691,678 and $3,034,097 for
the fiscal years ended December 31, 1996 and 1997, respectively. At December 31,
1997,  the  Company had an  accumulated  deficit of  $5,461,933  and net working
capital of  $1,423,643.  See "Item 6.  Management's  Discussion  and Analysis of
Results of Operations and Financial Condition."

         Even if the Company is  successful  in  expanding  the  production  and
distribution  of its products and in increasing net sales, it may be expected to
incur  substantial  additional  expense,  including  advertising and promotional
costs and  "slotting"  expenses  (i.e.,  the cost of  obtaining  shelf  space in
certain grocery stores). Accordingly, the Company may incur additional
                                       3
<PAGE>
losses in the future as a result of the implementation of the Company's business
strategy,  even if net sales increase  significantly.  There can be no assurance
that the Company's  business  strategy will prove successful or that the Company
will ever become profitable.

         Possible Need for Additional  Financing.  Continued operating losses or
expansion of the Company's business may each result in requirements for funds in
excess of cash flow  generated  from  operations,  the  Company's  existing cash
balances and its available borrowing  facilities.  Accordingly,  the Company may
require future debt or equity financing to meet its business requirements. There
can be no assurance that such  financing will be available or, if available,  on
terms  attractive  to the  Company.  Any such  financing  may  dilute the equity
interests of the Company's stockholders.

         Non-Compliance with Financial  Covenants;  Possible  Acceleration of 9%
Convertible  Debentures.  At December  31, 1997 the Company had  outstanding  9%
Convertible Debentures due July 1, 2002 (the "9% Convertible Debentures") in the
aggregate  principle  amount of $2,299,591.  The Company is required to maintain
certain  financial  ratios  pursuant to the Debenture Loan Agreement (as defined
herein) so long as the 9%  Convertible  Debentures are  outstanding.  Should the
Company be in default  under any of these  requirements,  the  holders of the 9%
Convertible  Debentures  have the right,  upon written notice and after a thirty
day period during which such default may be cured, to demand  immediate  payment
of all the then unpaid  principal and accrued but unpaid  interest  under the 9%
Convertible  Debentures.  While the Company is not in compliance with certain of
these  requirements,  the holders of the 9% Convertible  Debentures have granted
the Company a waiver effective through June 1999. There can be no assurance that
the Company will attain a sufficient  level of  profitability,  be in compliance
with the  financial  ratios upon the  expiration  of the waivers,  or be able to
obtain an  extension or renewal of the waivers.  Any  acceleration  under the 9%
Convertible  Debentures  prior to their  maturity  on July 1, 2002  could have a
material adverse effect upon the Company.  See "Item 6. Management's  Discussion
and Analysis of Results of  Operations  and Financial  Condition--Liquidity  and
Capital Resources."

         Competition.  The market for salty snack  foods,  such as those sold by
the Company,  including potato chips,  tortilla chips, popcorn and pretzels,  is
large and  intensely  competitive.  Competitive  factors in the salty snack food
industry  include  product quality and taste,  brand awareness among  consumers,
access to supermarket shelf space, price, advertising and promotion,  variety of
snacks offered,  nutritional content,  product packaging and package design. The
Company competes in that market  principally on the basis of product quality and
taste.

         The snack food  industry is  primarily  dominated by  Frito-Lay,  Inc.,
which has  substantially  greater financial and other resources than the Company
and  sells  brands  that  are more  widely  recognized  than  are the  Company's
products.  Numerous other companies that are actual or potential  competitors of
the Company,  many with greater  financial and other  resources  (including more
employees  and more  extensive  facilities)  than the  Company,  offer  products
similar to those of the Company.  In addition,  many of such competitors offer a
wider  range of products  than that  offered by the  Company.  Local or regional
markets often have  significant  smaller  competitors,  many of whom offer batch
fried products similar to those of the Company.  Expansion of Company operations
into new markets has and will continue to encounter significant competition from
national,  regional  and  local  competitors  that  may  be  greater  than  that
encountered  by  the  Company  in  its  existing  markets.  In  addition,   such
competitors may challenge the Company's position in its existing markets.  While
the Company  believes that its products and method of operations  will enable it
to compete successfully, there can be no assurance of its ability to do so.

         Promotional  and  Shelf  Space  Costs.  Successful  marketing  of  food
products  generally  depends  upon  obtaining  adequate  retail  shelf space for
product display,  particularly in supermarkets.  Frequently,  food manufacturers
and distributors, such as the Company, incur additional costs in order to obtain
additional  shelf  space.  Whether  or not the  Company  incurs  such costs in a
particular  market is  dependent  upon a number of factors,  including  existing
demand for the  Company's  products,  relative  availability  of shelf space and
general competitive conditions. The Company may incur significant shelf space or
other promotional costs as a necessary condition of entering into competition in
particular markets or stores. If incurred,  such costs may materially affect the
Company's financial performance.

         No Assurance of Consumer  Acceptance  of Company's  Existing and Future
Products.  Consumer preferences for snack foods are continually changing and are
extremely difficult to predict. The ability of the Company to develop successful
operations  in new  markets  will depend upon  customer  acceptance  of, and the
Company's ability to manufacture,  its products.  There can be no assurance that
the Company's  products will achieve a significant  degree of market acceptance,
that acceptance,  if achieved,  will be sustained for any significant  period or
that  product  life cycles will be  sufficient  to permit the Company to recover
start-up and other associated costs. In addition, there can be no assurance that
the Company will succeed in the  development of any new products or that any new
products  developed by the Company will achieve  market  acceptance  or generate
meaningful revenue for the Company.
                                       4
<PAGE>
         Uncertainties  and Risks of Food  Product  Industry.  The food  product
industry in which the  Company is engaged is subject to  numerous  uncertainties
and risks outside of the Company's  control.  Profitability  in the food product
industry  is subject  to  adverse  changes  in  general  business  and  economic
conditions,  oversupply  of certain food  products at the  wholesale  and retail
levels,  seasonality,  the risk  that a food  product  may be  banned or its use
limited or declared unhealthful,  the risk that product tampering may occur that
may require a recall of one or more of the Company's products, and the risk that
sales of a food product may decline due to perceived health concerns, changes in
consumer tastes or other reasons beyond the control of the Company.

         Fluctuations  in Prices of Supplies;  Dependence  Upon  Availability of
Supplies and  Performance of Suppliers.  The Company's  manufacturing  costs are
subject  to  fluctuations  in the  prices  of  potatoes  and oil,  the two major
ingredients  used  in  the  manufacture  of  potato  chips,  as  well  as  other
ingredients of the Company's products. Potatoes are widely available year-round,
either  freshly  harvested or from storage  during  winter  months.  TrisunR,  a
sunflower oil low in saturated fat that is used by the Company in the production
of Poore BrothersTM brand potato chips, is supplied by one company.  The Company
believes that alternative cooking oils that are low in saturated fat are readily
abundant and available. The Company is dependent on its suppliers to provide the
Company with products and  ingredients in adequate supply and on a timely basis.
Although the Company believes that its requirements for products and ingredients
are readily  available,  and that its business  success is not  dependent on any
single  supplier,  the  failure  of  certain  suppliers  to meet  the  Company's
performance specifications, quality standards or delivery schedules could have a
material  adverse effect on the Company's  operations.  In particular,  a sudden
scarcity,  a  substantial  price  increase,  or  an  unavailability  of  product
ingredients could materially  adversely affect the Company's  operations.  There
can be no assurance that alternative  ingredients would be available when needed
and on commercially attractive terms, if at all.

         Lack of  Proprietary  Manufacturing  Methods.  The taste and quality of
Poore  BrothersTM  brand  potato  chips is largely  due to two  elements  of the
Company's  manufacturing  process:  its  use of  batch  frying  and  its  use of
distinctive  seasonings  to produce a variety of flavors.  The Company  does not
have exclusive  rights to the use of either element;  consequently,  competitors
may incorporate such elements into their own processes.

         Dependence Upon Major  Customers.  Two customers of the Company,  Fry's
Food Stores (a subsidiary of Kroger, Inc.) and Safeway,  Inc., accounted for 14%
and 10%,  respectively,  of the Company's 1997 net sales,  with the remainder of
the  Company's  net  sales  being  derived  from  sales to a  limited  number of
additional customers,  either grocery chains or regional  distributors,  none of
which individually  accounted for more than 10% of the Company's sales for 1997.
A  decision  by any  major  customers  to cease or  substantially  reduce  their
purchases could have a material adverse effect on the Company's business.

         Reliance  on  Key  Employees;  Non-Compete  Agreements.  The  Company's
success is dependent in large part upon the abilities of its officers, including
Eric J. Kufel  (President  and Chief  Executive  Officer).  The inability of the
officers to perform  their duties or the inability of the Company to attract and
retain other highly  qualified  personnel  could have a material  adverse effect
upon the Company's  business and prospects.  The Company does not maintain,  nor
does it currently contemplate  obtaining,  "key man" life insurance with respect
to such  employees.  With the  exception of James M. Poore and Wendell T. Jones,
the  employment  of the  officers of the Company is on an "at-will"  basis.  The
Company has non-compete  agreements with all of its officers,  except Mr. Jones.
See "Item 9. Directors and Executive Officers of the Company."

         Legal Proceedings.  In June 1996, a lawsuit was commenced in an Arizona
state court against two directors of the Company, Mark S. Howells and Jeffrey J.
Puglisi, and PB Southeast which alleged, among other things, that  James Gossett
had an oral agreement with Mr. Howells to receive a 49% ownership interest in PB
Southeast,  that Messrs. Howells and Puglisi breached fiduciary duties and other
obligations  to Mr.  Gossett and that he was  entitled to exchange  such alleged
stock  interest  for  shares  in the  Company.  Another  plaintiff,  PB  Pacific
Distributing,  Inc., further alleged that Messrs.  Howells and Puglisi failed to
honor the terms of an alleged  distribution  agreement  between it and PB Foods.
The complaint seeks unspecified amounts of damages,  fees and costs. In February
1997,  plaintiffs  filed  pleadings  indicating  they are  seeking $3 million in
damages;  plaintiffs may not be limited by this damage amount at trial.  Messrs.
Howells  and  Puglisi  and PB  Southeast  have filed an answer and  counterclaim
against Mr.  Gossett,  denying the major  provisions of the complaint,  alleging
various acts of nonperformance and breaches of fiduciary duty on the part of Mr.
Gossett,  and seeking various compensatory and punitive damages. The Company has
agreed to indemnify  Messrs.  Howells and Puglisi in regard to this lawsuit.  In
July 1997,  summary  judgement  was  granted in favor of all  defendants  on all
counts of the lawsuit.  In its Order,  the Maricopa  County  (Arizona)  Superior
Court  ruled  that  there was no oral  contract  and that the  remainder  of the
plaintiffs'  claims could not support a cause of action against the  defendants.
In February 1998, the Court reversed its prior grant of summary  judgment on one
of the seven counts and reinstated Mr. Gossett's, claim that Messrs. Howells and
Puglisi breached fiduciary duties to him. The
                                       5
<PAGE>
Court also set the  matter for trial  beginning  October  5, 1998.  The  Court's
recent  ruling  merely  preserves  Mr.  Gossett's  claim  for trial and does not
adjudicate  the  merits of the claim.  The  Company  believes  that the claim is
without merit and will continue to vigorously  defend the lawsuit.  See "Item 3.
Legal Proceedings."

         Governmental  Regulation.  The  packaged  food  industry  is subject to
numerous  federal,  state and local  governmental  regulations,  including those
relating to the  preparation,  labeling  and  marketing  of food  products.  The
Company is particularly  affected by the Nutrition Labeling and Education Act of
1990 ("NLEA"),  which requires specified nutritional information to be disclosed
on all packaged  foods.  The Company  believes that the labeling on its products
currently meets these requirements.  The Company does not believe that complying
with the NLEA  regulations  materially  increases  the  Company's  manufacturing
costs. There can be no assurance, however, that new laws or regulations will not
be passed that could  require the Company to alter the taste or  composition  of
its products. Such changes could affect sales of the Company's products and have
a material adverse effect on the Company.

         Product  Liability  Claims.  As a  manufacturer  and  marketer  of food
products,  the Company may be subjected  to various  product  liability  claims.
There can be no assurance that the product liability insurance maintained by the
Company will be adequate to cover any loss or exposure for product liability, or
that such  insurance  will  continue to be available on terms  acceptable to the
Company. Any product liability claim not fully covered by insurance,  as well as
any adverse  publicity  from a product  liability  claim,  could have a material
adverse  effect on the  financial  condition  or  results of  operations  of the
Company.

         Volatility of Market Price of Common Stock.  Recent history relating to
market prices of companies that recently  completed an initial  public  offering
indicates that, from time to time, there is significant volatility in the market
price of the securities of such companies for reasons that may not be related to
such companies' operations or financial conditions.  Since the completion of the
initial  public  offering of the  Company's  Common Stock in December 1996 at an
offering  price of $3.50 per  share,  the market  price of the Common  Stock has
experienced a substantial  decline.  The last reported sales price of the Common
Stock on the NASDAQ SmallCap Market on March 24, 1998 was $1.31 per share. There
can be no assurance as to the future market price of the Common Stock.

         NASDAQ Listing Maintenance Requirements;  No Assurance of Qualification
for Continued  Listing.  NASDAQ has  implemented  rules changes  increasing  its
quantitative  listing  standards  that make it more difficult for the Company to
maintain  compliance  with the  listing  requirements  for the  NASDAQ  SmallCap
Market.  One of such  requirements  is that the bid price on the Common Stock be
equal to or  greater  than $1.  If the  Company  is  unable  to meet the  NASDAQ
SmallCap listing  requirements in the future,  its securities will be subject to
being  delisted,  and  trading,  if any,  would  thereafter  be conducted in the
over-the-counter  market  in the  so-called  "pink  sheets"  or the  "Electronic
Bulletin  Board"  of  the  National  Association  of  Securities  Dealers,  Inc.
("NASD").  As a consequence  of such  delisting,  an investor could find it more
difficult to dispose of, or to obtain accurate quotations as to the price of the
Company's Common Stock.

         Under the rules of the  Commission,  stock priced under $5.00 per share
is  classified  as "penny  stock."  Broker-dealers  trading in "penny stock" are
subject to burdensome record keeping and disclosure requirements, which can have
the effect of reducing the  liquidity  and the value of such stock.  Pursuant to
one such requirement,  broker-dealers involved in a penny stock transaction must
make a special  suitability  determination  for the  purchaser  and  receive the
purchaser's  written consent to the transaction  prior to the sale. A listing of
securities on the NASDAQ  SmallCap Market affords an exemption from those rules,
and because the Common Stock is currently  listed on the NASDAQ SmallCap Market,
the "penny  stock"  rules do not apply to it. If,  however,  at some time in the
future the Common Stock should become  ineligible  for continued  listing on the
NASDAQ SmallCap Market, those rules would apply.

         Certain   Anti-takeover   Provisions.   The  Company's  Certificate  of
Incorporation  authorizes  the issuance of up to 50,000  shares of "blank check"
Preferred  Stock  with  such  designations,  rights  and  preferences  as may be
determined  from  time to time by the Board of  Directors  of the  Company.  The
Company  may  issue  such  shares  of  Preferred  Stock  in the  future  without
stockholder approval.  The rights of the holders of Common Stock will be subject
to, and may be adversely affected by, the rights of the holders of any Preferred
Stock that may be issued in the future.  The issuance of Preferred Stock,  while
providing  desirable  flexibility in connection with possible  acquisitions  and
other corporate  purposes,  could have the effect of  discouraging,  delaying or
preventing a change of control of the Company,  and preventing holders of Common
Stock from realizing a premium on their shares.  In addition,  under Section 203
of the Delaware General Corporation Law (the "DGCL"),  the Company is prohibited
from  engaging  in any  business  combination  (as defined in the DGCL) with any
interested  stockholder  (as defined in the DGCL) unless certain  conditions are
met. This statutory provision could also have an anti-takeover effect.
                                       6
<PAGE>
Company History

         Messrs.  Donald and James Poore (the "Poore Brothers") founded PB Foods
in 1986 after  substantial  experience  in the potato chip  industry.  The Poore
Brothers  also  founded  PB  Distributing  in 1990 and PB  Texas in 1991,  which
provided  distribution  capabilities  for the Company's Poore  BrothersTM  brand
products.  Prior to forming PB Foods, the Poore Brothers  co-founded  Groff's of
Texas, Inc. in 1983, which also manufactured batch-fried potato chips. The Poore
Brothers had previously been employed for over thirteen years by Mira-Pak, Inc.,
a designer and manufacturer of packaging equipment for the snack food industry.

         In May 1993,  Mark S.  Howells  and  associated  individuals  formed PB
Southeast,  which acquired a license from PB Foods to manufacture and distribute
Poore  BrothersTM  brand products.  In 1994, PB Southeast opened a manufacturing
plant in LaVergne, Tennessee.

         In November 1994, PB Southeast  entered into a Purchase  Agreement (the
"Purchase  Agreement")  with PB Foods,  the Poore  Brothers and Amelia E. Poore,
that provided for the  acquisition by PB Southeast of (i)  substantially  all of
the  assets,  subject to certain  liabilities,  of PB Foods;  (ii) a 100% equity
interest in PB Distributing; and (iii) an 80% equity interest in PB Texas, after
giving effect to a 32% equity  interest to be purchased from other  stockholders
of PB Texas not parties to the Purchase Agreement.  Thereafter,  the Company was
formed as a holding company and the rights and obligations of PB Southeast under
the  Purchase   Agreement  were  assigned  to  the  Company.   The  transactions
contemplated  by the  Purchase  Agreement  were  consummated  on May  31,  1995.
Subsequent  to the  acquisition  date,  the Company  acquired the  remaining 20%
equity interest in PB Texas. The aggregate purchase price paid by the Company in
connection with these transactions was $4,057,163,  $3,232,593 of which was paid
in cash,  $500,000 of which was payable pursuant to a five-year  promissory note
(paid off in  January  1997) and the  remainder  of which was  satisfied  by the
issuance of 300,000  shares of the Company's  Common  Stock,  par value $.01 per
share (the  "Common  Stock") to the seller.  The Purchase  Agreement  contains a
non-compete  covenant pursuant to which each of the Poore Brothers agreed not to
compete  against the Company,  directly or  indirectly,  in various states for a
five-year period expiring on May 31, 2000.

         Also in May 1995, the Company  entered into an exchange  agreement with
certain  stockholders of PB Southeast,  including Mark S. Howells and Jeffrey J.
Puglisi,  directors  of the  Company,  pursuant to which the  Company  agreed to
acquire from them more than 99% of the  outstanding  shares of the capital stock
of PB  Southeast,  in exchange for the  issuance to them of 1,560,000  shares of
Common Stock,  concurrently  with and subject to the consummation of the closing
under the Purchase  Agreement.  Such exchange was  consummated  on May 31, 1995.
James  Gossett owns the  remaining  shares of PB  Southeast.  See "Item 3. Legal
Proceedings."

         In December 1996, the Company  completed an initial public  offering of
its  Common  Stock,  pursuant  to which  2,250,000  shares of Common  Stock were
offered and sold to the public at an offering price of $3.50 per share.  Of such
shares,  1,882,652  shares were sold by the Company and 367,348 shares were sold
by the holders of the 9% Convertible  Debentures  (Renaissance  Capital Growth &
Equity Income Fund III, Inc. and Wells Fargo Small Business  Investment Company,
Inc.,  formerly Wells Fargo Equity  Capital,  Inc.),  which acquired such shares
upon  the  conversion  of  $400,409  principal  amount  of  the  9%  Convertible
Debentures.  The initial public  offering was  underwritten  by Paradise  Valley
Securities,  Inc. (the "Underwriter").  The net proceeds to the Company from the
sale of the  1,882,652  shares of Common  Stock,  after  deducting  underwriting
discounts  and  commissions  and the  expenses  of the  offering  payable by the
Company, were approximately  $5,300,000.  On January 6, 1997, 337,500 additional
shares of  Common  Stock  were  sold by the  Company  upon the  exercise  by the
Underwriter of an  over-allotment  option  granted to it in connection  with the
initial public offering.  After deducting applicable  underwriting discounts and
expenses, the Company received net proceeds of approximately $1,000,000 from the
sale of such additional shares.

         On June 4, 1997, PB Texas sold its Houston, Texas distribution business
to Mr. David Hecht (the "Buyer"),  pursuant to an Asset Purchase,  Licensing and
Distribution  Agreement  effective June 1, 1997. Under the Agreement,  the Buyer
was sold certain assets of PB Texas (including  inventory,  vehicles and capital
equipment) and became the Company's distributor in the Houston, Texas market.

         In September 1997, the Company  consolidated  its entire  manufacturing
operations  into  its  new  facility  in  Goodyear,  Arizona.  As  part  of  the
consolidation,  the  Company  closed  its PB  Southeast  facility  in  LaVergne,
Tennessee on September 30, 1997.

Business Strategy

         The  Company's  business  objective  is to  become a  leading  regional
manufacturer  and  distributor  of branded  premium potato chips and other salty
snack foods by providing high quality  products at  competitive  prices that are
superior in taste to comparable  products.  The Company plans to achieve  growth
primarily through  increased  distribution and sales volume in existing markets,
development of new products and acquisitions.  The key elements of the Company's
business strategy are as follows:
                                       7
<PAGE>
         Increase  Consumer  Acceptance of Poore BrothersTM Brand Products.  The
         Company's  Poore  BrothersTM  brand products have achieved  significant
         market penetration in Arizona, Colorado, West Texas, New Mexico, Kansas
         and St.  Louis,  Missouri.  The Company  attributes  the success of its
         products in these markets to the taste  resulting from its batch frying
         process and the variety of flavors, sizes and types of products offered
         by the Company.  To increase  awareness and acceptance of its products,
         the Company is increasing its advertising and  distribution  efforts in
         certain key regional markets,  including Arizona,  Southern California,
         Colorado, New Mexico and West Texas. These efforts include, among other
         things,  joint advertising with  supermarkets and other  manufacturers,
         radio and outdoor  advertising,  product sampling,  event  sponsorship,
         coupon distribution and in-store advertisements and displays.

         Continue  Improvement  in  Operating  Efficiencies.  During  1997,  the
         Company's  management  team  focused its efforts on reducing  costs and
         improving  product quality.  These actions included  consolidating  the
         Arizona  operations  and the Tennessee  manufacturing  operation into a
         single  modern  facility in Arizona,  selling  the  unprofitable  Texas
         distribution  business,  and  discontinuing  unprofitable  pricing  and
         promotion practices. The consolidation and the Company's investments in
         new   machinery   and   manufacturing   processes   have   resulted  in
         significantly  increased  manufacturing  efficiencies  beginning in the
         fourth  quarter of 1997.  The  Company  also  invested in a new quality
         assurance  lab and  personnel  to  improve  the  Company's  ability  to
         consistently  produce products within a narrow specification range. The
         Company's plans include continued operating efficiency improvements and
         negotiated reductions in raw material costs in 1998.

         Develop and Distribute New Products. The Company intends to develop new
         products that leverage its  expertise in  manufacturing,  marketing and
         distributing  snack food products.  The Company believes it can develop
         new snack food  products  that  consumers  perceive  to be  superior in
         taste,  texture,   appearance  and  brand  personality,   resulting  in
         increased  consumer demand and shelf space for the Company's  products.
         In  addition,  the  Company  plans  to  grow  its  Arizona  snack  food
         distribution  business  through  increasing  its  emphasis  on  growing
         selective core brands, such as Snyder's pretzels.

         Expand Private Label Business.  The Company has  arrangements  with one
         California  and two  Arizona  grocery  chains for the  manufacture  and
         distribution  by the Company of their  respective  private label potato
         chips.  The Company  manufactures  potato chips for these  customers in
         various  types and flavors as specified by them.  The Company  believes
         that opportunities  exist for the Company to expand this segment of its
         business.  Consequently,  in July 1997 the Company expanded its private
         label  production  capacity by purchasing  and  installing a continuous
         fryer in its new Arizona facility that can produce  approximately 2,100
         pounds of potato chips per hour. The Company intends to seek additional
         private label  customers in the  southwestern  United States who demand
         exceptional product quality at a reasonable price.

Products

         Potato Chips. Poore BrothersTM brand potato chips were first introduced
by the Poore  Brothers in 1986 and have accounted for  substantially  all of the
Company's  manufacturing  sales to date.  The potato  chips are  marketed by the
Company as a premium product based on their  distinctive  combination of cooking
method and  variety of  distinctive  flavors.  The  potato  chips are  currently
offered in ten flavors: Original, Salt & Vinegar, Jalapeno, Barbecue, Parmesan &
Garlic,  Cajun, Dill Pickle,  Grilled Steak & Onion, Tangy Calypso and Unsalted.
The Company has agreements  with one  California and two Arizona  grocery chains
pursuant to which the Company  produces  their  respective  private label potato
chips in the styles and flavors specified by such grocery chains. From June 1996
until  September  1997,  the Company  marketed  low-fat  potato chips in various
flavors that were processed by a third party,  Great Snaxx of AZ L.L.C.  ("Great
Snaxx"). See "Manufacturing."

         Other Snack Food Products. Through its Arizona distribution subsidiary,
PB Distributing, the Company purchases and resells throughout Arizona snack food
products manufactured by others. Such products include pretzels, tortilla chips,
crackers, snack nuts and meat snacks.

Manufacturing

         The Company  believes  that a key element of the  product's  success to
date has been its use of certain  cooking  techniques and key ingredients in the
manufacturing  process  to produce  potato  chips with  improved  flavor.  These
techniques  currently involve two elements:  the Company's use of a batch frying
process for its brand name products,  as opposed to the conventional  continuous
line cooking method, and the Company's use of distinctive  seasonings to produce
potato  chips in a variety of flavors.  Although it produces  less  volume,  the
Company  believes  that its batch  frying  process is superior  to  conventional
continuous line cooking methods because it enhances crispness and flavor through
greater control over temperature and other cooking conditions.
                                       8
<PAGE>
         Production  Facilities.  In August  1997,  the  Company  completed  the
transition of all Arizona  manufacturing  operations into its newly  constructed
Goodyear,  Arizona  facility.  The new  Goodyear  facility  has the  capacity to
produce  approximately 3,000 pounds of potato chips per hour, with approximately
2,100 pounds of such capacity being  produced  using a continuous  frying method
and the remainder  being  produced using the Company's  batch frying method.  In
September 1997, the Company closed its PB Southeast  manufacturing  operation in
LaVergne,   Tennessee  and  consolidated  all  of  the  Company's  manufacturing
operations into the Company's new facility in Goodyear,  Arizona.  In connection
with the PB Southeast closure,  the Company sold certain equipment and moved the
remaining equipment (with an aggregate  production capacity of approximately 360
pounds of potato chips per hour) to the new  facility  for  storage.  If needed,
this equipment could be installed in the Arizona  facility  without  significant
time or cost.

         Private Label Products.  In order to meet potential  demand for private
label products, the Company installed a continuous fryer potato chip line in its
new  facility  that has the  capacity to produce  approximately  2,100 pounds of
potato chips per hour. In July 1997, the Company began  producing  private label
potato chips with the new continuous  fryer.  There can be no assurance that the
Company will obtain  sufficient  business to recoup the costs of its  investment
in, and alterations of its facilities.

         Low-Fat  Potato Chips.  In 1996,  the Company  signed an agreement with
Great  Snaxx  pursuant to which  Great  Snaxx  granted  the Company  rights in a
limited  geographic  region to market  low-fat  potato chips  processed by Great
Snaxx.  The Company  marketed low-fat potato chips processed by Great Snaxx from
June 1996 until  September  1997.  Sales of the  low-fat  potato  chips were not
significant  and  during  1997 and 1996  accounted  for less than 2.5% and 1.7%,
respectively,  of the  Company's  net sales.  On September 3, 1997,  Great Snaxx
notified the Company that it had ceased operations  related to its processing of
low-fat potato chips.  Under its terms, the cessation of business by Great Snaxx
automatically terminated the agreement.

         The Company may in the future consider  producing  low-fat potato chips
using an alternative production method, such as baking or the use of alternative
cooking  oils.  There can be no  assurance,  however,  that the Company would be
successful  in utilizing  an  alternative  method or that  low-fat  potato chips
produced by the Company would be accepted in the marketplace.

Marketing and Distribution

         The Company sells its products primarily in the southwest,  but also in
targeted  markets in the western,  southern and midwestern  United  States.  The
Company's  products  are  distributed  through  a select  group  of  independent
distributors.

         The  Company's  Arizona  distribution  subsidiary  operates  throughout
Arizona,  with 30 independently  operated service routes. Each route is operated
by an independent  distributor  who  merchandises  as many as 100 items at major
grocery store chains in Arizona,  such as  Albertson's,  ABCO,  Basha's,  Fry's,
Megafoods,  Safeway, Smith's, and Smitty's Food Stores. In addition to servicing
major supermarket  chains, the Company's  distributors  service many independent
grocery stores,  club stores  (including  Price/Costco and Sam's),  and military
facilities  throughout  Arizona. In addition to Poore BrothersTM brand products,
the Company distributes  throughout Arizona a wide variety of items manufactured
by other companies, including pretzels, tortilla chips, crackers, snack nuts and
meat  snacks.  The Company  also sells Poore  BrothersTM  brand  potato chips to
America West  Airlines and Trans World  Airlines  for  passenger  service and to
several vending companies in the southwest.

         Outside of Arizona, the Company selects  distributors  primarily on the
basis of quality of service,  call frequency on customers,  financial capability
and relationships they have with  supermarkets,  including access to shelf space
in  the  store's  snack  aisles.  As of  December  31,  1997,  the  Company  had
arrangements  with over 35 distributors  in a number of major cities,  including
St. Louis,  Denver, San Diego, Los Angeles,  San Antonio, El Paso,  Albuquerque,
Cincinnati, Houston, Wichita, Honolulu, Boise, Tampa, and Minneapolis.

         Successful  marketing of the Company's products depends,  in part, upon
obtaining  adequate  retail  shelf  space  for such  products,  particularly  in
supermarkets. Frequently, the Company incurs additional marketing costs in order
to obtain  additional  shelf space.  Whether or not the Company will continue to
incur such costs in the future will  depend upon a number of factors,  including
existing demand for the Company's products, relative availability of shelf space
and general  competitive  conditions.  The Company may incur  significant  shelf
space or other  promotional  costs as a necessary  condition  of  entering  into
competition  in  particular  markets  or stores.  Any such costs may  materially
affect the Company's financial performance.

Suppliers

         The principal raw materials  used by the Company are potatoes,  oil and
packaging  material.  The Company  believes  that the raw  materials it needs to
produce  its  products  are  readily   available  from  numerous   suppliers  on
commercially reasonable terms. Potatoes are widely available year-round,  either
freshly  harvested or from storage  during the winter  months.  The Company uses
both sunflower oil and  cottonseed  oil in the  production of potato chips.  The
Company  believes  that
                                       9
<PAGE>
alternative  cooking  oils for the  production  of Poore  BrothersTM  brand  and
private label potato chips are readily abundant and available.  The Company also
uses seasonings in its manufacturing process.

         The  Company   chooses  its   suppliers   based   primarily  on  price,
availability and quality and does not have any long-term  arrangements  with any
supplier,  except its 3-year  arrangement  with  Printpack  Inc.  for  packaging
material.   Although  the  Company  believes  that  its  required  products  and
ingredients  are  readily  available,  and  that  its  business  success  is not
dependent on any single supplier,  the failure of certain  suppliers to meet the
Company's  performance  specifications,  quality standards or delivery schedules
could have a material adverse effect on the Company's operations. In particular,
a sudden scarcity, a substantial price increase, or an unavailability of product
ingredients could materially  adversely affect the Company's  operations.  There
can be no assurance that alternative  ingredients would be available when needed
and on commercially attractive terms, if at all.

Customers

         Two  customers  of the  Company,  Fry's Food  Stores (a  subsidiary  of
Kroger, Inc.) and Safeway, Inc. accounted for 14% and 10%, respectively,  of the
Company's 1997 net sales.  The remainder of the Company's  revenues were derived
from sales to a limited number of additional customers, either grocery chains or
regional distributors, none of which individually accounted for more than 10% of
the Company's sales for 1997. A decision by any of the Company's major customers
to cease or  substantially  reduce their purchases could have a material adverse
effect on the Company's business.

Market Overview and Competition

         According to the Snack Food  Association  ("SFA"),  the U.S. market for
salty  snack foods  reached  $16.0  billion at retail in 1996 with potato  chips
accounting for  approximately 33% of the market,  and tortilla chips,  pretzels,
popcorn  and  other  products  accounting  for the  balance.  Per  capita  snack
consumption,  in dollar  terms,  has  increased  every year  during the past six
years, ranging from an increase of 6.0% (in 1990) to 0.4% (in 1994), with a 1996
increase  of 4.4% to a rate of $60.42 per person  per annum.  Potato  chip sales
have similarly  increased steadily over the same period,  with 1996 retail sales
of $5.3 billion (a 9.3%  increase  over 1995)  contrasted  to 1990 sales of $4.3
billion.

         The  Company's  products  compete  generally  against other salty snack
foods,  including potato chips, tortilla chips, popcorn and pretzels.  The salty
snack food industry is large and highly  competitive and is dominated  primarily
by Frito-Lay,  Inc., a subsidiary of PepsiCo,  Inc.  Frito-Lay,  Inc.  possesses
substantially greater financial, production,  marketing,  distribution and other
resources than the Company and brands that are more widely  recognized  than the
Company's  products.  Numerous  other  companies  that are  actual or  potential
competitors  of the Company,  many with greater  financial  and other  resources
(including more employees and more extensive facilities) than the Company, offer
products similar to those of the Company. In addition,  many of such competitors
offer a wider range of products  than offered by the Company.  Local or regional
markets often have  significant  smaller  competitors,  many of whom offer batch
fried or low-fat products similar to those of the Company.  Expansion of Company
operations  to other  areas  of the  United  States  has and  will  continue  to
encounter significant competition from national,  regional and local competitors
that may be  greater  than  that  encountered  by the  Company  in its  existing
markets.  In addition,  such competitors may challenge the Company's position in
its existing markets.  While the Company believes that its specialized  products
and method of operations will enable it to compete successfully, there can be no
assurance of its ability to do so.

         The principal competitive factors affecting the market of the Company's
products  include  product quality and taste,  brand awareness among  consumers,
access to supermarket shelf space, price, advertising and promotion,  variety of
snacks offered,  nutritional content,  product packaging and package design. The
Company  competes in the market  principally on the basis of product quality and
taste.

Government Regulation

         The manufacture,  labeling and  distribution of the Company's  products
are subject to the rules and  regulations  of various  federal,  state and local
health  agencies,  including  the FDA. In May 1994,  regulations  under the NLEA
concerning labeling of food products,  including  permissible use of nutritional
claims  such as  "fat-free"  and  "low-fat,"  became  effective.  The Company is
complying with the NLEA  regulations and closely monitors the fat content of its
products  through various testing and quality  control  procedures.  The Company
does not believe that compliance with the NLEA regulations  materially increases
the Company's  manufacturing  costs.  There can be no assurance that new laws or
regulations will not be passed that could require the Company to alter the taste
or composition of its products. Such changes could affect sales of the Company's
products and have a material adverse effect on the Company.

         In addition to laws relating to food products, the Company's operations
are governed by laws relating to  environmental  matters,  workplace  safety and
worker health,  principally the Occupational  Safety and Health Act. The Company
believes that it presently  complies in all material respects with such laws and
regulations.
                                       10
<PAGE>
Employees

         As of  December  31,  1997,  the Company  had 73  full-time  employees,
including 56 in manufacturing and distribution,  6 in sales and marketing and 11
in administration  and finance.  The Company's  employees are not represented by
any collective  bargaining  organization and the Company has never experienced a
work  stoppage.  The Company  believes that its relations with its employees are
good.


Item 2.  Description of Property

         The Company owns a new 60,000 square foot facility located on 7.7 acres
of land in Goodyear,  Arizona,  approximately 15 miles west of Phoenix, Arizona.
Construction  of this new facility was  completed in June 1997.  In August 1997,
the Company  completed the transition of all of its Arizona  operations into the
new facility.  The site will enable the Company to expand its  facilities in the
future to a total building size of 120,000 square feet. The facility is financed
by a mortgage  with Morgan  Guaranty  Trust  Company of New York that matures in
June 2012.

         On  February  28,  1997,  the  Company  sold three  12,000  square foot
buildings in Goodyear,  Arizona,  which previously  housed the Company's Arizona
operations and were replaced by the new facility. The net proceeds from the sale
of the  properties,  which  approximated  $710,000 were used to repay  mortgages
which encumbered the properties and to repay the $500,000  principal amount of a
promissory  note  issued  by the  Company  to the  Poore  Brothers  in  1995  in
connection with the PB  Acquisition.  The Company leased the properties from the
buyer on a  month-to-month  basis  until  the  Company's  relocation  to its new
facility was completed in August 1997.  The total amount of such lease  payments
was $56,000.

         Until  December 31,  1997,  PB  Southeast  leased a 16,900  square foot
manufacturing  facility located in LaVergne,  Tennessee,  approximately 15 miles
south of Nashville,  Tennessee.  The facility was leased under a lease agreement
that by its terms  expired in November  1998.  In  September  1997,  the Company
closed its PB Southeast  operation and  consolidated its operations into its new
Arizona facility. In December 1997, the Company completed  negotiations with the
landlord for the early termination of the lease effective December 31, 1997.

         The Company  believes that its  facilities  are  adequately  covered by
insurance.

 Item 3.  Legal Proceedings

         In June 1996, a lawsuit was commenced in an Arizona state court against
two  directors of the Company,  Mark S. Howells and Jeffrey J.  Puglisi,  and PB
Southeast  which  alleged,  among other  things,  that James Gossett had an oral
agreement with Mr. Howells to receive a 49% ownership  interest in PB Southeast,
that Messrs. Howells and Puglisi breached fiduciary duties and other obligations
to Mr.  Gossett and that he was entitled to exchange such alleged stock interest
for shares in the Company.  Another plaintiff,  PB Pacific  Distributing,  Inc.,
further alleged that Messrs. Howells and Puglisi failed to honor the terms of an
alleged  distribution  agreement  between it and PB Foods.  The complaint  seeks
unspecified  amounts of damages,  fees and costs.  In February 1997,  plaintiffs
filed pleadings  indicating  they are seeking $3 million in damages;  plaintiffs
may not be limited by this damage amount at trial.  Messrs.  Howells and Puglisi
and PB  Southeast  have filed an answer and  counterclaim  against  Mr.  Gossett
denying  the  major  provisions  of the  complaint,  alleging  various  acts  of
nonperformance  and  breaches of fiduciary  duty on the part of Mr.  Gossett and
seeking various  compensatory  and punitive  damages.  The Company has agreed to
indemnify Messrs.  Howells and Puglisi in regard to this lawsuit.  In July 1997,
summary  judgement  was granted in favor of all  defendants on all counts of the
lawsuit.  In its Order, the Maricopa County (Arizona)  Superior Court ruled that
there was no oral  contract  and that the  remainder of the  plaintiffs'  claims
could not support a cause of action  against the  defendants.  In February 1998,
the Court  reversed  its prior  grant of  summary  judgment  on one of the seven
counts and  reinstated  Mr.  Gossett's  claim that  Messr.  Howells  and Puglisi
breached  fiduciary  duties to him.  The  Court  also set the  matter  for trial
beginning  October 5, 1998.  The Court's  recent  ruling  merely  preserves  Mr.
Gossett's  claim for trial and does not adjudicate the merits of the claim.  The
Company believes that the claim is without merit and will continue to vigorously
defend the lawsuit.

         In September  1997, a lawsuit was commenced  against PB Distributing by
Chris Ivey and his company,  Shelby and Associates  (collectively  "Ivey").  The
complaint alleges,  among other things,  that PB Distributing  defrauded Ivey as
part of Ivey's  purchase of a  distributing  company  from  Walter  Distributing
Company and James Walter and that as a result,  Ivey has suffered  damages of at
least $390,000.  Ivey is also seeking punitive damages.  PB Distributing and the
Company have denied the  allegations and believe that the claim is without merit
and will continue to vigorously defend the lawsuit.

         The  Company is a party to  various  lawsuits  arising in the  ordinary
course  of  business.  Management  believes,  based on  discussions  with  legal
counsel, that the resolution of such lawsuits will not have a material effect on
the financial statements taken as a whole.

Item 4.  Submission of Matters to a Vote of Security Holders

         None.
                                       11
<PAGE>
                                     PART II

Item 5.  Market for Common Equity and Related Stockholder Matters

         The common stock,  $.01 par value,  of the Company (the "Common Stock")
began trading on the NASDAQ  SmallCap  Market tier of the NASDAQ Stock Market on
December 6, 1996 under the symbol  "POOR." The following  table sets forth,  for
the periods  indicated,  the high and low  reported  sales prices for the Common
Stock on the  NASDAQ  SmallCap  Market.  The  trading  market  in the  Company's
securities may at times be relatively  illiquid due to low trading  volume.  The
Company's  initial public offering became effective on December 6, 1996.  Before
this date, there was no public market for the Company's securities.
<TABLE>
<CAPTION>
                                                                                          Sales Prices
                                                                                          ------------
                                        Period of Quotation                             High        Low
                                        -------------------                             ----        ---
                 <S>                                                                   <C>         <C>
                 Fiscal 1996:
                      Fourth Quarter (December 6, 1996 to December 31, 1996)           $5.13       $3.25

                 Fiscal 1997:
                      First Quarter                                                    $4.25       $2.88
                      Second Quarter                                                   $3.25       $1.94
                      Third Quarter                                                    $2.75       $1.28
                      Fourth Quarter                                                   $1.69       $0.94
</TABLE>

         On March  24,  1998,  there  were  7,126,657  shares  of  Common  Stock
outstanding.  As of such date, the shares of Common Stock were held of record by
approximately 2,600 stockholders.

         The Company has never  declared or paid any  dividends on the shares of
Common Stock. Management intends to retain any future earnings for the operation
and  expansion  of the  Company's  business and does not  anticipate  paying any
dividends  at any time in the  foreseeable  future.  In any event,  certain debt
agreements  of the  Company  limit the  Company's  ability  to  declare  and pay
dividends.

Item 6.  Management's  Discussion  and  Analysis  of Results of  Operations  and
Financial Condition

Results of Operations

         Year ended  December 31, 1997  compared to the year ended  December 31,
1996

         Net sales decreased to $15,731,796 for the year ended December 31, 1997
from  $17,960,484  for the year ended  December  31,  1996.  This  represents  a
decrease of $2,228,688, or 12%. Kettle chip sales for 1997 were $9,758,977, down
$485,900,  or 5%,  from  $10,244,877  in 1996.  The  decrease  was caused by (i)
$750,000 in lower sales by the Company's  Texas  distribution  business (sold in
June 1997),  (ii) $486,000 in lower sales  attributed to the  discontinuance  of
unprofitable  pricing and  promotion  programs,  and (iii) offset by $750,000 of
increased sales by the Arizona operation. For 1997, net sales from private label
potato chips were $1,079,398, up $166,126 or 18% from $913,272 in 1996 primarily
as a result of adding one new private  label  customer in  September  1997.  Net
sales from low-fat potato chips were $382,713, up $84,818, or 28%, from $297,895
in 1996 (sales of which began in June 1996 and ceased in September 1997).  Sales
of products manufactured by others for 1997 were $4,510,708, down $1,993,732, or
31%, from  $6,504,440 in 1996. The decrease was  attributable to the sale of the
Company's Texas  distribution  business ($1.3 million) and the discontinuance in
Arizona of several  unprofitable  product  lines  manufactured  by others  ($0.7
million).  For 1997 and 1996,  sales of  products  manufactured  by the  Company
accounted for 71% and 64%,  respectively,  of total sales, and sales of products
manufactured by others accounted for 29% and 36%, respectively,  of total sales.
The decrease in the percentage of sales attributable to products manufactured by
others was  primarily  due to the  resignation  of non-snack  food  distribution
products from the Company's  Arizona  distribution  business and the sale of the
Company's Texas distribution business.

         Gross profit for the year ended  December 31, 1997 was  $2,021,817,  or
13% of net sales, as compared to $2,974,110,  or 17% of net sales,  for the year
ended  December  31, 1996.  The $952,293  decrease in gross profit was driven by
higher  manufacturing  costs and  lower  revenues.  Gross  profit  decreased  by
approximately $380,000 as a result of reduced manufacturing  efficiencies due to
lower sales volume at the now closed  Tennessee  manufacturing  facility.  Lower
sales volumes  contributed  approximately  $370,000 with the remainder resulting
from increased manufacturing costs in the Arizona
                                       12
<PAGE>
manufacturing  operation due to inefficiencies  related to the transition to the
new facility and new equipment,  along with higher fixed costs  associated  with
the Company's higher production capacity.

         Selling, general and administrative expenses increased to $3,982,428 in
1997 up $707,106, or 22%, from $3,275,322 in 1996. Included in selling,  general
and administrative expenses in 1997 were approximately $280,000 of restructuring
expenses related to severance,  relocation, moving and equipment write-downs. In
addition,  the Company  incurred higher  professional  service costs of $323,000
(legal,  accounting,  insurance  and  printing)  associated  with being a public
company.  Advertising and promotional expense for 1997 was up $100,000 over 1996
reflecting  a $200,000  investment  in consumer  marketing  programs,  including
radio,  billboards,  event  sponsorship and coupons,  launched during the fourth
quarter of 1997.

         The  "Sale  of  Texas  distribution   business"  in  the  Statement  of
Operations  reflects one-time  restructuring  charges of $164,383 related to the
sale in June 1997. These charges include amounts related to asset write-downs of
$97,000,  salaries  and  benefits of $57,000 and lease  termination  expenses of
$10,000.

         The "Closing of Tennessee manufacturing  operation" in the Statement of
Operations  reflects  one-time  restructuring  charges of $581,492 in connection
with the closure of the PB Southeast  manufacturing operation in September 1997.
These charges included amounts related to asset  write-downs of $381,000,  lease
termination  expenses of $55,000,  other facility  shutdown expenses of $33,000,
freight associated with equipment transfers of $47,000 and severance and related
benefits of $65,000.

         Net interest expense  decreased to $327,611 for the year ended December
31, 1997 from $390,466 for the year ended  December 31, 1996.  This decrease was
due primarily to $115,000 of increased interest income generated from investment
of the proceeds of the initial  public  offering that occurred in December 1996.
There  was a  $52,000  increase  in  interest  expense  due  principally  to the
permanent  financing  on the  Company's  new  Arizona  facility  and  additional
equipment leases.

         The  Company's  net losses for the years  ended  December  31, 1997 and
December 31, 1996 were  $3,034,097 and $691,678,  respectively.  The increase in
net loss was due to a $1,453,000  increase in operating  expenses and a $952,000
decrease in gross  profit.  The  increased  operating  expenses  were  primarily
attributable to restructuring costs associated with the closure of the Company's
Tennessee   manufacturing   operation  and  the  sale  of  the  Company's  Texas
distribution   business.   The   reduction  in  gross  profit  was   principally
attributable to reduced  manufacturing  efficiencies at the now-closed Tennessee
manufacturing  facility  and lost revenue from the  Company's  now-closed  Texas
distribution business.

Liquidity and Capital Resources

         Net working capital was $1,423,643 at December 31, 1997, with a current
ratio of 1.6:1.  At December 31, 1996,  the  Company's  net working  capital was
$4,185,602,  with a current ratio of 2.2:1.  The $2,761,959  decrease in working
capital was  primarily  attributable  to the Company's use of cash for operating
activities of approximately $2,064,000.

         Completion  of the new  manufacturing,  distribution  and  headquarters
facility, along with the purchase and installation of equipment,  required funds
of  $2,950,812  during  1997.  These  capital  expenditures  were  funded by the
refinancing  of the  Company's $1 million  short-term  construction  loan into a
permanent $2 million mortgage financing arrangement, financing of $862,961 under
equipment  financing  leases and  proceeds  from the  Company's  initial  public
offering.

         In  connection  with  the  Company's  sale  of the  Texas  distribution
business in June 1997 and the closure of the Tennessee  manufacturing  operation
in September 1997, $478,000 of the $746,000 in total charges represents non-cash
asset  write-downs.  Of the $268,000 which required cash payments,  $187,000 was
paid in 1997, and the remaining  $81,000 was paid in January 1998. In connection
with the  Company's  closure of the  Tennessee  manufacturing  operation and the
relocation of certain assets to Arizona, the $160,000 outstanding balance on the
Commercial  Development  Block  Grant from the State of  Tennessee  was paid off
using working capital in January 1998.

         Construction of the Company's new Arizona  manufacturing,  distribution
and   headquarters   facility  was  initially   financed  with  a  $2.4  million
construction loan from the National Bank of Arizona,  secured by a first deed of
trust on the land and the building. Interest on the construction loan was at the
prime rate plus 2% (10.25% at December 31, 1996).  On June 4, 1997,  the Company
refinanced the $1 million  remaining  balance on the construction loan with a $2
million  mortgage loan  arrangement  with Morgan  Guaranty  Trust Company of New
York. The fixed rate note bears interest at 9.03% and is secured by the land and
the building.  The note matures on July 1, 2012,  however monthly  principal and
interest   installments  of  $18,425  are  determined  based  on  a  twenty-year
amortization period.
                                       13
<PAGE>
         The Company has entered into a variety of capital and operating  leases
for the  acquisition  of  equipment  and  vehicles.  The leases  generally  have
five-year terms. In June 1997, the Company entered into five-year capital leases
at 9.06% with FINOVA Capital Corporation for new production  equipment installed
at the new  Arizona  facility.  In 1997,  the  Company  entered  into leases for
equipment with an aggregate fair market value of $863,000.

         On February  28,  1997,  in  connection  with the  construction  of its
Arizona manufacturing facility, the Company sold existing land and buildings for
net  proceeds of  approximately  $710,000.  The  carrying  value of the disposed
property  approximated the net proceeds and the sale had an immaterial impact on
the results of operations. Proceeds from the sale were used primarily to pay off
related mortgage debt and notes payable totaling approximately $650,000.

         In December  1996,  the Company  completed an initial  public  offering
resulting in the sale of 2,250,000  shares of its Common Stock,  $.01 par value,
to the public at $3.50 per share.  The net proceeds to the Company from the sale
of  1,882,652  shares  (the  balance  of the shares  having  been sold by the 9%
Convertible Debenture holders),  after deducting expenses of the offering,  were
approximately $5.3 million. In January 1997, the Company sold 337,500 additional
shares of Common  Stock  pursuant  to an  over-allotment  option  granted to the
underwriter  of  the  initial  public  offering.  Net  proceeds  from  the  sale
approximated  $1,000,000.  In connection with the initial public  offering,  the
underwriter was granted a warrant to purchase  225,000 shares of Common Stock at
$4.38 per share, which is exercisable through December 6, 2001.

         On July 26, 1996,  the Company  entered  into a  $1,000,000  Receivable
Financing  Agreement to provide working capital,  with First Community Financial
Corporation  (the "Credit  Agreement")  pursuant to which it initially  borrowed
$675,000,  a portion of which was used to retire the Company's  previous working
capital line. The Credit Agreement, as amended, was renewed in November 1997 for
a six month period with automatic  renewals from year to year, unless terminated
by either party on the anniversary date of the agreement by written notice given
not less than 30 days prior to the anniversary  date. The Credit Agreement bears
interest  at the prime  rate plus 3.50%  (12.00% at  December  31,  1997),  with
minimum monthly interest of $2,500. The Company may borrow up to an amount equal
to 75% of eligible  receivables,  representing  accounts receivable  outstanding
less than 60 days,  subject to concentration  limits.  At December 31, 1997, the
Company had approximately  $262,000  available under the working capital line of
credit. There can be no assurance that the working capital line will be renewed.
If the  working  capital  line is not  renewed  and no  alternative  funding  is
obtained, the Company would implement cost reduction measures and reduce planned
capital  expenditures.  Non-renewal  of the  working  capital  line could have a
material adverse effect on the Company.

         On May 31, 1995,  the Company  issued  $2,700,000 of its 9% Convertible
Debentures,  with monthly principal payments of approximately  $20,000 beginning
in July 1998 through July 1, 2002, in  connection  with the PB  Acquisition.  In
December 1996, in connection  with the Company's  initial public  offering,  the
holders of the 9% Convertible  Debentures converted $400,409 principal amount of
the 9%  Convertible  Debentures  into  367,348  shares  of Common  Stock.  As of
December 31, 1997, $2,299,591 principal amount of the 9% Convertible  Debentures
remained outstanding. As of December 31, 1997, the Company was not in compliance
with a financial  ratio,  that the Company is required to maintain  while the 9%
Convertible Debentures are outstanding,  related to a required interest coverage
ratio of  1.5:1(actual  of  -5.7:1).  As a result  of an event of  default,  the
holders of the 9% Convertible Debentures have the right, upon written notice and
after a thirty-day  period  during  which such  default may be cured,  to demand
immediate  payment of the then unpaid  principal and accrued but unpaid interest
under the Debentures.  The holders of the 9% Convertible Debentures have granted
the Company a waiver  effective  through  June 30,  1999.  After that time,  the
Company  will be  required  to be in  compliance  with the  following  financial
ratios,  so long as the 9% Convertible  Debentures remain  outstanding:  working
capital of at least  $1,000,000;  minimum  shareholders'  equity (net worth); an
interest coverage ratio of at least 2.0:1; and a current ratio at the end of any
fiscal  quarter of at least 1.1:1.  The Company is currently in compliance  with
the  minimum   shareholders'   equity,   working   capital  and  current   ratio
requirements.  Management  believes that the  achievement of the Company's plans
and  objectives  will  enable  the  Company  to  attain  a  sufficient  level of
profitability   to  remain  in   compliance   with  the   financial   ratios  or
alternatively,  that the Company  will be able to obtain an extension or renewal
of the waivers. There can be no assurance, however, that the Company will attain
any such  profitability  and be in compliance with the financial ratios upon the
expiration  of the waivers or be able to obtain an  extension  or renewal of the
waivers.  Any  acceleration  under the 9% Convertible  Debentures prior to their
maturity on July 1, 2002 could have a material adverse effect upon the Company.

         At December 31, 1997,  the Company had net operating  losses  available
for federal and state income taxes of  approximately  $4,548,000.  The Company's
ability to utilize its net operating  losses to offset future taxable income may
be limited  under the  Internal  Revenue  Code  Section 382 change in  ownership
rules. A valuation  allowance has been provided  since the Company  believes the
realizability  of the  deferred tax asset does not meet the more likely than not
criteria under
                                       14
<PAGE>
SFAS 109, "Accounting for Income Taxes." The Company's accumulated net operating
losses expire in varying amounts between 2010 and 2012.

Management's Plans

         In  connection  with  the  implementation  of  the  Company's  business
strategy,  the  Company  may incur  additional  operating  losses in the future.
Expenditures  relating  to  market  and  territory  expansion  and  new  product
development may adversely affect selling,  general and  administrative  expenses
and consequently  may adversely affect operating and net income.  These types of
expenditures  are expensed for  accounting  purposes as incurred,  while revenue
generated from the result of such expansion may benefit future periods.

         Management  believes  that  existing  working  capital,  together  with
available line of credit borrowings, and anticipated cash flows from operations,
will be sufficient to finance the  operations of the Company for the next twelve
months. The belief is based on current operating plans and certain  assumptions,
including   those   relating  to  the  Company's   future   revenue  levels  and
expenditures,  industry and general economic conditions and other conditions. If
any of these  factors  change,  the Company  may  require  future debt or equity
financings  to meet its business  requirements.  There can be no assurance  that
such financings will be available or, if available,  on terms  attractive to the
Company.

Inflation

         While  inflation has not had a significant  effect on operations in the
last year, management recognizes that inflationary pressures may have an adverse
effect on the Company as a result of higher asset  replacement costs and related
depreciation and higher material costs. Additionally, the Company may be subject
to seasonal price increases for raw materials.  The Company attempts to minimize
the  fluctuation  in seasonal  costs by entering  into purchase  commitments  in
advance,  which have the effect of smoothing out price  volatility.  The Company
will attempt to minimize  overall price  inflation,  if any,  through  increased
sales prices and productivity improvements.

Item 7.  Financial Statements
<TABLE>
<CAPTION>
                                                                                                                   Page
<S>                                                                                                                  <C>
Reports

Report of independent accountants with respect to financial statements for the year ended December 31, 1997          23
Report of independent accountants with respect to financial statements for the year ended December 31, 1996          24

Financial Statements

Consolidated balance sheets as of December 31, 1997 and 1996                                                         25
Consolidated statements of operations for the years ended December 31, 1997 and 1996                                 26
Consolidated statement of shareholders' equity for the years ended December 31, 1997 and 1996                        27
Consolidated statements of cash flows for the years ended December 31, 1997 and 1996                                 28
Notes to financial statements                                                                                        29
</TABLE>

Item  8.  Changes  in and  Disagreements  with  Accountants  on  Accounting  and
Financial Disclosure

         Information  with  respect  to this  Item 8 is hereby  incorporated  by
reference from the Company's  "Current  Report on Form 8-K" filed by the Company
with the Commission on January 7, 1998.
                                       15
<PAGE>
                                    PART III

Item 9.  Directors and Executive Officers of the Company

         The executive  officers and  Directors of the Company,  and their ages,
are as follows:
<TABLE>
<CAPTION>
                      Name                         Age                              Position
<S>                                                 <C>           <C>
      Eric J. Kufel...............................  31            President, Chief Executive Officer, Director
      Thomas W. Freeze............................  46            Vice President, Chief Financial Officer, Treasurer, and
                                                                    Secretary
      Scott D. Fullmer............................  34            Vice President -- Sales and Marketing
      Glen E. Flook...............................  39            Vice President -- Manufacturing
      James M. Poore..............................  51            Vice President
      Wendell T. Jones............................  57            Director of Sales -- Arizona
      Mark S. Howells.............................  44            Chairman, Director
      Jeffrey J. Puglisi..........................  39            Director
      Robert C. Pearson...........................  62            Director
      Aaron M. Shenkman...........................  57            Director
</TABLE>

Eric J. Kufel. Mr. Kufel has served as President,  Chief Executive Officer and a
Director of the Company since February 1997. From November 1995 to January 1997,
Mr. Kufel was Senior Brand Manager at The Dial  Corporation  and was responsible
for the operating results of Purex Laundry Detergent. From June 1995 to November
1995, Mr. Kufel was Senior Brand Manager for The Coca-Cola  Company where he was
responsible  for the marketing and  development  of Minute Maid  products.  From
November  1994 to June  1995 Mr.  Kufel  was  Brand  Manager  for The  Coca-Cola
Company,  and from June 1994 to November  1994,  Mr. Kufel was  Assistant  Brand
Manager for The Coca-Cola Company. From January 1993 to June 1994, Mr. Kufel was
employed  by  The  Kellogg  Company  in  various   capacities   including  being
responsible  for introducing the Healthy Choice line of cereal and executing the
marketing plan for Kellogg's  Frosted Flakes cereal.  Mr. Kufel earned a Masters
of International  Management from the American  Graduate School of International
Management in December 1992.

Thomas W.  Freeze.  Mr.  Freeze has served as Vice  President,  Chief  Financial
Officer,  Secretary and  Treasurer of the Company  since April 1997.  From April
1994  to  April  1997,  Mr.  Freeze  served  as  Vice  President,   Finance  and
Administration -- Retail of New England Business Service, Inc. From October 1989
to April 1994, Mr. Freeze served as Vice  President,  Treasurer and Secretary of
New England Business Service, Inc.

Scott D. Fullmer.  Mr. Fullmer has served as Vice  President-Sales and Marketing
of the Company since  February  1997.  From September 1993 to February 1997, Mr.
Fullmer served in various capacities with The Dial Corporation, including Senior
Brand Manager,  where he was  responsible for managing the sales and advertising
for Dial Soap.  From February 1992 to September  1993,  Mr.  Fullmer was Product
Manager for Sara Lee Corp.  From April 1989 to February 1992, Mr. Fullmer served
in various capacities with Borden, Inc. including Product Manager,  Snack Foods,
where he was responsible for managing the  merchandising  of selected snack food
products including potato chips. From May 1986 to April 1989, Mr. Fullmer was in
sales management at Frito-Lay, Inc.

Glen E. Flook. Mr. Flook has served as Vice President-Manufacturing  since March
1997.  From  January 1994 to February  1997,  Mr. Flook was employed by The Dial
Corporation as a Plant Manager for a manufacturing  operation that generated $40
million in annual revenues.  From January 1983 to January 1994, Mr. Flook served
in  various  capacities  with  Frito-Lay,  Inc.,  including  Plant  Manager  and
Production Manager.

James M. Poore.  Mr. Poore has served as a Vice  President of the Company  since
June  1995.  Mr.  Poore  co-founded  PB  Foods in 1986  and  served  as its Vice
President,  Secretary,  Treasurer and Director  until the PB  Acquisition in May
1995.  In  addition,  Mr.  Poore  served as the  Secretary  and a Director of PB
Distributing, a subsidiary of the Company, from January 1990 to May 1995, and as
Chairman of the Board and a Director of PB Texas,  a subsidiary  of the Company,
from May 1991 to May 1995.  In 1983,  he  co-founded  Groff's of Texas,  Inc., a
potato chip manufacturer in Brookshire, Texas, and served as its President until
January 1986.

Wendell T. Jones.  Mr.  Jones has been the  Director  of Sales -- Arizona  since
February 1997.  Previously,  Mr. Jones was National Sales Manager of the Company
from  January  1996 to February  1997.  From 1969 to 1996,  Mr.  Jones served in
various capacities at Frito-Lay,  Inc., including Director of Sales,  Operations
Manager and Manager-Trade Development.
                                       16
<PAGE>
Mark S. Howells.  Mr. Howells has served as Chairman of the Board of the Company
since March 1995.  For the period from March 1995 to August  1995,  Mr.  Howells
also served as President  and Chief  Executive  Officer of the  Company.  He has
served  as the  Chairman  of the  Board of PB  Southeast,  a  subsidiary  of the
Company,  since its  inception in May 1993 and served as its President and Chief
Executive  Officer from May 1993 to August  1994.  Since 1988,  Mr.  Howells has
devoted a majority  of his time to  serving as the  President  and  Chairman  of
Arizona Securities Group, Inc., a registered securities broker-dealer.

Jeffrey J.  Puglisi.  Mr.  Puglisi has served as a Director of the Company since
March 1995.  From March 1996 to August  1996,  Mr.  Puglisi  also served as Vice
Chairman of the  Company.  For the period  from  August 1995 to March 1996,  Mr.
Puglisi served as Chief  Executive  Officer of the Company.  For the period from
March 1995 to August 1995, Mr. Puglisi served as Executive Vice President, Chief
Operating  Officer,  Secretary and  Treasurer of the Company.  He also served as
President,  Chief  Executive  Officer and a Director of PB Southeast from August
1994 to August 1995.  Since 1988, Mr. Puglisi has also served as the Senior Vice
President  of  Arizona   Securities   Group,   Inc.,  a  registered   securities
broker-dealer.  In  addition,  since  August 1997 Mr.  Puglisi has served as the
investment  manager  for  Puglisi  Capital  Partners,  LP, a private  investment
partnership.

Robert C.  Pearson.  Mr.  Pearson has served as a Director of the Company  since
March 1996. Mr. Pearson has been Senior Vice President -- Corporate  Finance for
Renaissance  Capital Group, Inc. since April 1997.  Previously,  Mr. Pearson had
been  an  independent  financial  and  management  consultant   specializing  in
investments  with  emerging  growth  companies.  He has  performed  services for
Renaissance  Capital  Partners  ("RCP") in connection with the Company and other
RCP investments.  RCP is the operating  manager of Renaissance  Capital Growth &
Income Fund III, Inc. ("Renaissance"),  the owner of a 9% Convertible Debenture.
From 1990 to 1994,  Mr.  Pearson  served as Executive  Vice  President and Chief
Financial  Officer of Thomas Group,  Inc., a publicly  traded  consulting  firm.
Prior to 1990, Mr.  Pearson was Vice President -- Finance of Texas  Instruments,
Incorporated.

         Pursuant to the Debenture Loan  Agreement  dated May 31, 1995 among the
Company,  Renaissance and Wells Fargo Small Business  Investment  Company,  Inc.
(formerly  Wells Fargo Equity  Capital,  Inc.,  and  hereinafter  referred to as
"Wells Fargo"),  so long as the 9% Convertible  Debentures issued by the Company
have not been fully converted into shares of Common Stock or redeemed or paid by
the  Company,  Renaissance  shall be  entitled  to  designate  a nominee  to the
Company's Board of Directors subject to election by the Company's  stockholders.
Renaissance designated Mr. Pearson as a nominee to the Board of Directors.

Aaron M.  Shenkman.  Mr.  Shenkman has served as a Director of the Company since
June 1997.  He has  served as the  General  Partner  of Managed  Funds LLC since
October  1997.  He  served  as the  Vice-Chairman  of  Helen  of Troy  Corp.,  a
distributor  of personal care  products  from March 1997 to October  1997.  From
February 1984 to February 1997, Mr.  Shenkman was the President of Helen of Troy
Corp.  From 1993 to 1996,  Mr.  Shenkman  also served as a Director of Craftmade
International, a distributor of ceiling fans.


Items 9-12.  Documents Incorporated by Reference

         Information with respect to a portion of Item 9 and Items 10, 11 and 12
of Form 10-KSB is hereby  incorporated  by  reference  into this Part III of the
Annual Report on Form 10-KSB from the Company's Proxy Statement  relating to the
Company's  1998 Annual Meeting of  Stockholders  to be filed by the Company with
the Commission on or about April 10, 1998.
                                       17
<PAGE>
Item 13.  Exhibits and Reports of Form 8-K

         The following documents are filed as part of this Annual Report on Form
10-KSB:

         (a) The following exhibits as required by Item 601 of Regulation S-B:
<TABLE>
<CAPTION>
Exhibit
Number                                 Description
---------                              -----------
<S>  <C>      <C>
3.1  --       Certificate  of  Incorporation  of  the  Company  filed  with  the
              Secretary  of State of the State of Delaware on February 23, 1995.
              (1)
3.2  --       Certificate of Amendment to the  Certificate of  Incorporation  of
              the  Company  filed  with the  Secretary  of State of the State of
              Delaware on March 3, 1995. (1)
3.3  --       By-Laws of the Company. (1)
4.1  --       Specimen Certificate for shares of Common Stock. (2)
4.2  --       Form of  Underwriter's  Warrant  issued by the Company to Paradise
              Valley Securities, Inc. on December 11, 1996. (3)
4.3  --       Convertible  Debenture  Loan  Agreement  dated  May 31,  1995 (the
              "Debenture Loan Agreement") by and among the Company,  PB Arizona,
              PB  Distributing,  PB Texas,  PB Southeast,  Renaissance and Wells
              Fargo. (2)
4.4  --       9.00%  Convertible  Debenture  dated May 31,  1995,  issued by the
              Company to Renaissance. (1)
4.5  --       9.00%  Convertible  Debenture  dated May 31,  1995,  issued by the
              Company to Wells Fargo. (1)
10.1 --       Employment  Agreement  dated  March 11,  1996,  by and between the
              Company and David J. Brennan. (1)
10.2 --       Employment  Agreement  dated July 21,  1995,  by and  between  the
              Company and Jeffrey H. Strasberg, as amended. (1)
10.3 --       Employment Agreement dated May 31, 1995, by and between PB Arizona
              and James M. Poore (1)
10.4 --       Employment  Agreement  dated  May 20,  1996,  by and  between  the
              Company and Wendell T. Jones. (1)
10.5 --       Non-Qualified Stock Option Agreements dated August 1, 1995, August
              31, 1995 and  February  29,  1996,  by and between the Company and
              Mark S. Howells. (1)
10.6 --       Non-Qualified Stock Option Agreements dated August 1, 1995, August
              31, 1995 and  February  29,  1996,  by and between the Company and
              Jeffrey J. Puglisi. (1)
10.7 --       Non-Qualified  Stock Option Agreement dated August 1, 1995, by and
              between the Company and Parris H. Holmes, Jr. (1)
10.8 --       Accounts Receivable Security Agreement dated July 26, 1996, by and
              between  PB  Arizona  and First  Community  Financial  Corporation
              ("First Community"). (1)
10.9 --       Guaranty  and  Subordination  dated  July 26,  1996,  issued by PB
              Arizona to First Community.  10.10 -- Multiple Advance  Promissory
              Note dated July 26, 1996, issued by PB Arizona to First Community.
              (1)
10.11 --      Accounts Receivable Security Agreement dated July 26, 1996, by and
              between PB Distributing and First Community, with exhibits. (1)
10-12 --      Guaranty and  Subordination  Agreement dated July 26, 1996, issued
              by PB Distributing to First Community. (1)
10.13 --      Multiple Advance Promissory Note dated July 26, 1996, issued by PB
              Distributing to First Community. (1)
10.14 --      Security  Agreement  dated  July  26,  1996,  by  and  between  PB
              Southeast and First Community. (1)
10.15 --      Security  Agreement  dated July 26, 1996,  by and between PB Texas
              and First Community. (1)
10.16 --      Form of  Security  Agreements  dated  May 31,  1995,  by and among
              Renaissance,  Wells Fargo and each of the Company,  PB Arizona, PB
              Southeast, PB Texas and PB Distributing. (1)
10.17 --      Master  Equipment Lease Agreement dated September 22, 1995, by and
              between Banc One Arizona Leasing Corporation and PB Arizona ("Banc
              One Lease Agreement"), with equipment schedules. (1)
10.18 --      Corporate   Guaranty  dated  September  25,  1995,  issued  by  PB
              Distributing to Banc One Arizona Leasing Corporation in connection
              with the Banc One Lease Agreement. (1)
10.19 --      Equipment  Lease Agreement dated December 12, 1995, by and between
              PB Arizona and FINOVA Capital Corporation. (1)
10.20 --      Guaranty dated December 12, 1995,  issued by the Company to FINOVA
              Capital Corporation. (1)
10.21 --      Master Lease Agreement (the "LCA Lease  Agreement") dated February
              1, 1996,  by and between PB Arizona and LCA  Capital  Corp.  (also
              known as LCA, a Division  of  Associates  Commercial  Corporation)
              ("LCA"). (1)
10.22 --      Purchase  Agreement  dated  February  1, 1996,  by and  between PB
              Arizona and LCA in connection with the LCA Lease Agreement. (1)
10.23 --      Corporate  Guaranty  dated as of February  1, 1996,  issued by the
              Company to LCA in connection with LCA Lease Agreement. (1) Exhibit
              Number Description
</TABLE>
                                       18
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number                                 Description
---------                              -----------
<S>   <C>      <C>
10.24 --      Loan  Agreement  dated  September  11,  1996,  by and  between the
              Company and National Bank of Arizona ("NBA"). (1)
10.25 --      Promissory Note dated September 11, 1996, in the principal  amount
              of $2,400,000, issued by the Company to NBA. (1)
10.26 --      Deed of Trust,  Security  Agreement and Financing  Statement dated
              September 11, 1996, by and between the Company and NBA. (1)
10.27 --      Assignment of Permits, Licenses,  Approvals,  Deposits,  Contracts
              and Documents dated September 11, 1996, by and between the Company
              and NBA. (1)
10.28 --      Specific  Assignment of Development  Agreement dated September 11,
              1996, by and between the Company and NBA. (1)
10.29 --      Development  Agreement  dated May 14,  1996,  by and  between  the
              Company and the City of Goodyear, Arizona. (1)
10.30 --      Agreement  dated August 29,  1996,  by and between the Company and
              Westminster Capital, Inc. ("Westminster"), as amended. (1)
10.31 --      Secured Promissory Note dated September 11, 1996, in the principal
              amount of $1,250,000, issued by the Company to Westminster. (1)
10.32 --      Unsecured  Environmental  Indemnity  Agreement dated September 11,
              1996, by the Company in favor of Westminster. (1)
10.33 --      Commercial Pledge and Security Agreement dated September 11, 1996,
              by and among the Company, NBA and Westminster. (1)
10.34 --      Subordinated  Deed of Trust,  Security  Agreement,  Assignment  of
              Leases and Rents and Fixture  Filing dated  September 11, 1996, by
              and among the Company,  First American Title Insurance Company and
              Westminster. (1)
10.35 --      Standard  Form of Agreement  between  Owner and  Contractor  dated
              August 8, 1996, between the Company and Newcon, Inc. (1)
10.36 --      Agreement for the Purchase and Sale of Assets and  Assumption  and
              Liabilities dated November 11, 1994, by and between PB Arizona, PB
              Foods, James Poore, Donald Poore and Amelia Poore. (1)
10.37 --      Form  of  Independent  Distributor  Agreement  by and  between  PB
              Distributing and independent distributors. (1)
10.38 --      Agreement for the Exclusive Right to Purchase, Package, Distribute
              and Sell "Low Fat" Snack Foods dated  September  11, 1996,  by and
              between  the Company and Great  Snaxx.  (Certain  portions of this
              document  are  omitted   pursuant  to  a  confidential   treatment
              request.) (2)
10.39 --      Amendment No. 1 dated October 14, 1996, to Warrant dated September
              11, 1996, issued by the Company to Westminster. (2)
10.40 --      Waiver  Letter  dated  August  1.  1996,  from   Renaissance,   in
              connection with the Debenture Loan Agreement. (2)
10.41 --      Waiver  Letter  dated  August  27,  1996,  from  Wells  Fargo,  in
              connection with the Debenture Loan Agreement. (2)
10.42 --      Letter   Agreement   dated   November   5,  1996,   amending   the
              Non-Qualified  Stock Option  Agreement dated February 29, 1996, by
              and between the Company and Mark S. Howells. (2)
10.43 --      Letter   Agreement   dated   November   5,  1996,   amending   the
              Non-Qualified  Stock Option  Agreement dated February 29, 1996, by
              and between the Company and Jeffrey J. Puglisi. (2)
10.44 --      Non-Qualified Stock Option Agreement dated as of October 22, 1996,
              by and between the Company and Mark S. Howells. (2)
10.45 --      Letter  Agreement dated as of November 5, 1996, by and between the
              Company and Jeffrey J. Puglisi. (2)
10.46 --      Letter  Agreement dated as of November 5, 1996, by and between the
              Company and David J. Brennan. (2)
10.47 --      Stock Option  Agreement dated October 22, 1996, by and between the
              Company and David J. Brennan. (3)
10.48 --      Amendment to Accounts Security Receivable Agreement dated November
              1, 1996, by and between PB Arizona and First Community. (2)
10.49 --      Amendment to Accounts Receivable Security Agreement dated November
              1, 1996, by and between PB Distributing and First Community. (2)
10.50 --      Letter Agreement dated November 1, 1996, by and among the Company,
              Mark S. Howells,  Jeffrey J. Puglisi,  David J. Brennan and Parris
              H. Holmes, Jr. (2)
10.51 --      Letter  Agreement  dated  December  4, 1996,  by and  between  the
              Company and Jeffrey J. Puglisi, relating to stock options. (3)
10.52 --      Letter  Agreement  dated  December  4, 1996,  by and  between  the
              Company and Mark S. Howells, relating to stock options. (3)
</TABLE>
                                       19
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number                                 Description
---------                              -----------
<S>   <C>      <C>
10.53 --      Letter  Agreement  dated  December  4. 1996,  by and  between  the
              Company and Parris H. Holmes, Jr., relating to stock options. (3)
10.54 --      Letter  Agreement  dated  December  4, 1996,  by and  between  the
              Company and David J. Brennan, relating to stock options. (3)
10.55 --      Letter  Agreement  dated  December  4, 1996,  by and  between  the
              Company and Jeffrey H. Strasberg, relating to stock options. (3)
10.56 --      Form of Underwriting  Agreement  entered into on December 6, 1996,
              by and between the  Company,  Paradise  Valley  Securities,  Inc.,
              Renaissance  and  Wells  Fargo.   (Incorporated  by  reference  to
              Amendment  No. 4 to the Company's  Registration  Statement on Form
              SB-2, Registration No. 333-5594-LA.)
10.57 --      Employment  Agreement  dated  January 24, 1997, by and between the
              Company and Eric J. Kufel. (4)
10.58 --      First Amendment to Employment Agreement dated February 2, 1997, by
              and between the Company and David J. Brennan. (4)
10.59 --      Employment  Agreement  dated  February 4, 1997, by and between the
              Company and Scott D. Fullmer. (4)
10.60 --      Employment  Agreement  dated February 14, 1997, by and between the
              Company and Glen E. Flook. (4)
10.61 --      Amendment dated January 28, 1997, amending Employment Agreement by
              and between the Company and Wendell T. Jones. (4)
10.62 --      Second Loan Modification  Agreement dated January 10, 1997, by and
              between the Company and NBA. (4)
10.63 --      Amendment to Accounts Receivable Security Agreement dated December
              30, 1996, by and between PB Distributing and First Community. (4)
10.64 --      Amendment to Accounts Receivable Security Agreement dated December
              30, 1996, by and between PB Arizona and First Community. (4)
10.65 --      Promissory Note Modification Agreement dated December 30, 1996, by
              and between PB Distributing and First Community. (4)
10.66 --      Promissory Note Modification Agreement dated December 30, 1996, by
              and between PB Arizona and First Community. (4)
10.67 --      Commercial Real Estate  Purchase  Contract and Receipt for Deposit
              dated  January  22,  1997,  by and  between  the  Company and D.F.
              Properties, Inc. (4)
10.68 --      Separation  Agreement  and  Release of All Claims  dated March 10,
              1997,  by and  between  the  Company  and  Jeffrey  H.  Strasberg.
              (Incorporated  by reference to the Company's  Quarterly  Report on
              Form  10-QSB  for the  quarter  ended  March  31,  1997,  File No.
              001-14556.)
10.69 --      Employment  Agreement  dated  April 10,  1997,  by and between the
              Company and Thomas W.  Freeze.  (Incorporated  by reference to the
              Company's  Quarterly  Report on Form 10-QSB for the quarter  ended
              March 31, 1997, File No. 001-14556.)
10.70 --      Asset Purchase,  Licensing and Distribution  Agreement dated as of
              June  1,  1997,   by  and  between  PB  Texas  and  David   Hecht.
              (Incorporated by reference to the Company's Current Report on Form
              8-K dated June 4, 1997, File No. 001-14556.)
10.71 --      Fixed  Rate Note  dated  June 4,  1997,  by and  between La Cometa
              Properties,  Inc. and Morgan  Guaranty  Trust Company of New York.
              (Incorporated  by reference to the Company's  Quarterly  Report on
              Form  10-QSB  for the  quarter  ended  June  30,  1997,  File  No.
              001-14556.)
10.72 --      Deed of Trust and Security  Agreement  dated June 4, 1997,  by and
              between  La Cometa  Properties,  Inc.  and Morgan  Guaranty  Trust
              Company of New York.  (Incorporated  by reference to the Company's
              Quarterly  Report on Form  10-QSB for the  quarter  ended June 30,
              1997, File No. 001-14556.)
10.73 --      Guaranty  Agreement dated June 4, 1997, by and between the Company
              and Morgan  Guaranty Trust Company of New York.  (Incorporated  by
              reference to the Company's Quarterly Report on Form 10-QSB for the
              quarter ended June 30, 1997, File No. 001-14556.)
10.74 --      Equipment  Lease  Agreement  dated June 9, 1997, by and between PB
              Arizona and FINOVA Capital Corporation. (Incorporated by reference
              to the Company's  Quarterly  Report on Form 10-QSB for the quarter
              ended June 30, 1997, File No. 001-14556.)
10.75 --      Poore   Brothers,   Inc.   1995  Stock  Option  Plan,  as  amended
              (Incorporated  by reference to the Company's  Quarterly  Report on
              Form  10-QSB  for the  quarter  ended  June  30,  1997,  File  No.
              001-14556.)
10.76 --      Fixed  Rate Note  dated  June 4,  1997,  by and  between La Cometa
              Properties,  Inc. and Morgan  Guaranty  Trust Company of New York.
              (5)
10.77 --      Deed of Trust and Security  Agreement  dated June 4, 1997,  by and
              between  La Cometa  Properties,  Inc.  and Morgan  Guaranty  Trust
              Company of New York. (5)
</TABLE>
                                       20
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number                                 Description
---------                              -----------
<S>   <C>      <C>
10.78 --      Guaranty  Agreement dated June 4, 1997, by and between the Company
              and Morgan Guaranty Trust Company of New York. (5)
10.79 --      Equipment  Lease  Agreement  dated June 9, 1997, by and between PB
              Arizona and FINOVA Capital Corporation. (5)
21.1 --       List of Subsidiaries of the Company. (6)
27.1 --       Restated Financial Data Schedule for 1997 (6)
27.2 --       Restated Financial Data Schedule for 1996 (6)
</TABLE>

---------------------------------

(1)  Incorporated by reference to the Company's  Registration  Statement on Form
          SB-2, Registration No. 333-5594-LA.
(2)  Incorporated  by  reference to  Amendment  No. 1 to Company's  Registration
          Statement on Form SB-2, Registration No. 333-5594-LA.
(3)  Incorporated by reference to Amendment No. 3 to the Company's  Registration
          Statement on Form SB-2, Registration No. 333-5594-LA.
(4)  Incorporated by reference to the Company's Annual Report on Form 10-KSB for
          the fiscal year ended December 31, 1996.
(5)  Incorporated by reference to the Company's  Quarterly Report on Form 10-QSB
          for the three-month period ended June 30, 1997.
(6)  Filed herewith.

         (b) Reports on Form 8-K.

              (1) Current Report on Form 8-K, reporting the consolidation of the
                  Company's  manufacturing  operations  into the  Company's  new
                  facility in Goodyear,  Arizona and the related  closure of the
                  Company's  manufacturing  operation  in  LaVergne,   Tennessee
                  (filed with the Commission on October 2, 1997).
                                       21
<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:  March 30, 1998                  POORE BROTHERS, INC.

                                        By:  /s/ Eric J. Kufel
                                           -------------------------------------
                                                        Eric J. Kufel
                                           President and Chief Executive Officer

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  report has been  signed  below by the  following  persons on behalf of the
Registrant, in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
                 Signature                                           Title                                   Date
                 ---------                                           -----                                   ----
<S>                                             <C>                                                     <C>
             /s/ Eric J. Kufel                  President, Chief Executive Officer, and Director        March 30, 1998
---------------------------------------------            (Principal Executive Officer)
               Eric J. Kufel

            /s/ Thomas W. Freeze               Vice President, Chief Financial Officer, Treasurer       March 30, 1998
---------------------------------------------                    and Secretary
              Thomas W. Freeze                          (Principal Financial Officer and
                                                         Principal Accounting Officer)

            /s/ Mark S. Howells                        Chairman of the Board of Directors               March 30, 1998
---------------------------------------------
              Mark S. Howells

           /s/ Jeffrey J. Puglisi                                   Director                            March 30, 1998
---------------------------------------------
             Jeffrey J. Puglisi

           /s/ Robert C. Pearson                                    Director                            March 30, 1998
---------------------------------------------
             Robert C. Pearson

           /s/ Aaron M. Shenkman                                    Director                            March 30, 1998
---------------------------------------------
             Aaron M. Shenkman
</TABLE>
                                       22
<PAGE>
                        REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholders and Board of Directors
Poore Brothers, Inc.

We have audited the accompanying  consolidated  balance sheet of Poore Brothers,
Inc. and  subsidiaries  as of December 31,  1997,  and the related  consolidated
statements of operation,  shareholders' equity, and cash flows for the year then
ended.  These  consolidated  financial  statements are the responsibility of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial statements based on our audit.

We conducted our audit 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 audit provides a reasonable basis for our opinion.

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


/s/  ARTHUR ANDERSEN LLP

ARTHUR ANDERSEN LLP

Phoenix, Arizona,
  February 12, 1998.
                                       23
<PAGE>
                        REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholders and Board of Directors
Poore Brothers, Inc.

We have audited the accompanying  consolidated  balance sheet of Poore Brothers,
Inc. and  Subsidiaries  as of December 31,  1996,  and the related  consolidated
statements of operations, shareholders' equity, and cash flows for the year then
ended.  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 audit.

We conducted our audit 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 audit provides a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the consolidated  financial position of Poore
Brothers,  Inc. and  Subsidiaries as of December 31, 1996, and the  consolidated
results  of their  operations  and their  cash  flows for the year then ended in
conformity with generally accepted accounting principles.


/s/  COOPERS & LYBRAND L.L.P.

COOPERS & LYBRAND L.L.P.


Phoenix, Arizona
March 4, 1997
                                       24
<PAGE>
                      POORE BROTHERS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                                        December 31,
                                                                               ----------------------------
                                                                                   1997            1996
                                                                               ------------    ------------
<S>                                                                            <C>             <C>
                                     ASSETS
Current assets:
   Cash and cash equivalents ...............................................   $  1,622,751    $  3,603,850
   Restricted certificate of deposit .......................................           --         1,250,000
   Accounts receivable, net of allowance of $174,000 in 1997 and $121,000
     in 1996 ...............................................................      1,528,318       1,912,064
   Note receivable .........................................................         78,414            --
   Inventories .............................................................        473,025         863,309
   Other current assets ....................................................        175,274         193,581
                                                                               ------------    ------------
     Total current assets ..................................................      3,877,782       7,822,804

Property and equipment, net ................................................      6,602,435       4,032,343
Intangible assets, net .....................................................      2,294,324       2,470,231
Other assets, net ..........................................................        100,673          15,067
                                                                               ------------    ------------
     Total assets ..........................................................   $ 12,875,214    $ 14,340,445
                                                                               ============    ============

                      LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
   Accounts payable ........................................................   $    824,129    $  1,318,952
   Accrued liabilities .....................................................        502,793         500,192
   Current portion of long-term debt .......................................      1,127,217       1,818,058
                                                                               ------------    ------------
     Total current liabilities .............................................      2,454,139       3,637,202

Long-term debt, less current portion .......................................      5,017,724       3,355,651
Other liabilities ..........................................................           --             6,000
                                                                               ------------    ------------
     Total liabilities .....................................................      7,471,863       6,998,853
                                                                               ------------    ------------
Commitments and contingencies
Shareholders' equity:
   Preferred stock, $100 par value; 50,000 shares authorized; none issued
     and outstanding at December 31, 1997 and 1996, respectively ...........           --              --
   Common stock, $.01 par value; 15,000,000 shares authorized; 7,051,657 and
     6,648,824    shares issued and outstanding at December 31, 1997 and 1996,
      respectively .........................................................         70,516          66,488
   Additional paid-in capital ..............................................     10,794,768       9,702,940
   Accumulated deficit .....................................................     (5,461,933)     (2,427,836)
                                                                               ------------    ------------
     Total shareholders' equity ............................................      5,403,351       7,341,592
                                                                               ------------    ------------
     Total liabilities and shareholders' equity ............................   $ 12,875,214    $ 14,340,445
                                                                               ============    ============
</TABLE>
   The accompanying notes are an integral part of these financial statements.
                                       25
<PAGE>
                      POORE BROTHERS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS


                                                   Years ended December 31,
                                                 ----------------------------
                                                     1997            1996
                                                 ------------    ------------


  Net sales ..................................   $ 15,731,796    $ 17,960,484


  Cost of sales ..............................     13,709,979      14,986,374
                                                 ------------    ------------

     Gross profit ............................      2,021,817       2,974,110

  Selling, general and administrative expenses      3,982,428       3,275,322

  Closing of Tennessee manufacturing operation        581,492            --

  Sale of Texas distribution business ........        164,383            --
                                                 ------------    ------------

     Operating loss ..........................     (2,706,486)       (301,212)
                                                 ------------    ------------

  Interest income ............................        128,205          13,211

  Interest expense ...........................       (455,816)       (403,677)
                                                 ------------    ------------
                                                     (327,611)       (390,466)
                                                 ------------    ------------
      Net loss ...............................   $ (3,034,097)   $   (691,678)
                                                 ============    ============

    Net loss per common share:
      Basic ..................................   $      (0.43)   $      (0.16)
                                                 ============    ============
      Diluted ................................   $      (0.43)   $      (0.16)
                                                 ============    ============

    Weighted average number of common shares:
      Basic ..................................      7,018,324       4,352,263
                                                 ============    ============
      Diluted ................................      7,018,324       4,352,263
                                                 ============    ============

   The accompanying notes are an integral part of these financial statements.
                                       26
<PAGE>
                      POORE BROTHERS, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
                                                  Common Stock
                                          ----------------------------      Paid-in       Accumulated
                                             Shares          Amount         Capital         Deficit           Total
                                          ------------    ------------    ------------    ------------    ------------
<S>                                          <C>          <C>             <C>             <C>             <C>
Balance, December 31, 1995 ............      3,598,924    $     35,989    $  2,516,466    $ (1,736,158)   $    816,297
   Repurchases of common stock ........        (50,100)           (501)        (56,209)           --           (56,710)
   Conversion of convertible debentures        367,348           3,674         396,735            --           400,409
   Sales of common stock ..............      2,732,652          27,326       6,215,948            --         6,243,274
   Issuance of warrants ...............           --              --           630,000            --           630,000
   Net loss ...........................           --              --              --          (691,678)       (691,678)
                                          ------------    ------------    ------------    ------------    ------------
Balance, December 31, 1996 ............      6,648,824          66,488       9,702,940      (2,427,836)      7,341,592
   Sale of common stock ...............        337,500           3,375       1,020,300            --         1,023,675
   Exercise of common stock options ...         65,333             653          71,528            --            72,181
   Net loss ...........................           --              --              --        (3,034,097)     (3,034,097)
                                          ------------    ------------    ------------    ------------    ------------
Balance, December 31, 1997 ............      7,051,657    $     70,516    $ 10,794,768    $ (5,461,933)   $  5,403,351
                                          ============    ============    ============    ============    ============
</TABLE>
   The accompanying notes are an integral part of these financial statements.
                                       27
<PAGE>
                      POORE BROTHERS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                                  Years ended December 31,
                                                                                 --------------------------
                                                                                     1997           1996
                                                                                 -----------    -----------
<S>                                                                              <C>            <C>
Cash flows used in operating activities:
   Net loss ..................................................................   $(3,034,097)   $  (691,678)
   Adjustments to reconcile net loss to net cash used in operating activities:
     Depreciation ............................................................       409,962        284,409
     Amortization ............................................................       175,907        175,788
     Bad debt expense ........................................................        72,489         60,230
     Loss on disposition of businesses .......................................       478,377           --
     Change in operating assets and liabilities:
       Accounts receivable ...................................................       253,718       (767,179)
       Inventories ...........................................................       233,456       (181,518)
       Other assets and liabilities ..........................................       (37,518)      (172,786)
       Accounts payable and accrued liabilities ..............................      (616,580)       724,687
                                                                                 -----------    -----------
                          Net cash used in operating activities ..............    (2,064,286)      (568,047)
                                                                                 -----------    -----------
Cash flows used in  investing activities:
   Proceeds on disposal of property ..........................................       773,309           --
   Sale of Texas distribution business .......................................        78,414           --
   Purchase of property and equipment ........................................    (2,950,812)      (675,620)
                                                                                 -----------    -----------
                         Net cash used in investing activities ...............    (2,099,089)      (675,620)
                                                                                 -----------    -----------
Cash flows from financing activities:
   Proceeds from issuance of common stock ....................................     1,253,431      7,635,781
   Payments on purchase of common stock ......................................          --          (56,709)
   Stock issuance costs ......................................................      (157,575)    (1,392,508)
   Proceeds from issuance of debt ............................................     1,734,627           --
   Sale/(purchase) of restricted certificate of deposit ......................     1,250,000     (1,250,000)
   Payments made on long-term debt ...........................................    (2,133,034)      (267,920)
   Net increase (decrease) in working capital line of credit .................       234,827        (21,730)
                                                                                 -----------    -----------
                         Net cash provided by financing activities ...........     2,182,276      4,646,914
                                                                                 -----------    -----------
Net increase (decrease) in cash and cash equivalents .........................    (1,981,099)     3,403,247
Cash and cash equivalents at beginning of year ...............................     3,603,850        200,603
                                                                                 -----------    -----------
Cash and cash equivalents at end of year .....................................   $ 1,622,751    $ 3,603,850
                                                                                 ===========    ===========

Supplemental disclosures of cash flow information:
   Cash paid during the year for interest, net of amounts capitalized ........   $   474,648    $   416,764
   Summary of noncash investing and financing activities:
       Capital lease obligation incurred - equipment acquisition .............       100,077        186,220
     Construction loan for new facility ......................................       998,746      1,248,117
     Mortgage impounds for interest, taxes and insurance .....................        35,990           --
     Note received for sale of Texas distribution business ...................        78,414           --
        Warrants issued ......................................................          --          630,000
        Conversion of debt to common stock ...................................          --          400,409
</TABLE>
   The accompanying notes are an integral part of these financial statements.
                                       28
<PAGE>
                      POORE BROTHERS, INC. AND SUBSIDIARIES
                          NOTES TO FINANCIAL STATEMENTS

1. Organization, Business and Summary of Significant Accounting Policies:

      Poore  Brothers,  Inc.,  (the  "Company"),  a  Delaware  corporation,  was
organized  in February  1995 as a holding  company and on May 31, 1995  acquired
substantially  all  of  the  equity  of  Poore  Brothers  Southeast,  Inc.  ("PB
Southeast") in an exchange  transaction  pursuant to which 1,560,000  previously
unissued  shares of the Company's  common  stock,  par value $.01 per share (the
"Common Stock"),  were exchanged for 150,366 issued and outstanding shares of PB
Southeast's  common stock.  The exchange  transaction with PB Southeast has been
accounted for similar to a  pooling-of-interests  since both entities had common
ownership and control immediately prior to the transaction.

     On May 31, 1995, the Company acquired (i)  substantially all of the assets,
subject to certain liabilities of Poore Brothers Foods, Inc.; (ii) a 100% equity
interest in Poore Brothers Distributing,  Inc.; and (iii) an 80% equity interest
in Poore Brothers of Texas, Inc. ("PB Texas"). During the remainder of 1995, the
Company  acquired  an  additional  equity  interest  in PB Texas,  bringing  the
Company's  total  equity  interest to 94%.  The total  purchase  price for these
acquisitions was $4,052,631, and the assets acquired were primarily property and
equipment,  accounts receivable and inventory.  The purchases were financed with
$500,000 of notes payable, 300,000 shares of Common Stock issued to the sellers,
and by the issuance of Convertible  Debentures and the sale of Common Stock in a
private offering. In 1997, the Company acquired the remaining 6% equity interest
in PB Texas for $4,532 in cash.  These  acquisitions  have been accounted for as
purchases in accordance with Accounting  Principals  Board No. 16.  Accordingly,
only the  results  of their  operations  subsequent  to  acquisition  have  been
included in the Company's  results.  In connection  with the  acquisitions,  the
Company  recorded  goodwill  of  $2,482,494,  which  is  being  amortized  on  a
straight-line basis over a twenty-year period.

     During 1997, the Company sold its PB Texas distribution business and closed
its PB Southeast manufacturing operation.


Business Objectives, Risks and Plans

     The Company  manufactures and distributes potato chips and other snack food
products  under the Poore  Brothers  (TM) brand name,  as well as private  label
potato  chips,  and also  distributes  a wide  variety  of  other  independently
manufactured  snack food items. The Company sells its products  primarily in the
southwestern  United  States.  The Company's  business  objective is to become a
leading  regional  manufacturer  and distributor of branded premium potato chips
and other salty snack foods by providing  high quality  products at  competitive
prices that are superior in taste to comparable  products.  The Company plans to
achieve growth  primarily  through  increased  distribution  and sales volume in
existing markets, development of new products and acquisitions.

     Although certain of the Poore Brothers  companies have operated for several
years,  the Company as a whole has a relatively  brief  operating  history.  The
Company  has had  significant  operating  losses  to date and has  never  made a
profit.   Successful   future   operations   are   subject  to  certain   risks,
uncertainties,   expenses  and  difficulties   frequently   encountered  in  the
establishment  and  growth of a new  business  in the snack food  industry.  The
market for salty snack foods, such as potato chips,  tortilla chips, popcorn and
pretzels, is large and intensely  competitive.  The industry is dominated by one
significant   competitor  and  includes  many  other  competitors  with  greater
financial and other resources than the Company.

     During  1997,  the  Company   identified   and   implemented  a  number  of
restructuring  actions to reposition  the Company in the  intensely  competitive
snack food industry. These actions included significant  organizational changes,
discontinuance   of  unprofitable   product  lines,  sale  of  its  unprofitable
distribution  business  in Texas,  and  closure  of its  unprofitable  Tennessee
manufacturing  operation.  See Note 2. In addition,  the Company  completed  the
construction  of a modern  manufacturing  facility,  negotiated new raw material
contracts  and  purchased  new  processing  and  packaging  equipment to improve
manufacturing efficiencies.

     These  actions  have  reduced  the  Company's  fixed  selling,  general and
administrative  costs and significantly  reduced cost of sales, despite the loss
of revenues  resulting  from the closure of the Tennessee  operation and sale of
its Texas  distribution  business.  In addition,  management is testing  various
marketing  programs  for the first time  (e.g.  radio and  outdoor  advertising,
coupons,  promotions and event sponsorship) to determine which programs are most
cost effective in generating  revenue growth. As a result,  management  believes
that the Company will  generate  positive cash flow in 1998 and  therefore,  its
existing  working  capital and  borrowing  facilities  as well as cash flow from
operations  should  enable the Company to meet its operating  cash  requirements
through 1998.
                                       29
<PAGE>
                      POORE BROTHERS, INC. AND SUBSIDIARIES
                   NOTES TO FINANCIAL STATEMENTS - (Continued)

1.  Organization,  Business  and  Summary of  Significant  Accounting  Policies:
(continued)

Principles of Consolidation

     The  consolidated  financial  statements  include  the  accounts  of  Poore
Brothers, Inc. and all of its controlled  subsidiaries.  In all situations,  the
Company owns from 99% to 100% of the voting interests of its  subsidiaries.  All
significant intercompany amounts and transactions have been eliminated.

Use of 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,
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.

Fair value of Financial Instruments

     At  December  31,  1996  and  1997,  the  carrying  value  of cash and cash
equivalents, accounts receivable, note receivable, accounts payable, and accrued
liabilities  approximate  fair values since they are  short-term in nature.  The
carrying  value  of the  long-term  debt  approximates  fair-value  based on the
borrowing rates currently available to the Company for long-term borrowings with
similar terms.

     The  Company  estimates  fair  values  of  financial  instruments  by using
available market information. Considerable judgement is required in interpreting
market data to develop the estimates of fair value.  Accordingly,  the estimates
may not be indicative of the amounts that the Company could realize in a current
market  exchange.   The  use  of  different  market   assumptions  or  valuation
methodologies could have a material effect on the estimated fair value amounts.

Basis of Presentation

     Certain expenses relating to manufacturing  costs and promotional  expenses
have been reclassified for the previously reported periods shown as part of this
current  filing  in  order  to  conform  to  the  current  financial   statement
classifications and to those that are preferred in the industry. The current and
previously reported amounts are shown in the table below.

                                                            Year ended
                                                         December 31, 1996
                                                   ----------------------------
                                                    Previously        Current
                                                     Reported         Filing
                                                   ------------    ------------
 Net sales .....................................   $ 17,219,641    $ 17,960,484
 Cost of sales .................................     13,091,194      14,986,374
 Gross profit ..................................      4,128,447       2,974,110
 Selling, general and administrative expenses ..      4,429,659       3,275,322
 Operating (loss) ..............................       (301,212)       (301,212)

Cash and Cash Equivalents

     Cash  equivalents  consist of highly  liquid  investments  with an original
maturity  of three  months or less when  purchased.  Cash at  December  31, 1997
includes  $100,000 of restricted cash held in escrow in connection with the sale
of the Company's former facilities located in Goodyear, Arizona.

Restricted Certificate of Deposit

     Restricted  certificate of deposit at December 31, 1996 represents  amounts
segregated as collateral for a construction loan. The construction loan was paid
in full in 1997. See Note 6.
                                       30
<PAGE>
                      POORE BROTHERS, INC. AND SUBSIDIARIES
                   NOTES TO FINANCIAL STATEMENTS - (Continued)

1.  Organization,  Business  and  Summary of  Significant  Accounting  Policies:
(continued)

Inventories

      Inventories  are  stated at the  lower of cost  (first-in,  first-out)  or
market.

Property and Equipment

      Property and  equipment are recorded at cost.  Cost includes  expenditures
for major improvements and replacements.  Maintenance and repairs are charged to
operations when incurred.  When assets are retired or otherwise disposed of, the
related  costs and  accumulated  depreciation  are removed from the  appropriate
accounts, and the resulting gain or loss is recognized.  Depreciation expense is
computed using the  straight-line  method over the estimated useful lives of the
assets, ranging from 2 to 30 years.

      During  construction,  the Company capitalized interest in accordance with
Statement of Financial  Accounting  Standards (SFAS) No. 34,  "Capitalization of
Interest Cost."  Capitalized  interest  totaled $30,492 and $687,177 during 1997
and  1996,  respectively.  Total  interest  costs  incurred  were  $486,308  and
$1,090,854 during 1997 and 1996, respectively.

Intangible Assets

      Organizational  costs  are  recorded  at  cost  and  amortized  using  the
straight-line  method over a five-year  period.  Goodwill is amortized using the
straight-line  method over twenty years.  Accumulated  amortization was $315,819
and $191,463 at December 31, 1997 and 1996,  respectively.  The Company assesses
the recoverability of goodwill at each balance sheet date by determining whether
amortization  of the assets  over their  original  estimated  useful life can be
recovered through estimated future undiscounted cash flow.

Stock-Based Compensation

      In October 1995, the Financial Accounting Standards Board issued SFAS 123,
"Accounting  for  Stock-based  Compensation",  which  defines a fair value based
method of accounting for employee  stock options or similar equity  instruments.
However,  it also  allows an entity  to  continue  to  account  for these  plans
according to APB 25,  provided pro forma  disclosures  of net income  (loss) and
earnings  (loss)  per  share  are  made as if the fair  value  based  method  of
accounting  defined by SFAS 123 had been  applied.  The  Company  has elected to
continue  to  measure   compensation  expense  related  to  employee  (including
directors) stock purchase options using APB 25.

Revenue Recognition

      Sales and related cost of sales are recognized upon shipment of products.

Income Taxes

      Deferred tax assets and liabilities are recognized for the expected future
tax  consequences of events that have been included in the financial  statements
or income tax returns.  Deferred tax assets and liabilities are determined based
on the  difference  between the financial  statement and tax bases of assets and
liabilities using enacted rates expected to apply to taxable income in the years
in which those  differences are expected to be recovered or settled.  The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
the period that includes the enactment date.

Loss Per Share

      During 1997, the Company adopted SFAS 128, "Earnings Per Share".  Pursuant
to SFAS 128,  basic earnings per common share is computed by dividing net income
(loss) by the  weighted  average  number of shares of common  stock  outstanding
during the year.  Exercises  of  outstanding  stock  options and  conversion  of
convertible  debentures  were not assumed for  purposes of  calculating  diluted
earning  per share for the years  ended  December  31,  1997 and 1996,  as their
effect was  anti-dilutive.
                                       31
<PAGE>
                      POORE BROTHERS, INC. AND SUBSIDIARIES
                   NOTES TO FINANCIAL STATEMENTS - (Continued)

1.    Organization and Summary of Significant Accounting Policies:  (continued)

Loss Per Share (continued)

                                                       Years Ended
                                                       December 31,
                                                --------------------------
                                                   1997           1996
                                                -----------    -----------
     Basic loss per share:
       Loss available to common shareholders    $(3,034,097)   $  (691,678)
       Weighted average common shares             7,018,324      4,352,263
                                                -----------    -----------
                      Loss per share-basic      $     (0.43)   $     (0.16)
                                                ===========    ===========
      Diluted loss per share:
       Loss available to common shareholders    $(3,034,097)   $  (691,678)
       Weighted average common shares             7,018,324      4,352,263
       Common stock equivalents                        --             --
                                                -----------    -----------
                       Loss per share-diluted   $     (0.43)   $     (0.16)
                                                ===========    ===========


2.    Restructuring Actions

     On June 4, 1997, PB Texas sold its Houston,  Texas distribution business to
Mr. David Hecht (the  "Buyer"),  pursuant to an Asset  Purchase,  Licensing  and
Distribution  Agreement  (the  "Agreement")  effective  June 1, 1997.  Under the
Agreement, the Buyer was sold certain assets of PB Texas (including inventories,
vehicles and capital  equipment)  and became the  Company's  distributor  in the
Houston,  Texas market.  The purchase  price for the assets sold by PB Texas was
approximately  $157,000,  50% of  which  was  paid by the  Buyer  in cash at the
closing  and 50% of which  will be paid  pursuant  to a one  year,  non-interest
bearing promissory note issued by the Buyer to the Company.  As a result of this
transaction, the PB Texas distribution operation has been dissolved. The Company
incurred one-time restructuring charges of approximately $164,000 related to the
sale.  These charges include  amounts  related to asset  write-downs of $97,000,
salaries and benefits of $57,000, and lease termination costs of $10,000.

     In  September  1997,  the  Company  consolidated  all of its  manufacturing
operations into its new 60,000 square foot Goodyear,  Arizona facility.  As part
of the consolidation,  the Company closed its LaVergne, Tennessee (PB Southeast)
facility on September 30, 1997 resulting in the termination of 30 employees. The
Company incurred  one-time  restructuring  charges of approximately  $581,000 in
connection with the closure of its PB Southeast manufacturing  operation.  These
charges  included  amounts  related  to asset  write-downs  of  $381,000,  lease
termination  expenses of $55,000,  other facility  shutdown expenses of $33,000,
freight associated with equipment transfers of $47,000 and severance and related
benefits of $65,000.

     In connection with the Company's sale of the Texas distribution business in
June 1997 and the closure of the Tennessee  manufacturing operation in September
1997,  $478,000  of the  $746,000  in  total  restructuring  charges  represents
non-cash  asset  write-downs.  Of the  remaining  $268,000  which  required cash
payments,  $187,000  was paid in 1997,  and the  remaining  $81,000  was paid in
January  1998.  As a result of the closure of the  Tennessee  operation  and the
relocation of certain  assets to Arizona,  the $160,000  Commercial  Development
Block Grant from the State of Tennessee  was paid off using  working  capital in
January 1998.
                                       32
<PAGE>
                      POORE BROTHERS, INC. AND SUBSIDIARIES
                   NOTES TO FINANCIAL STATEMENTS - (Continued)

2.    Restructuring Actions (continued)

     Pro forma unaudited  information has been provided below for the year ended
December 31, 1997  assuming the events  discussed in this note took place at the
beginning of the period  presented.  The pro forma results of operation  include
adjustments to eliminate the PB Texas distribution business and the PB Southeast
manufacturing  operation, as well as the related restructuring charges described
above.  The pro forma data does not purport to be indicative of the results that
would have been obtained had these events actually  occurred at the beginning of
the periods  presented nor does it project the  Company's  results of operations
for any future period.

                       PRO FORMA STATEMENTS OF OPERATIONS

                                                  Year ended December 31, 1997
                                                  ----------------------------
                                                  As Reported      Pro Forma
                                                  ------------    ------------
                                                                  (unaudited)
   Net sales                                      $ 15,731,796    $ 13,719,444
   Cost of sales                                    13,709,979      11,292,796
                                                  ------------    ------------
        Gross profit                                 2,021,817       2,426,648
   Selling, general and administrative expenses      3,982,428       3,578,334
   Loss on disposition of businesses                   745,875            --
                                                  ------------    ------------
        Operating income (loss)                     (2,706,486)     (1,151,686)
   Net interest expense                               (327,611)       (323,446)
                                                  ------------    ------------
        Net income (loss)                         $ (3,034,097)   $ (1,475,132)
                                                  ============    ============
   Net loss per common share - basic              $      (0.43)   $     (0. 21)
                                                  ============    ============

3. Concentrations of Credit Risk:

      The Company's cash and cash  equivalents are placed with major banks.  The
Company,  in the normal  course of  business,  maintains  balances  in excess of
Federal  insurance  limits.  The  balance in excess of the  insurance  limit was
$542,957 and $4,376,179 at December 31, 1997 and 1996, respectively.

      Financial  instruments  subject to credit risk consist  primarily of trade
accounts  receivable.  In the normal  course of  business,  the Company  extends
unsecured credit to its customers.  Substantially all of the Company's customers
are  distributors  whose  sales are  concentrated  to  retailers  in the grocery
industry in the southwest United States.  The Company  investigates a customer's
credit worthiness before extending credit.

4. Inventories:

    Inventories consisted of the following:

                                             December 31,
                                         -------------------
                                           1997       1996
                                         --------   --------
                        Finished goods   $226,298   $609,918
                        Raw materials     246,727    253,391
                                         --------   --------
                                         $473,025   $863,309
                                         ========   ========
                                       33
<PAGE>
                      POORE BROTHERS, INC. AND SUBSIDIARIES
                   NOTES TO FINANCIAL STATEMENTS - (Continued)

5. Property and Equipment:

    Property and equipment consisted of the following:

                                                          December 31,
                                                   --------------------------
                                                      1997           1996
                                                   -----------    -----------
  Buildings and improvements                       $ 3,378,988    $ 2,652,548
  Equipment                                          3,296,134      1,307,417
  Land                                                 272,006        401,842
  Vehicles                                              81,333        251,559
  Furniture and office equipment                       207,242        118,965
                                                   -----------    -----------
                                                     7,235,703      4,732,331
  Less accumulated depreciation and amortization      (633,268)      (699,988)
                                                   -----------    -----------
                                                   $ 6,602,435    $ 4,032,343
                                                   ===========    ===========

      Included  in  equipment  are assets  held  under  capital  leases  with an
original cost of $1,315,657 and accumulated amortization of $162,126 at December
31, 1997, and original cost of $463,857 and accumulated  amortization of $33,888
at December 31, 1996.

      Depreciation   expense  was  $409,962  and  $284,409  in  1997  and  1996,
respectively.

     At December 31, 1996, the Company was completing the  construction of a new
manufacturing facility in Arizona.  Included in land, buildings and improvements
was the carrying  value of the old facility.  At December 31, 1996,  the Company
reflected a charge of $30,000 in cost of sales to reduce the  carrying  value of
the old facility to its net realizable value of $710,000.  On February 28, 1997,
the land and  buildings  were sold for  approximately  $710,000 and the proceeds
from the sale  were used to pay off  related  mortgage  debt and  notes  payable
totaling approximately $650,000.

     In the event that  facts and  circumstances  indicate  that the cost of the
property and equipment may be impaired, an evaluation of recoverability would be
performed.  This evaluation would include the comparison of the future estimated
undiscounted  cash flows  associated  with the assets to the carrying  amount of
these assets to determine if a writedown is required.
                                       34
<PAGE>
                      POORE BROTHERS, INC. AND SUBSIDIARIES
                   NOTES TO FINANCIAL STATEMENTS - (Continued)

6.     Long-Term Debt:

      Long-term debt consisted of the following:
<TABLE>
<CAPTION>
                                                                           December 31,
                                                                      -----------------------
                                                                         1997         1996
                                                                      ----------   ----------
<S>                                                                   <C>          <C>
Convertible Debentures; interest at 9%; interest and
   principal due in monthly installments through 2002;
   collateralized by land, buildings, equipment and intangibles ...   $2,299,591   $2,299,591
Construction loan due June 11, 1997; interest at bank prime
   rate plus 2% (10.25% at December 31, 1996); collateralized
   by first deed of trust on land and building and certificate
   of deposit totaling $1,250,000 .................................         --      1,248,117
Notes payable to former owners due May 31, 2000; interest at
   bank prime rate plus 1.75% (10.00% at December 31, 1996) .......         --        500,000
Notes payable; due in monthly installments through December
   2000; interest rates ranging from 3% to 11.75%;
   collateralized by equipment and vehicles and guaranteed by
   the Chairman of the Board ......................................      162,201      234,071
Working capital line (up to 75% of eligible receivables);
   interest at bank prime rate plus 4.50% (12.75%) at December
   31, 1996 and at prime plus 3.50% (12.0%) at December 31,
   1997; collaterized by accounts receivable and inventories;
   due May 31, 1998 ...............................................      586,097      351,270
Mortgage loan due in monthly installments through July 2012;
   interest at 9.03%; collaterized by land and building ...........    1,989,147         --
Mortgage loans due 1997 to 1998; interest at bank prime rate
   plus 1.75% (10.00% at December 31, 1996); collateralized by
   land and buildings .............................................         --        156,740
Capital lease obligations due in monthly installments through 2002;
   interest rates ranging from 8.19% to 11.3%; collateralized by
   equipment ......................................................    1,107,905      383,920
                                                                      ----------   ----------
                                                                       6,144,941    5,173,709

Less current portion ..............................................    1,127,217    1,818,058
                                                                      ----------   ----------
                                                                      $5,017,724   $3,355,651
                                                                      ==========   ==========
</TABLE>
      Annual maturities of long-term debt are as follows:


                                                              December 31,
                                                                 1997
                                                              -----------

       1998   ............................................... $ 1,127,217
       1999   ...............................................     499,485
       2000   ...............................................     535,880
       2001   ...............................................     516,478
       2002   ...............................................     436,427
       Thereafter............................................   3,029,454
                                                              -----------
                                                              $ 6,144,941
                                                              ===========
                                       35
<PAGE>
                      POORE BROTHERS, INC. AND SUBSIDIARIES
                   NOTES TO FINANCIAL STATEMENTS - (Continued)

6. Long-Term Debt: (continued)

      In September  1996, the Company  entered into a $2,400,000  loan agreement
with National  Bank of Arizona,  to finance the  construction  of its new 60,000
square foot manufacturing,  distribution and headquarters  facility in Goodyear,
Arizona  collateralized  by a first deed of trust on the land and  building  and
additionally  collateralized  by U.S.  treasury bills provided by an independent
investor.  As consideration for providing the U.S. treasury bills as collateral,
the Company  issued to the investor a warrant  which,  as amended,  entitles the
investor  to purchase  300,000  shares of Common  Stock at an exercise  price of
$1.40 per share and expires  September 11, 2006. In connection with the warrant,
the Company  recorded an increase to  additional  paid-in  capital and  building
costs of $630,000 which  represents the fair value of the warrant at the date of
award.  In December  1996,  the U.S treasury  bills  provided by the investor as
collateral were replaced by the Company with a $1,250,000 restricted certificate
of deposit.

     On June 4, 1997,  the Company  refinanced  the balance of the  construction
loan, $998,746, with permanent financing. The new permanent financing,  provided
by Morgan Guaranty Trust Company of New York, is a $2 million,  15-year mortgage
at 9.03%.  Monthly principal and interest payments of $18,425 are required to be
made by the Company. In addition,  the Company obtained financing during 1997 of
$862,961 from FINOVA Capital Corporation under 5-year, 9.06% equipment financing
leases for new production equipment installed in the Company's new facility (see
Note 7).

     At December 31, 1997, the Company had outstanding 9% Convertible Debentures
due July 1, 2002 (the "9% Convertible  Debentures")  in the principal  amount of
$2,299,591.  Interest on the 9% Convertible Debentures is paid by the Company on
a monthly  basis.  Monthly  principal  payments  of  approximately  $20,000  are
required to be made by the Company beginning in July 1998 through July 2002 (see
Note 8).

     Various debt  agreements  of the Company  contain  covenants  requiring the
maintenance of certain financial ratios. The most restrictive  covenants require
the Company to maintain an interest  coverage  ratio of 1.5:1,  minimum  working
capital of $1,000,000 and a calculated  minimum amount of shareholders'  equity.
The Company was not in  compliance  with a 9%  Convertible  Debenture  provision
requiring an interest coverage ratio of 1.5:1 (actual of -5.7:1). As a result of
an event of  default,  the  holders of the 9%  Convertible  Debentures  have the
right,  upon  written  notice and after a  thirty-day  period  during which such
default may be cured, to demand  immediate  payment of the then unpaid principal
and  accrued but unpaid  interest  under the  Debentures.  The holders of the 9%
Convertible  Debentures have granted the Company a waiver effective through June
30, 1999. After that time, the Company will be required to be in compliance with
the following financial ratios, so long as the 9% Convertible  Debentures remain
outstanding:  working  capital  of at least  $1,000,000;  minimum  shareholders'
equity (net worth);  an interest coverage ratio of at least 2.0:1; and a current
ratio  at the end of any  fiscal  quarter  of at least  1.1:1.  The  Company  is
currently in compliance with the minimum shareholders'  equity,  working capital
and current ratio requirements.  Management believes that the achievement of the
Company's  plans and  objectives  will enable the Company to attain a sufficient
level of  profitability  to remain in compliance  with the  financial  ratios or
alternatively,  that the Company  will be able to obtain an extension or renewal
of the waivers. There can be no assurance, however, that the Company will attain
any such  profitability  and be in compliance with the financial ratios upon the
expiration  of the waivers or be able to obtain an  extension  or renewal of the
waivers.  Any  acceleration  under the 9% Convertible  Debentures prior to their
maturity on July 1, 2002 could have a material adverse effect upon the Company.

      The Company's $1.0 million  working  capital line of credit was renewed in
November 1997 for a six month period with automatic  renewals from year to year,
unless  terminated by either party on the  anniversary  date of the agreement by
written  notice given not less than 30 days prior to the  anniversary  date.  At
December 31, 1997, the Company had  approximately  $262,000  available under the
working  capital  line of credit.  There can be no  assurance  that the  working
capital line will be renewed.  If the working capital line is not renewed and no
alternative  funding is obtained,  the Company would  implement  cost  reduction
measures and reduce  planned  capital  expenditures.  Non-renewal of the working
capital line could have a material adverse effect on the Company.
                                       36
<PAGE>
                      POORE BROTHERS, INC. AND SUBSIDIARIES
                   NOTES TO FINANCIAL STATEMENTS - (Continued)

7.    Commitments and Contingencies:

      Rental  expense  under  operating  leases was $34,632 and $171,612 for the
years 1997 and 1996,  respectively.  Minimum  future  rental  commitments  under
non-cancelable leases as of December 31, 1997 are as follows:

                                               Capital     Operating
                                                Leases      Leases      Total
                                                ------      ------      -----
 1998   ..................................   $   340,718  $  34,632  $  375,350
 1999   ..................................       327,597     34,632     362,229
 2000   ..................................       307,651     25,974     333,625
 2001   ..................................       230,318                230,318
 2002   ..................................       131,378                131,378
                                              ----------  ---------  ----------
 Total  ..................................     1,337,662  $  95,238  $1,432,900
                                                          =========  ==========
 Less amount representing interest........       229,757
                                              ----------
 Present value............................    $1,107,905

     8.   Capital Stock:

      In connection  with the  acquisition of the Poore Brothers  companies (see
Note 1), the Company issued 300,000 shares of Common Stock to the sellers of the
companies. The Company has the right to repurchase these shares for an aggregate
purchase price of $500,000 by May 31, 1998.

     At issuance,  the  Company's 9%  Convertible  Debentures  (see Note 6) were
convertible into 2,477,065 shares of Common Stock at an effective price of $1.09
per share, subject to anti-dilution  adjustments.  In December 1996, $400,409 of
such  debentures  were converted into 367,348 shares of Common Stock,  leaving a
debenture balance convertible into 2,109,717 shares of Common Stock.

      In  December  1996,  the  Company  completed  an initial  public  offering
resulting in the sale of 2,250,000  shares of its Common Stock,  $.01 par value,
to the public at $3.50 per share.  The net proceeds to the Company from the sale
of  1,882,652  shares  (the  balance  of the shares  having  been sold by the 9%
Convertible Debenture holders),  after deducting expenses of the offering,  were
approximately $5.3 million. In January 1997, the Company sold 337,500 additional
shares of Common  Stock  pursuant  to an  over-allotment  option  granted to the
underwriter  of  its  initial  public  offering.  Net  proceeds  from  the  sale
approximated  $1,000,000.  In connection with the initial public  offering,  the
underwriter was granted a warrant to purchase  225,000 shares of common stock at
$4.38 per share, which is exercisable through December 6, 2001.

9.     Stock Options:

      The  Company's  1995 Stock  Option Plan (the  "Plan"),  as amended in June
1997,  provides  for the  issuance  of options to purchase  1,500,000  shares of
Common Stock.  The options granted  pursuant to the Plan expire over a five-year
period and  generally  vest over  three-year  periods.  In  addition  to options
granted  under the Plan,  the  Company  also  issued  non-qualified  options  to
purchase Common Stock to certain  Directors  which were  exercisable on issuance
and expire ten years from date of grant.  All  options are issued at fair market
value and are  noncompensatory.  Fair market  value is  determined  based on the
price of sales  of  Common  Stock  occurring  at or near the time of the  option
award.  Outstanding options have exercise prices ranging from $1.08 to $3.94 per
share.
                                       37
<PAGE>
                      POORE BROTHERS, INC. AND SUBSIDIARIES
                   NOTES TO FINANCIAL STATEMENTS - (Continued)

9.    Stock Options:  (continued)

      Stock option activity was as follows:
<TABLE>
<CAPTION>
                                                       Plan Options                       Non-Plan Options
                                                       ------------                       ----------------
                                                                 Weighted                           Weighted
                                                 Options          Average             Options        Average
                                                 Outstanding  Exercise Price         Outstanding  Exercise Price
                                                 -----------  --------------         -----------  --------------
<S>                                                  <C>           <C>                   <C>           <C>
Balance, December 31, 1995 ...........               485,000       $1.08                 600,000       $1.08
   Granted ...........................               420,000        1.69                 220,000        1.46
   Canceled ..........................             (250,000)        1.08                  -
                                                 ------------                        ------------
Balance, December 31, 1996 ...........               655,000        1.47                 820,000        1.18
   Granted ...........................               871,950        3.24                  -
   Canceled ..........................             (393,999)        1.58                  -
   Exercised .........................              (65,333)        1.10                  -
                                                 ------------                        ------------
Balance, December 31, 1997 ...........             1,067,618        2.90                 820,000        1.18
                                                 ============                        ============
</TABLE>

      At December 31, 1997,  outstanding  Plan options had an average  remaining
term of 4.0 years.  Plan  options  that were  exercisable  at December  31, 1997
totaled  239,668 with a weighted  average  exercise price per share of $1.64. At
December 31, 1996,  there were 122,334 Plan options that were  exercisable  at a
weighted average exercise price of $1.88 per share. Non-Plan options at December
31, 1997 had an average  remaining  term of 7.6 years.  On January 28, 1998, the
Company  granted  an  additional  270,000  options  under the Plan at a price of
$1.02.

      Had  compensation  cost for the Company's  stock  options been  determined
based on the fair  value at the date of grant for  awards in 1995  through  1997
consistent  with the provisions of SFAS 123, the Company's net loss and net loss
per share would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
                                                                                                 Years ended December 31,
                                                                                              --------------------------------
                                                                                                  1997              1996
                                                                                              --------------    --------------
                <S>                                                                            <C>                <C>
                Net loss - as reported                                                         $(3,034,097)       $ (691,678)
                Net loss - pro forma                                                            (3,438,253)         (907,000)
                Basic net loss per share of common stock - as reported                               (0.43)            (0.16)
                Basic net loss per share of common stock - pro forma                                 (0.49)            (0.21)
</TABLE>

      The  assumption  regarding the stock options  issued was that 100% of such
options  vested  when  granted,  rather  than the 56% vested as  required by the
awards as of December 31, 1997.  The fair value of options  granted prior to the
Company's   initial  public  offering  was  computed  using  the  minimum  value
calculation  method. For all other options,  the fair value of each option grant
is estimated on the date of grant using the Black-Scholes  option-pricing  model
with the following weighted-average assumptions:  dividend yield of 0%; expected
volatility  of 72% and 102%;  risk-free  interest  rate of 6.20% and 6.14%;  and
expected  lives of 3 and 5 years for 1997 and  1996,  respectively.  Under  this
method,  the weighted  average  fair value of the options  granted was $1.68 and
$0.53 per share in 1997 and 1996, respectively.

10.    Income Taxes:

      There was no current or deferred  benefit  for income  taxes for the years
ended December 31, 1997 and 1996. The following table provides a  reconciliation
between the amount  determined by applying the statutory federal income tax rate
to the pretax loss and benefit for income taxes:

                                         Years ended December 31,
                                        --------------------------
                                           1997           1996
                                        -----------    -----------
            Benefit at statutory rate   $ 1,031,593    $   235,170
            Valuation allowance .....    (1,190,000)      (265,000)
            State income tax, net ...       158,407         29,830
                                        ===========    ===========
                                        $         0    $         0
                                        ===========    ===========
                                       38
<PAGE>
                      POORE BROTHERS, INC. AND SUBSIDIARIES
                   NOTES TO FINANCIAL STATEMENTS - (Continued)

10.    Income Taxes:  (continued)

       The income tax effects of loss  carryforwards  and temporary  differences
between financial and income tax reporting that give rise to the deferred income
tax assets and liabilities are as follows:

                                                      Years ended December 31,
                                                     --------------------------
                                                        1997           1996
                                                     -----------    -----------
Net operating loss carryforward .....................$ 1,830,000    $   658,000
Bad debt expense ....................................     70,000         48,000
Accrued liabilities .................................     10,000         14,000
                                                     -----------    -----------
     Gross deferred tax assets ......................  1,910,000        720,000
Deferred tax asset valuation allowance .............. (1,910,000)      (655,000)
     Gross deferred tax liabilities (depreciation and
        Amortization) ...............................          0        (65,000)
                                                     -----------    -----------
Net deferred tax assets .............................$         0    $         0
                                                     ===========    ===========

      Gross  deferred tax assets are reduced by a valuation  allowance  based on
management's estimate that it is more likely than not that the tax benefits will
not be realized.

      At December 31, 1997, the Company had net operating  losses  available for
federal  and state  income  taxes of  approximately  $4,548,000.  The  Company's
ability to utilize its net operating  losses to offset future taxable income may
be limited  under the  Internal  Revenue  Code  Section 382 change in  ownership
rules. A valuation  allowance has been provided  since the Company  believes the
realizability  of the  deferred tax asset does not meet the more likely than not
criteria under SFAS 109. The Company's  accumulated net operating  losses expire
in varying amounts between 2010 and 2012.

11.    Major Customers:

      For the year ended December 31, 1997, two Arizona  grocery chain customers
of the Company accounted for $2,255,000,  or 14%, and $1,579,000, or 10%, of the
Company's   consolidated   net  sales.   One  Arizona  grocery  chain  comprised
$2,820,000,  or 16%, of the Company's  consolidated net sales for the year ended
December 31, 1996.

12.    Litigation:

      On June 19,  1996,  James  Gossett and an  associated  entity  commenced a
lawsuit in an Arizona state court against two directors of the Company,  Messrs.
Mark Howells and Jeffrey Puglisi,  and the Company's  subsidiary,  PB Southeast,
alleging, inter alia, that Mr. Gossett had an oral agreement with Mr. Howells to
receive up to a 49% ownership interest in PB Southeast, that Messrs. Howells and
Puglisi breached  fiduciary duties and other obligations to Mr. Gossett and that
he is  entitled  to  exchange  such  alleged  stock  interest  for shares in the
Company.  Mr. Gossett further alleges that PB Southeast and Messrs.  Howells and
Puglisi failed to honor the terms of an alleged  distribution  agreement between
Poore Brothers Foods,  Inc. and Mr. Gossett's  associated  entity,  whereby such
entity was granted exclusive  distribution  rights to Poore Brothers products in
California.  The complaint seeks unspecified amounts of damages, fees and costs.
In February  1997,  plaintiffs  filed  pleadings  indicating  their seeking $3.0
million in  damages;  plaintiffs  may not be limited  by this  damage  amount at
trial.  Messrs.  Howells and Puglisi and PB  Southeast  have filed an answer and
counterclaim against Mr. Gossett, denying the major provisions of the complaint,
alleging  various acts of  nonperformance  and breaches of fiduciary duty on the
part of Mr. Gossett and seeking various  compensatory and punitive damages.  The
Company has agreed to indemnify  Messrs.  Howells and Puglisi in connection with
this  lawsuit.  In July  1997,  summary  judgement  was  granted in favor of all
defendants,  including PB Southeast, on all counts of the lawsuit. In its Order,
the  Maricopa  County  (Arizona)  Superior  Court  ruled  that there was no oral
contract and that the remainder of plaintiffs'  claims could not support a cause
of action against the defendants. In February 1998, the Court reversed its prior
grant  of  summary  judgment  on one of the  seven  counts  and  reinstated  Mr.
Gossett's claim that the defendants  breached  fiduciary  duties to Mr. Gossett.
The Court also set the matter for trial  beginning  October 5, 1998. The Court's
recent  ruling  merely  preserves  Mr.  Gossett's  claim  for trial and does not
adjudicate  the  merits of the claim.  The  Company  believes  that the claim is
without merit and will continue to vigorously defend the lawsuit.
                                       39
<PAGE>
                      POORE BROTHERS, INC. AND SUBSIDIARIES
                   NOTES TO FINANCIAL STATEMENTS - (Continued)

12.      Litigation:  (continued)

     The Company is a party to various  lawsuits  arising in the ordinary course
of business.  Management believes, based on discussions with legal counsel, that
the resolution of such lawsuits will not have a material effect on the financial
statements taken as a whole.

13.      Related Parties:

     In connection  with the sale of Common Stock and 9% Convertible  Debentures
in the May 31, 1995  acquisitions of the Poore Brothers  companies,  the Company
paid Arizona Securities Group, Inc. $120,000 in sales commissions and $22,000 as
reimbursement  of expenses  incurred  in its  services as  Placement  Agent.  In
connection with a sale of stock in March 1996,  Arizona  Securities  Group, Inc.
received a fee of $46,875.  Arizona  Securities Group, Inc. is managed and owned
by Messrs. Howells and Puglisi, directors of the Company.

     From February  1997 to October 1997,  the Company paid $67,600 to a company
owned by the brother of the  Company's  Chairman,  for  construction  management
services related to the Company's new Arizona manufacturing facility.
                                       40
<PAGE>
                                  EXHIBIT INDEX


21.1     List of subsidiaries of Poore Brothers, Inc.
27.1     Restated Financial Data Schedule for 1997
27.2     Restated Financial Data Schedule for 1996
                                       41