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, 1998

[ ] 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

                              POORE BROTHERS, INC.
                 (Name of Small Business issuer in its charter)

             Delaware                                     86-0786101
  (State or other jurisdiction              (I.R.S. Employer Identification No.)
of incorporation or organization)


                           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 $13,167,993.

     At March 19, 1999, the aggregate  market value of the  Registrant's  common
stock held by non-affiliates of the Registrant was approximately $5,152,919.

     At March 19, 1999,  the number of issued and  outstanding  shares of common
stock of the Registrant was 7,832,997.  Transitional  Small Business  Disclosure
Format (check one): Yes [ ]  No [X]
<PAGE>
                           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,  the
possible diversion of management resources from the day-to-day operations of the
Company  as a  result  of  the  Company's  pursuit  of  strategic  acquisitions;
potential  difficulties  resulting from the  integration of acquired  businesses
with  Company's   business,   other   acquisition-related   risks,   significant
competition,  risks  related to the food  products  industry,  volatility of the
market  price of the  Company's  common  stock,  par value  $.01 per share  (the
"Common  Stock"),  the possible  de-listing  of the Common Stock from the Nasdaq
SmallCap Market 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.

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<PAGE>
ITEM 1. DESCRIPTION OF BUSINESS

BUSINESS

     Poore Brothers, Inc. and its subsidiaries (collectively, the "Company") are
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 brands of batch-cooked potato chips under
the Poore  Brothers(R)  and the Bob's Texas Style(TM)  trademarks,  manufactures
private  label  potato  chips for grocery  store  chains,  and  distributes  and
merchandises  snack food products that are manufactured by others.  For the year
ended December 31, 1998,  revenues  totaled  $13,167,993.  Approximately  78% of
sales were  attributable  to products  manufactured  by the Company (65% branded
potato chips sales and 13% private  label  potato chip sales) and  approximately
22% of sales were  attributable to the distribution by the Company of snack food
products  manufactured  by other  companies.  The  Company  generally  sells its
products to retailers through independent distributors.

     Poore  Brothers(R) and Bob's Texas Style(TM)  potato chips are manufactured
with a batch frying process that the Company believes produces potato chips with
enhanced  crispness and flavor.  They are currently  produced in twelve flavors:
Original,  Salt & Vinegar,  Jalapeno,  Barbecue,  Parmesan & Garlic, Cajun, Dill
Pickle, Grilled Steak & Onion, Habanero, Unsalted, Hot Ranch and Vinegar & Dill.
Poore Brothers(R) potato chips are currently offered in ten of those flavors and
Bob's  Texas  Style(TM)  potato  chips are  currently  offered in seven of those
flavors.  The Company also manufactures potato chips for sale on a private label
basis  using  a  continuous  frying  process.  The  Company  currently  has  two
California  and three Arizona  grocery chains as customers for its private label
potato chips. See "PRODUCTS" and "MARKETING AND DISTRIBUTION."

     The Company  also sells Poore  Brothers(R)  brand  tortilla  chips and dips
(both of which were  introduced in May 1998),  as well as Bob's Texas  Style(TM)
brand tortilla chips and puffs,  all of which are manufactured by third parties.
The  Poore  Brothers(R)  brand  tortilla  chips  are  offered  in  four  flavors
(Original,  Jalapeno,  Roasted Red Pepper and Sun Dried Tomato) and the dips are
offered in three flavors (Sour Cream & Jalapeno, Roasted Red Pepper and Santa Fe
Black  Bean).  Sales of these  products  have not  been  material  to date.  See
"PRODUCTS" and "MARKETING AND DISTRIBUTION."

     The Company's business objective is to be a leading regional  manufacturer,
marketer and  distributor of premium  branded and private label potato chips and
other salty snack foods by providing high quality products at competitive prices
that are superior in taste,  texture,  flavor  variety and brand  personality to
comparable products. The Company's philosophy is to compete in the market niches
not served by the dominant national  competition.  A significant  element of the
Company's  growth  strategy  is  to  pursue  additional  strategic   acquisition
opportunities.  The Company  plans to acquire  snack food  brands  that  provide
strategic fit and possess strong brand equity in a geographic  region or channel
of  distribution  in order to expand,  complement  or  diversify  the  Company's
business.  In  August  1998,  the  Company  retained  Everen  Securities,   Inc.
("Everen"),  a major  full-service  brokerage  firm, as the Company's  financial
advisor to assist the Company in  connection  with  strategic  acquisitions.  In
addition, the Company plans to increase sales of its existing products, increase
distribution   and   merchandising   revenues   and   continue  to  improve  its
manufacturing capacity utilization. See "BUSINESS STRATEGY."

     All  products  currently  manufactured  by  the  Company  (including  Poore
Brothers(R)  and Bob's Texas  Style(TM)  brand potato chips,  as well as private
label  potato  chips)  are  produced  at  the  Company's  recently   constructed
manufacturing  facility in Goodyear,  Arizona.  The land and building comprising
the facility are owned by La Cometa Properties,  Inc., a wholly-owned subsidiary
of the Company.

     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 Company's  subsidiaries 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,  $3,034,097 and
$874,091  for  the  fiscal  years  ended  December  31,  1996,  1997  and  1998,
respectively.  At December 31, 1998, the Company had an  accumulated  deficit of
$6,336,024  and net  working  capital  of  $768,155.  See "ITEM 6.  MANAGEMENT'S
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL  CONDITION."

     Even  if the  Company  is  successful  in  making  strategic  acquisitions,
increasing  distribution and sales volume of the Company's existing products and
developing  new  products,  it may be expected to incur  substantial  additional
expenses,   including   integration  costs  of  acquisitions,   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
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.

                                       3
<PAGE>
     NEED FOR  ADDITIONAL  FINANCING.  A  significant  element of the  Company's
business strategy is to pursue selected strategic acquisition  opportunities for
the  purpose of  expanding,  complementing  and/or  diversifying  the  Company's
business.  In connection with the acquisition of the business and certain assets
of Tejas Snacks,  L.P.  ("Tejas") in November 1998, the Company needed to borrow
funds from Norwest Business Credit,  Inc.  ("Norwest")  pursuant to a Credit and
Security  Agreement  (the  "Norwest  Credit  Agreement"),  in order to satisfy a
portion of the cash  consideration  payable to Tejas.  See  "BUSINESS -- COMPANY
HISTORY"  and "ITEM 6.  MANAGEMENT'S  DISCUSSION  AND  ANALYSIS  OF  RESULTS  OF
OPERATIONS  AND FINANCIAL  CONDITION -- LIQUIDITY AND CAPITAL  Resources." It is
likely that in the future the Company will require  funds in excess of cash flow
generated from  operations in order to consummate  any  additional  acquisitions
involving cash consideration to the sellers. Any such funds would most likely be
obtained  through  third-party  financing  (debt or equity).  In  addition,  the
Company may, in the future,  require third party financing (debt or equity) as a
result of continued  operating  losses or expansion  of the  Company's  business
through  non-acquisition means. There can be no assurance that any such required
financing  will be  available  or,  if  available,  on terms  attractive  to the
Company.  Any third  party  financing  obtained  by the  Company  may  result in
dilution of the equity interests of the Company's shareholders.

     RISKS ASSOCIATED WITH ACQUISITIONS.  A significant element of the Company's
business strategy is to pursue selected strategic acquisition  opportunities for
the  purpose of  expanding,  complementing  and/or  diversifying  the  Company's
business;  however,  no assurance  can be given that the Company will be able to
identify,  finance and complete additional  suitable  acquisitions on acceptable
terms, or that future acquisitions, if completed, will be successful. Any future
acquisitions  could divert  management's  attention from the daily operations of
the  Company  and  otherwise  require  additional  management,  operational  and
financial  resources.  Moreover,  there is no assurance  that the Company  would
successfully  integrate  acquired  companies or their  management teams into the
Company's operating structure,  retain management teams of acquired companies on
a long-term basis, or operate acquired  companies  profitably.  Acquisitions may
also involve a number of other risks,  including adverse  short-term  effects on
the  Company's  operating  results,  dependence  on retaining  key personnel and
customers, amortization of acquired intangible assets, and risks associated with
unanticipated liabilities or contingencies.

     LEVERAGE;  FINANCIAL  COVENANTS  PURSUANT TO 9% CONVERTIBLE  DEBENTURES AND
PURSUANT TO NORWEST CREDIT AGREEMENT;  NON-COMPLIANCE  WITH FINANCIAL  COVENANTS
AND POSSIBLE ACCELERATION OF INDEBTEDNESS.  At December 31, 1998 the Company had
outstanding  9%  Convertible  Debentures  due July 1, 2002 (the "9%  Convertible
Debentures")  in the aggregate  principal  amount of $2,229,114 and  outstanding
indebtedness  under the Norwest  Credit  Agreement  in the  aggregate  principal
amount of $1,319,235.  The indebtedness under the 9% Convertible  Debentures and
the Norwest Credit  Agreement is secured by  substantially  all of the Company's
assets. The Company is required to maintain certain financial ratios pursuant to
the loan agreement  pursuant to which the 9% Convertible  Debentures were issued
(the  "Debenture Loan  Agreement") so long as the 9% Convertible  Debentures are
outstanding  and pursuant to the Norwest Credit  Agreement so long as borrowings
from Norwest  thereunder  remain  outstanding.  Should the Company be in default
under any of such requirements, the holders of the 9% Convertible Debentures and
Norwest, as applicable,  shall have the right, upon written notice and after the
expiration of any applicable  period during which such default may be cured,  to
demand  immediate  payment of all of the then unpaid  principal  and accrued but
unpaid  interest under the 9% Convertible  Debentures or pursuant to the Norwest
Credit  Agreement,  respectively.  At December 31, 1998,  the Company was not in
compliance with an interest coverage ratio requirement of 1:1 (actual of 0.92:1)
under the  Debenture  Loan  Agreement,  a minimum  debt service  coverage  ratio
requirement  of  0.50  to 1  (actual  of 0.30 to 1)  under  the  Norwest  Credit
Agreement,  and a maximum  quarterly net loss  limitation of $50,000 (actual net
loss of $146,366) under the Norwest Credit Agreement.  Such  non-compliance  has
not to date resulted in an event of default under either  agreement  because the
holders of the 9%  Convertible  Debentures  have granted the Company a series of
waivers, including a current waiver effective through June 30, 1999, and Norwest
has  granted  the Company a waiver for the period  ended  December  31, 1998 and
agreed to modify  the  financial  ratio  requirements  for future  periods.  The
Company is currently in  compliance  with the other  financial  ratios under the
Debenture Loan  Agreement  (including  working  capital,  minimum  shareholders'
equity  and  current  ratio  requirements)  and  the  Norwest  Credit  Agreement
(including minimum quarterly and annual operating results, and minimum quarterly
and  annual  changes  in book net  worth).  There can be no  assurance  that the
Company will be in compliance  with the financial  ratios in the future (and, in
the case of the financial  ratios under the Debenture Loan  Agreement,  upon the
expiration  of the  waivers)  or be  able to  obtain  additional  waivers  or an
extension or renewal of existing waivers. Any acceleration of the 9% Convertible
Debentures or the borrowings  under the Norwest Credit  Agreement prior to their
respective maturities 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."

     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

                                       4
<PAGE>
Common  Stock on the  NASDAQ  SmallCap  Market on March  19,  1999 was $0.75 per
share.  There can be no  assurance  as to the future  market price of the Common
Stock. See "NASDAQ LISTING MAINTENANCE REQUIREMENTS; POSSIBLE DE-LISTING."

     NASDAQ  LISTING  MAINTENANCE  REQUIREMENTS;   POSSIBLE  DE-LISTING.  Nasdaq
recently implemented rules changes increasing its quantitative listing standards
that make it more  difficult  for  companies  to  maintain  compliance  with the
listing requirements for the Nasdaq SmallCap Market. One of such requirements is
that the bid price of listed  securities  be equal to or greater  than $1. As of
November  9, 1998,  the  closing  bid price of the  Company's  Common  Stock had
remained below $1.00 per share for thirty consecutive trading days. As a result,
the Company received a notice from the Nasdaq Stock Market, Inc. ("Nasdaq") that
the Company was not in compliance  with the closing bid price  requirements  for
continued  listing of the Common  Stock on the Nasdaq  SmallCap  Market and that
such Common Stock would be de-listed  after February 15, 1999 if the closing bid
price was not equal to or greater  than $1.00 per share for a period of at least
ten  consecutive  trading days during the ninety-day  period ending February 15,
1999.  On February  9, 1999,  the  Company  submitted  to Nasdaq a request for a
hearing to discuss the  possibility of obtaining an extension of such ninety-day
period. The Company's hearing request was granted by Nasdaq and is scheduled for
April 16, 1999;  the  de-listing  of the Common Stock has been stayed  pending a
determination  by Nasdaq  after the  hearing.  If Nasdaq  denies  the  Company's
request,  or if the Company's  request is granted but the Company's Common Stock
fails to comply with the minimum closing bid price  requirement for at least ten
consecutive  trading days during such  extension  period,  then the Common Stock
will  likely  be  de-listed  from  the  Nasdaq  SmallCap  Market.  Upon any such
de-listing,  trading,  if any, in the Common Stock 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  de-listing,  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.  See  "VOLATILITY  OF MARKET PRICE OF COMMON STOCK" AND
"RISK OF LOW-PRICED STOCK."

     RISK OF LOW-PRICED 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.
See "NASDAQ LISTING MAINTENANCE REQUIREMENTS; POSSIBLE DE-LISTING."

     COMPETITION.  The market for salty snack  foods,  such as those sold by the
Company, including potato chips, tortilla chips, dips, pretzels and meat snacks,
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 methods of operation  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

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<PAGE>
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.

     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.  A sunflower oil
that is low in saturated  fat is used by the Company in the  production of Poore
Brothers(R) and Bob's Texas Style(TM) brand potato chips,  and is available from
various suppliers.  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
Brothers(R)  and Bob's Texas  Style(TM) 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.  One customer of the Company,  Fry's Food
Stores (a subsidiary of Kroger,  Inc.),  accounted for 16% of the Company's 1998
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 1998.  A decision  by any major  customer  to cease or
substantially  reduce its 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,   Glen  E.  Flook,   Vice
President-Manufacturing,   and  Thomas  W.  Freeze,  Vice  President  and  Chief
Financial 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 Thomas
G. Bigham, Wendell T. Jones, Kevin M. Kohl and James M. Poore, 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."

     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.

                                       6
<PAGE>
         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.

     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
shareholder 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  shareholder  (as defined in the DGCL) unless certain  conditions are
met. This statutory provision could also have an anti-takeover effect.

     YEAR  2000  COMPLIANCE.  The Year  2000  issue is the  result  of  computer
programs  being  written  using two  digits  rather  than four to  identify  the
applicable  year.  For example,  computer  programs that utilize  date-sensitive
information  may  recognize  a date using "00" as the year 1900  rather than the
year 2000. This could result in system failures or miscalculations.

     The Company  processes  much of its data using licensed  computer  programs
form third parties,  including its accounting software.  Such third parties have
advised the Company  that they have made all  necessary  programming  changes to
such computer  programs to address the Year 2000 issue.  The Company  tested its
systems for Year 2000  compliance  during the first half of 1998 and  discovered
that certain database  information utilized by the Company for purposes of order
entry, billing and accounts receivable is not Year 2000 compliant,  although the
underlying  database  software is Year 2000  compliant.  The Company  intends to
implement corrective measures with respect to such database information prior to
the end of the third  quarter of 1999.  The Company has not, and does not expect
to incur significant  expenses in connection with such corrective  measures.  In
addition,  the Company believes that,  notwithstanding the foregoing,  it has no
material  internal risk in connection with the potential impact of the Year 2000
issue  on  the  processing  of  date-sensitive   information  by  the  Company's
computerized information systems.

     The  Company is in the process of  determining  the effect of the Year 2000
issue on its vendors' and customers' systems. There can be no assurance that the
systems of such third parties will be Year 2000 compliant on a timely basis,  or
that the Company's  results of operations will not be adversely  affected by the
failure of systems  operated by third  parties to  properly  operate in the Year
2000.

COMPANY HISTORY

     Messrs.  Donald  and James  Poore  (the  "Poore  Brothers")  founded  Poore
Brothers Foods,  Inc. ("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 Brothers(R)  brand products.  In 1983, prior to the formation of PB Foods,
the Poore Brothers co-founded Groff's of Texas, Inc. (a predecessor  business to
Tejas, previous owner of the Bob's Texas Style(TM) potato chip brand acquired by
the Company in November 1998), which also manufactured batch fried potato chips.

     In May 1993,  Mark S.  Howells,  the  Company's  Chairman,  and  associated
individuals  formed PB  Southeast,  which  acquired  a license  from PB Foods to
manufacture  and  distribute  Poore  Brothers(R)  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  shareholders
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

                                       7
<PAGE>
(that was repaid in January  1997) and the  remainder of which was  satisfied by
the issuance of 300,000 shares of the Company's 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  shareholders of PB Southeast,  including Mark S. Howells and Jeffrey J.
Puglisi, a former director 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.  The  remaining  shares of PB Southeast  were  purchased by the Company in
November 1998 in  connection  with the  settlement  of  litigation  involving PB
Southeast and Messrs.  Howells and Puglisi.  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.  ("Renaissance  Capital")  and Wells Fargo Small  Business
Investment Company,  Inc. ("Wells Fargo"),  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.

     In 1997, the Company implemented a restructuring  program pursuant to which
a number of actions were taken in order to improve the Company's  cost structure
and provide greater strategic focus, including:

     (i) The Company hired a new management team.

     (ii) On June 4, 1997,  the Company  sold the  Houston,  Texas  distribution
business of PB Texas  (which was  unprofitable  and which the Company  viewed as
having little  prospects for  generating  future sales growth or profits) to Mr.
David Hecht ("Hecht") pursuant to an Asset Purchase,  Licensing and Distribution
Agreement  effective June 1, 1997.  Under the agreement,  Hecht was sold certain
assets of PB Texas  (including  inventory,  vehicles and capital  equipment) and
became the Company's distributor in the Houston, Texas market.

     (iii) In September 1997, the Company  consolidated its entire manufacturing
operations  into  a  newly   constructed   60,000  square  foot   manufacturing,
distribution and headquarter facility in Goodyear, Arizona and, as a result, the
Company closed its unprofitable PB Southeast manufacturing facility in LaVergne,
Tennessee  on  September  30,  1997.  In  addition,  the Company  purchased  new
processing and packaging equipment. These actions were taken in order to improve
the Company's overall manufacturing efficiency.

     (iv) The Company  discontinued  the  distribution  of non-snack  food items
(such as coffee and candy) in order to permit the Company to focus its resources
on its core snack food product lines.

     In August 1998, the Company retained Everen, a major full-service brokerage
firm,  as the  Company's  financial  advisor to assist the Company in connection
with  strategic  acquisitions,  a  major  component  of the  Company's  business
strategy. See "BUSINESS STRATEGY."

     On November 4, 1998,  the Company  acquired the business and certain assets
of Tejas,  a  Texas-based  potato  chip  manufacturer.  The  assets,  which were
acquired through a newly formed wholly-owned subsidiary of the Company, Tejas PB
Distributing,  Inc.,  included  the Bob's Texas  Style(TM)  potato  chips brand,
inventories and certain capital  equipment.  In consideration  for these assets,
the Company issued 523,077 unregistered shares of Common Stock with a fair value
of $450,000 and paid  approximately  $1,180,000  in cash.  The Company  utilized
available  cash  as well as  funds  available  pursuant  to the  Norwest  Credit
Agreement to satisfy the cash portion of the  consideration.  Tejas had sales of
approximately  $2.8 million for the nine months  ended  September  30, 1998.  In
connection  with the  acquisition,  production  of Bob's Texas  Style(TM)  brand
potato chips was transferred to the Company's Goodyear, Arizona facility.

BUSINESS STRATEGY

     The Company's business objective is to be a leading regional  manufacturer,
marketer and  distributor of premium  branded and private label potato chips and
other salty snack foods by providing high quality products at competitive prices
that are superior in taste,  texture,  flavor  variety and brand  personality to
comparable products. The Company's philosophy is to compete in the market niches
not served by the dominant  national  competition.  The Company plans to achieve
growth in  manufactured  product sales by acquiring  other snack food brands and
growing  existing  products.   In  addition,   the  Company  plans  to  increase
distribution   and   merchandising   revenues,   and  continue  to  improve  its
manufacturing  capacity  utilization.  The  primary  elements  of the  Company's
business strategy are as follows:

                                       8
<PAGE>
          PURSUE  STRATEGIC  ACQUISITIONS IN THE BRANDED SNACK FOOD CATEGORY.  A
     significant   element  of  the  Company's  growth  strategy  is  to  pursue
     additional strategic  acquisition  opportunities.  The Company's plan is to
     acquire  snack food brands that provide  strategic  fit and possess  strong
     brand equity in a geographic  region or channel of distribution in order to
     expand,  complement or diversify the Company's business. The acquisition of
     the business and certain  assets of Tejas in November  1998,  including the
     Bob's Texas  Style(TM)  potato  chips brand,  was the first such  strategic
     acquisition.  The Company is continuing to search for other  companies with
     strong,  differentiated  snack food brands. The Company has retained Everen
     Securities,  Inc., a major  full-service  brokerage  firm as the  Company's
     financial   advisor  to  assist  the   Company  in  pursuit  of   strategic
     acquisitions.

          BUILD POORE BROTHERS(R) AND BOB'S TEXAS STYLE(TM) BRANDs.  The Company
     plans to  build  market  share  through  continued  trade  advertising  and
     promotion activity in certain core markets, including Arizona and Texas, as
     well as by new product innovations.  Marketing efforts include, among other
     things,  joint  advertising  with  supermarkets  and  other  manufacturers,
     in-store   advertisements  and  in-store  displays.  The  Company  is  also
     participating  in  selected  event   sponsorships,   such  as  the  Arizona
     Diamondbacks  baseball  team and the  Phoenix  Open  golf  tournament.  The
     Company  believes  that these  events offer  opportunities  to conduct mass
     sampling to motivate  consumers to try its branded products.  Opportunities
     to achieve  distribution  in new grocery chains or markets will continue to
     be targeted.

          In order to reinforce the Company's  positioning  regarding innovative
     products and flavor variety,  the Company plans to introduce a new Habanero
     ("pure  heat")  flavor  for both its  Poore  Brothers(R)  and  Bob's  Texas
     Style(TM)  potato chip brands  during the first half of 1999.  In addition,
     the Company  plans to re-launch  the Bob's Texas  Style(TM)  brand with new
     packaging  and new  products,  including  new potato chip flavors and a new
     line of tortilla chips.

          EXPAND  THE  PRIVATE  LABEL  BUSINESS.   The  Company   currently  has
     arrangements  with two California and three 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,  utilizing a
     continuous  fryer  purchased and installed by the Company in mid-1997.  The
     Company grew its private  label  business by 60% in 1998 and believes  that
     contract manufacturing  opportunities exist. While they are extremely price
     competitive  and can be short in duration,  the Company  believes that they
     provide a  profitable  opportunity  for the Company to improve the capacity
     utilization of the continuous fryer. The Company intends to seek additional
     private  label  customers  in the  southwestern  United  States  who demand
     superior product quality at a reasonable price.

          INCREASE DISTRIBUTION AND MERCHANDISING REVENUES. The Company believes
     that its Arizona distribution  operation provides it with a key competitive
     advantage in its home market.  The Company  plans to grow its Arizona snack
     food  distribution  business  by growing its stable of core  brands,  which
     include Snyder's pretzels, Lance crackers, Guiltless Gourmet tortilla chips
     and Slim Jim meat snacks.  The Company  believes that an  opportunity  also
     exists  to  grow  the  Company's  Texas   merchandising   business  through
     additional product lines. The merchandising  operation offers retailers and
     manufacturers  cost effective  merchandising  support for their products in
     south/central Texas.

          IMPROVE  MANUFACTURING  CAPACITY  UTILIZATION.  In 1998,  the  Company
     achieved  significant  improvements in gross profit margins,  increasing to
     25%  from  13%  in  1997,  primarily  as a  result  of the  Company's  1997
     manufacturing  consolidation  and  equipment  modernization.   The  Company
     believes that  additional  improvements  to  manufactured  products'  gross
     profit margins are possible with the achievement of the business strategies
     discussed  above.  Depending on product  mix,  the  existing  manufacturing
     facility could produce twice the current volume and thereby  further reduce
     manufacturing product costs.

PRODUCTS

     MANUFACTURED SNACK FOOD PRODUCTS. Poore Brothers(R) brand potato chips were
first  introduced  by  the  Poore  Brothers  in  1986  and  have  accounted  for
substantially  all of the sales of Poore Brothers(R) brand products 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, Habanero and Unsalted.

     In November 1998, the Company acquired  certain assets of Tejas,  including
the Bob's Texas Style(TM) potato chips brand.  Tejas was a successor business to
Groff's of Texas, Inc.  (co-founded by the Poore Brothers in 1983).  Bob's Texas
Style(TM)  potato  chips are also  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 seven flavors:
Original, Vinegar & Dill, Jalapeno, Hot Ranch, Barbecue, Cajun, and Unsalted.

     The Company  currently has agreements with two California and three 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.  In September
1997, sales of the low-fat potato chips were  discontinued  when the third party
processor ceased operations. Sales of the low-fat potato chips were not material
and approximated 2.5% and 1.7% of sales in 1996 and 1997, respectively.

                                       9
<PAGE>
     DISTRIBUTED   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,  dips,  crackers and meat snacks.  Through its Texas
subsidiary,  Tejas PB  Distributing,  Inc. ("Tejas  Distributing"),  the Company
merchandises,  but does not purchase and resell, snack food products for a major
grocery  retailer in  south/central  Texas.  In addition to the Company's  Bob's
Texas Style(TM) brand products, Tejas Distributing merchandises such products as
private  label  potato  chips,   tortilla  chips,   pretzels  and  cheese  puffs
manufactured by other companies.

     The Company  also sells Poore  Brothers(R)  brand  tortilla  chips and dips
(both of which were  introduced in May 1998),  as well as Bob's Texas  Style(TM)
brand tortilla chips and puffs,  all of which are manufactured by third parties.
The  Poore  Brothers(R)  brand  tortilla  chips  are  offered  in  four  flavors
(Original,  Jalapeno,  Roasted Red Pepper and Sun Dried Tomato) and the dips are
offered in three flavors (Sour Cream & Jalapeno, Roasted Red Pepper and Santa Fe
Black Bean. Sales of these products have not been material to date.

MANUFACTURING

     The Company believes that a key element of the success to date of the Poore
Brothers(R)  and Bob's Texas Style(TM) brand potato chips has been the Company's
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.

     In  September  1997,  the  Company  consolidated  all of its  manufacturing
operations  into its present  facility  in  Goodyear,  Arizona,  which was newly
constructed  at the time.  The  Goodyear  facility  has the  capacity to produce
approximately  3,000 pounds of potato  chips per hour,  with  approximately  900
pounds of such  capacity used to batch fry the  Company's  branded  products and
2,100 pounds of such capacity used to continuous fry the Company's private label
products.  Prior to the consolidation,  the Company had two older less-efficient
manufacturing facilities, one of which was in LaVergne,  Tennessee and the other
of which  was in  Goodyear,  Arizona.  In  connection  with the  closure  of the
LaVergne,  Tennessee facility,  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 without significant time or cost. There can be
no  assurance  that the Company  will obtain  sufficient  business to recoup the
costs of its investment in its manufacturing  facility. See "ITEM 2. DESCRIPTION
OF PROPERTY."

DISTRIBUTION AND MARKETING

     The Company's  Poore  Brothers(R)  brand potato chip products have achieved
significant market presence in Arizona, New Mexico, Southern California, Hawaii,
Denver,  Colorado and St. Louis,  Missouri.  The Company's Bob's Texas Style(TM)
brand  potato  chip  products  have  achieved  significant  market  presence  in
south/central  Texas,  including  Houston,  San Antonio and Austin.  The Company
attributes the success of its products in these markets to consumer loyalty. The
Company believes this loyalty results from the products'  differentiated  taste,
texture and flavor  variety  which  result from its batch  frying  process.  The
Company sells its Poore Brothers(R)  brand products  primarily in the southwest,
but also in targeted  markets in the  western,  southern and  midwestern  United
States.  Substantially  all of the Company's Bob's Texas Style(TM)  products are
sold in south/central  Texas. The Company's  products are primarily  distributed
through a select group of independent distributors.

     The Company's Arizona  distribution  business 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,  Safeway,
Smith's,  and Fred Myers  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  Brothers(R)  brand  products,   the  Company
distributes  throughout  Arizona a wide variety of snack food items manufactured
by other companies,  including pretzels, tortilla chips, dips, crackers and meat
snacks.  The Company also sells Poore  Brothers(R) brand potato chips to several
vending and food service companies in the southwest.

     Through  its  Texas  subsidiary,   Tejas  PB  Distributing,   Inc.  ("Tejas
Distributing"),  the Company  merchandises,  but does not  purchase  and resell,
snack food  products for a major grocery  retailer in  south/central  Texas.  In
addition  to  the  Company's  Bob's  Texas   Style(TM)  brand  products,   Tejas
Distributing  merchandises such products as private label potato chips, tortilla
chips, pretzels and cheese puffs manufactured by other companies.

     Outside  of  Arizona  and   south/central   Texas,   the  Company   selects
distributors to distribute Poore Brothers(R) and Bob's Texas Style(TM)  products
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 stores' snack aisles.  As of December 31, 1998, the
Company had arrangements  with over 35 distributors in a number of major cities,
including Honolulu, San Diego, Los Angeles, Las Vegas, Denver,  Albuquerque,  El
Paso, San Antonio, Houston, Wichita, St. Louis, Cincinnati, and Grand Rapids.

                                       10
<PAGE>
     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.

     The Company's marketing programs are designed to increase product trial and
build brand awareness in core markets.  Most of the Company's marketing spending
is focused on trade  advertising  and trade  promotions  designed to attract new
consumers to the products at a reduced  retail price.  The  Company's  marketing
programs also include  selective  event  sponsorship  designed to increase brand
awareness  and  to  provide  opportunities  to  mass  sample  branded  products.
Sponsorship  of the Arizona  Diamondbacks  and the Phoenix Open in 1998 and 1999
typify the Company's efforts to reach targeted consumers and provide them with a
sample of the Company's products to encourage new and repeat purchases.

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  alternative  cooking oils for the  production  of Poore
Brothers(R),  Bob's Texas  Style(TM)  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 a 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

     One customer of the  Company,  Fry's Food Stores (a  subsidiary  of Kroger,
Inc.),  accounted for 16% of the Company's 1998 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 in 1998.  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 $16.4 billion at retail in 1997 with potato chips accounting
for approximately 32% 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 eight years, ranging from
an increase of 6.0% (in 1990) to 0.4% (in 1994), with a 1997 increase of 2.5% to
a rate of $61.94  per  person  per  annum.  Potato  chip  sales  have  similarly
increased steadily over the same period,  with 1997 retail sales of $5.2 billion
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 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 methods of
operation 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


                                       11
<PAGE>
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.

EMPLOYEES

     As of December 31, 1998, the Company had 98 full-time employees,  including
81 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.

TRADEMARKS

     The Company owns the  following  trademarks,  which are  registered  in the
United States: "Poore Brothers" and "An Intensely Different Taste." In addition,
the  trademark  "Texas  Style"  has been  assigned  to the  Company  by Tejas in
connection  with the Tejas  acquisition.  The assignment has been filed with the
U.S.  Trademark  Office for recording.  Once  recorded,  the record owner of the
trademark  will be the Company.  The Company  considers its  trademarks to be of
significant  importance in the Company's  business.  The Company is not aware of
any  circumstances  that would have a material  adverse  effect on the Company's
ability to use its trademarks.

ITEM 2. DESCRIPTION OF PROPERTY

     The Company owns a 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.  The Company  believes  that its  facility is  adequately  covered by
insurance.

     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,  the Company's PB Southeast  subsidiary  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.

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.  Messrs. Howells and Puglisi and PB Southeast filed a
counterclaim  against Mr. Gossett  alleging various acts of  nonperformance  and
breaches of fiduciary  duty on the part of Mr.  Gossett.  In November  1998, the
lawsuits  were  settled and all claims  dismissed  with  prejudice.  The Company
incurred no expense in the settlement other than its own legal fees.

                                       12
<PAGE>
     In September 1997, a lawsuit was commenced against PB Distributing by Chris
Ivey  and  his  company,  Shelby  and  Associates  (collectively,  "Ivey").  The
complaint alleged,  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 suffered damages of at least
$390,000.  In July 1998,  the Company  settled  the  litigation  with Ivey.  The
$13,000  settlement  included the release of all claims and the dismissal of 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.

                                     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.

                                                  SALES PRICES
                                                -----------------
          PERIOD OF QUOTATION                   HIGH        LOW
          -------------------                   ----        ---
          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

          Fiscal 1998:
               First Quarter                    $1.44       $0.97
               Second Quarter                   $1.63       $1.09
               Third Quarter                    $1.44       $0.75
               Fourth Quarter                   $1.06       $0.41

     Nasdaq  recently  implemented  rules changes  increasing  its  quantitative
listing  standards  that  make it  more  difficult  for  companies  to  maintain
compliance with the listing  requirements for the Nasdaq SmallCap Market. One of
such  requirements  is that the bid  price of listed  securities  be equal to or
greater  than  $1.00.  As of  November  9, 1998,  the  closing  bid price of the
Company's Common Stock had remained below $1.00 per share for thirty consecutive
trading  days. As a result,  the Company  received a notice from Nasdaq that the
Company  was not in  compliance  with the  closing  bid price  requirements  for
continued  listing of the Common  Stock on the Nasdaq  SmallCap  Market and that
such Common Stock would be de-listed  after February 15, 1999 if the closing bid
price was not equal to or greater  than $1.00 per share for a period of at least
ten  consecutive  trading days during the ninety-day  period ending February 15,
1999.  On February  9, 1999,  the  Company  submitted  to Nasdaq a request for a
hearing to discuss the  possibility of obtaining an extension of such ninety-day
period. The Company's hearing request was granted by Nasdaq and is scheduled for
April 16, 1999;  the  de-listing  of the Common Stock has been stayed  pending a
determination  by Nasdaq  after the  hearing.  If Nasdaq  denies  the  Company's
request,  or if the Company's  request is granted but the Company's Common Stock
fails to comply with the minimum closing bid price  requirement for at least ten
consecutive  trading days during such  extension  period,  then the Common Stock
will  likely  be  de-listed  from  the  Nasdaq  SmallCap  Market.  Upon any such
de-listing,  trading,  if any, in the Common Stock 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  de-listing,  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. See "ITEM 1. RISK FACTORS -- RISK OF LOW-PRICED STOCK."

     On March 19, 1999, there were 7,832,997 shares of Common Stock outstanding.
As of such date, the shares of Common Stock were held of record by approximately
2,800 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

                                       13
<PAGE>
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.

     In December 1996, the Company  completed an initial public  offering of its
common stock, par value $.01 per share (the "Common  Stock"),  pursuant to which
2,250,000  shares of Common Stock were  offered and sold to the public.  Of such
shares, 1,882,652 shares were sold by the Company at an aggregate offering price
of $6,589,282  and 367,348 shares were sold by the holders of the 9% Convertible
Debentures at an aggregate  offering  price of  $1,285,718.  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
($659,000),  the expense of the Underwriter  paid by the Company  ($198,000) and
the other expenses of the offering paid by the Company (approximately $432,000),
were approximately  $5,300,000. On January 6, 1997, an additional 337,500 shares
of Common  Stock were sold by the  Company  at an  aggregate  offering  price of
$1,181,250  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 commissions ($118,000), the expense of the
Underwriter  paid by the Company  ($35,000)  and the other  expenses paid by the
Company   (approximately   $9,000),   the  Company   received  net  proceeds  of
approximately $1,019,000 from the sale of such additional shares. As of December
31, 1998,  all of the proceeds of the offering had been  utilized by the Company
for the following  purposes:  construction  of the Company's  Goodyear,  Arizona
manufacturing facility which was completed in August 1997 ($2,683,000), purchase
and installation of new machinery and equipment in 1997  ($2,072,000),  purchase
of real estate ($19,000) and working capital ($1,545,000).

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
        FINANCIAL CONDITION

RESULTS OF OPERATIONS

     YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997

     Net sales for the year  ended  December  31,  1998 were  $13,168,000,  down
$2,564,000, or 16%, from $15,732,000 for 1997. Sales of products manufactured by
the  Company  accounted  for 78% and 71% of the  total  sales in 1998 and  1997,
respectively,  while sales of products  manufactured by others accounted for 22%
and 29% in 1998  and  1997,  respectively.  The sale of the  Texas  distribution
business in June 1997  represented  approximately  $1,452,000 of the total sales
decline,  consisting of $1,213,000 in sales of products  manufactured  by others
and $239,000 in sales of Poore Brothers manufactured potato chips. An additional
$697,000  decrease  occurred in sales of products  manufactured by others due to
the elimination of several  unprofitable product lines during the second quarter
of 1997. These decreases were partially  offset by increased  revenue from other
product lines of $282,000,  or 11%.  Manufactured potato chip sales for the year
ended December 31, 1998 were $10,286,000, down $696,000, or 6%, from $10,982,000
(excluding  PB Texas) for the year ended  December 31, 1997.  This  decrease was
driven  principally by lower volume as a result of the Company's  discontinuance
of unprofitable  promotion  programs with certain  customers and the shutdown of
the  Tennessee  manufacturing  facility in the third  quarter of 1997.  Sales of
private label potato chips increased $649,000,  or 60%, to $1,728,000  primarily
as a result of sales to a new customer beginning in late 1997, helping to offset
the overall decrease in manufactured potato chips.

     Gross profit for the year ended December 31, 1998, was  $3,244,000,  or 25%
of net sales,  as compared to  $2,022,000,  or 13% of net sales,  for 1997.  The
$1,222,000  increase in gross profit,  or 60%, occurred despite 16% lower sales.
This  increase is a result of the  restructuring  actions  implemented  in 1997,
benefits from  negotiated raw material cost savings and a continued  improvement
in manufacturing and operating  efficiencies at the Company's Goodyear,  Arizona
facility.

     Operating  expenses  decreased to  $3,603,000,  or 27% of net sales for the
year ended  December 31, 1998,  from  $4,728,000,  or 30% of net sales for 1997.
This represented a $1,125,000  decrease,  or 24%, compared to 1997. The decrease
was  primarily  attributable  to $164,000 in charges  recorded by the Company in
1997 related to severance,  equipment write-downs and lease termination costs in
connection  with the sale of the Company's Texas  distribution  business in June
1997; $581,000 in charges recorded by the Company in 1997 in connection with the
closure of the LaVergne, Tennessee manufacturing facility in September 1997; and
a decrease in selling, general and administrative expenses. Selling, general and
administrative  expenses decreased $380,000,  or 10%, to $3,603,000 for the year
ended December 31, 1998 from  $3,982,000 for 1997 despite a $29,000  increase in
depreciation  and amortization  and a $169,000,  or 13%,  increase in marketing,
advertising  and  promotional  spending.  Offsetting  these increases were a 21%
decrease in payroll costs and $344,000 in lower sales-related  expenses,  office
expenses and occupancy costs resulting from 1997's restructuring actions.

     Net interest expense  increased to $515,000 for the year ended December 31,
1998 from  $328,000 for 1997.  This was due primarily to an increase in interest
expense of $105,000  related to a full year of interest expense on the permanent
financing  of  the  Company's  Arizona  manufacturing  facility  and  production
equipment in 1998,  and an $82,000  decrease in interest  income  generated from
investment of the remaining proceeds of the initial public offering.

                                       14
<PAGE>
     The  Company's  net losses for the years ended  December  31, 1998 and 1997
were  $874,000  and  $3,034,000,  respectively.  The  reduction  in net loss was
attributable  primarily  to the  increased  gross  profit  and  lower  operating
expenses, offset by higher net interest expense.

     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%. Poore  Brothers(R)  potato 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 Company's  Arizona  operations.  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 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" 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"  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 $768,155 (a current ratio of 1.4:1) and $1,423,643
(a current ratio of 1.6:1) at December 31, 1998 and 1997,  respectively.  During
1998,  the  Company  used  $0.1  million  of  cash  for  operating   activities,
principally  growth in  receivables,  invested $1.4 million in new equipment and
the  purchase  of Tejas,  and  increased  its debt  financing  by $0.2  million,
resulting in an overall decrease in cash and cash equivalents of $1.3 million.

                                       15
<PAGE>
     On November 4, 1998, the Company signed the new $2.5 million Norwest Credit
Agreement  which  includes a $2.0  million  working  capital line of credit (the
"Norwest  Line of  Credit")  and a $0.5  million  term loan (the  "Norwest  Term
Loan").  Borrowings under the Norwest Credit Agreement have been used to pay off
borrowings  under the Company's  $1,000,000  Line of Credit with First Community
Financial  Corporation,  to finance a portion of the  consideration  paid by the
Company  in  connection  with the Tejas  acquisition,  and for  general  working
capital  needs.  The Norwest Line of Credit bears  interest at an annual rate of
prime plus 1.5% and matures in November  2001 while the Norwest  Term Loan bears
interest  at an annual  rate of prime  plus 3% and  requires  monthly  principal
payments of approximately $28,000, plus interest, until maturity on May 1, 2000.
The Norwest Credit Agreement is secured by receivables,  inventories,  equipment
and general  intangibles.  Borrowings under the Norwest Line of Credit are based
on 85% of eligible receivables and 60% of eligible  inventories.  As of December
31, 1998, the Company had a borrowing base of approximately $1,374,000 under the
Norwest Line of Credit.  The Norwest Credit Agreement requires the Company to be
in compliance with certain  financial  performance  criteria,  including minimum
debt service coverage ratio, minimum quarterly and annual operating results, and
minimum  quarterly and annual  changes in book net worth.  At December 31, 1998,
the Company was not in compliance  with a maximum  quarterly net loss limitation
of $50,000  (actual net loss of $146,366)  and a minimum  debt service  coverage
ratio  requirement  of not less than  0.50 to 1 (actual  of 0.30 to 1) under the
Norwest Credit  Agreement.  Such  non-compliance  has not to date resulted in an
event of default under the Norwest Credit Agreement  because Norwest granted the
Company a waiver for the period ended December 31, 1998 and agreed to modify the
financial ratio  requirements for future periods.  Management  believes that the
fulfillment  of the Company's  plans and  objectives  will enable the Company to
attain  a  sufficient  level  of  profitability  to be in  compliance  with  the
financial  performance  criteria;  however,  there can be no assurance  that the
Company will attain any such profitability or be in compliance. Any acceleration
under the Norwest Credit Agreement could have a material adverse effect upon the
Company.  As of December 31, 1998, there was an outstanding  balance of $847,013
on the Norwest Line of Credit and $472,222 on the Norwest Term Loan. On November
4, 1998,  pursuant to the terms of the  Norwest  Credit  Agreement,  the Company
issued to Norwest a warrant (the "Norwest Warrant") to purchase 50,000 shares of
Common Stock for an exercise price of $0.93375 per share. The Norwest Warrant is
exercisable  until  November  3, 2003,  the date of  termination  of the Norwest
Warrant,   and  provides  the  holder  thereof   certain  demand  and  piggyback
registration rights.

     The  Company's  previous $1.0 million  working  capital line of credit from
First  Community  Financial  Corporation  was  renewed as of May 31,  1998 for a
six-month  period.  In November 1998, the outstanding  balance was paid off from
borrowings under the Norwest Credit Agreement.

     In connection with the Company's sale of the Texas distribution business in
June 1997 and the closure of the LaVergne,  Tennessee manufacturing operation in
September 1997, $478,000 of the $746,000 in total charges  represented  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 LaVergne,  Tennessee  manufacturing  operation
and the  relocation  of  certain  assets to  Arizona,  the  outstanding  balance
($160,000) on a Commercial  Development  Block Grant from the State of Tennessee
was paid off using working capital in January 1998.

     Completion of the Company's Goodyear,  Arizona 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 a  short-term  construction  loan  into a
permanent $2.0 million  mortgage  financing  arrangement,  financing of $862,961
under  equipment  financing  leases and proceeds from the Company's 1996 initial
public  offering.  The $2.0 million  mortgage loan,  from Morgan  Guaranty Trust
Company  of New York,  bears  interest  at 9.03% per annum and is secured by the
building and the land on which it is located.  The loan matures on July 1, 2012;
however  monthly  principal and interest  installments of $18,425 are determined
based on a twenty-year amortization period.

     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
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 the  Goodyear,  Arizona  facility,  the Company  sold
existing  land  and  buildings   (comprising  the  Company's   previous  Arizona
manufacturing facility) 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 January 1997, the Company sold 337,500 additional shares of Common Stock
pursuant to an over-allotment option granted to the Underwriter in the Company's
December 1996 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.

     At December 31, 1998, the Company had outstanding 9% Convertible Debentures
due July 1, 2002 in the  principal  amount  of  $2,229,114.  The 9%  Convertible
Debentures are secured by land, building, equipment and intangibles. 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 November 1999 through June 2002. For the period November 1,
1998 through October 31, 1999,  Renaissance Capital (the holder of $1,718,094 of
9% Convertible  Debentures) agreed to waive all mandatory  principal  redemption
payments and to accept 183,263 unregistered shares of the Company's Common Stock

                                       16
<PAGE>
in lieu of cash  interest  payments.  Also in connection  with such waiver,  the
Company agreed to decrease the conversion price of the 9% Convertible Debentures
from $1.09 to $1.00.  As of December 31, 1998, 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  1.0:1(actual  of .92:1).  However,  the holders of the 9%  Convertible
Debentures  had  previously  granted the  Company a waiver as to such  financial
ratio effective through June 30, 1999. As consideration for the granting of such
waiver,  as of February 1998 the Company issued warrants to Renaissance  Capital
and Wells Fargo, the holders of the 9% Convertible Debentures,  representing the
right to  purchase  25,000  and 7,143  shares  of the  Company's  Common  Stock,
respectively,  at an  exercise  price of $1.00 per share.  Each  warrant  became
exercisable  upon  issuance and expires on July 1, 2002. 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 Company is currently in compliance
with the other financial ratios, including working capital of at least $500,000;
a minimum of $4,500,000  shareholders' equity; and a current ratio at the end of
any fiscal quarter of at least 1.1:1.  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.  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. 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, 1998,  the Company had net operating  losses  available
for federal and state income taxes of  approximately  $5,510,000.  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,   "Accounting   for  Income  Taxes."  The  Company's
accumulated  net  operating  losses expire in varying  amounts  between 2010 and
2018.

                                       17
<PAGE>
MANAGEMENT'S PLANS

     In connection with the  implementation of the Company's  business strategy,
the Company may incur additional operating losses in the future and is likely to
require future debt or equity financings (particularly in connection with future
strategic   acquisitions).    Expenditures   relating   to   acquisition-related
integration costs,  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.  As a
result  of the  1997  restructuring  actions  and the  1998  Tejas  acquisition,
management  believes  that the Company  will  generate  positive  cash flow from
operations in 1999, which, along with its existing working capital and borrowing
facilities,  should enable the Company to meet its operating  cash  requirements
through  1999.  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 any
required  financings will be available or, if available,  on terms attractive to
the Company.

INFLATION AND SEASONALITY

     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.

YEAR 2000 COMPLIANCE

     The Year 2000 issue is the result of computer  programs being written using
two digits  rather than four to  identify  the  applicable  year.  For  example,
computer programs that utilize  date-sensitive  information may recognize a date
using  "00" as the year 1900  rather  than the year 2000.  This could  result in
system failures or miscalculations.

     The Company  processes  much of its data using licensed  computer  programs
from third parties,  including its accounting software.  Such third parties have
advised the Company  that they have made all  necessary  programming  changes to
such computer  programs to address the Year 2000 issue.  The Company  tested its
systems for Year 2000  compliance  during the first half of 1998 and  discovered
that certain database  information utilized by the Company for purposes of order
entry, billing and accounts receivables is not Year 2000 compliant, although the
underlying  database  software is Year 2000  compliant.  The Company  intends to
implement  corrective measures with respect to such database  information during
the third  quarter of 1999.  The  Company  does not expect to incur  significant
expenses in connection with such corrective measures.  In addition,  the Company
believes that,  notwithstanding the foregoing,  it has no material internal risk
in connection with the potential impact of the Year 2000 issue on the processing
of date sensitive information by the Company's computerized information systems.

     The  Company is in the process of  determining  the effect of the Year 2000
issue on its vendors' and customers' systems. There can be no assurance that the
systems of such third parties will be Year 2000 compliant on a timely basis,  or
that the Company's  results of operations will not be adversely  affected by the
failure of systems  operated by third  parties to  properly  operate in the Year
2000.

ITEM 7. FINANCIAL STATEMENTS
                                                                       PAGE
                                                                       ----
REPORTS

Report of independent public accountants with respect to
  financial statements for the years ended December 31, 1998
  and 1997                                                              31

FINANCIAL STATEMENTS

Consolidated balance sheets as of December 31, 1998 and 1997            32
Consolidated statements of operations for the years ended
  December 31, 1998 and 1997                                            33
Consolidated statements of shareholders' equity for the years
  ended December 31, 1998 and 1997                                      34
Consolidated statements of cash flows for the years ended
  December 31, 1998 and 1997                                            35
Notes to consolidated financial statements                              36

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.

                                       18
<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:

    NAME                  AGE                        POSITION
    ----                  ---                        --------
    Eric J. Kufel         32       President, Chief Executive Officer, Director
    Glen E. Flook         40       Vice President-Manufacturing
    Thomas W. Freeze      47       Vice President, Chief Financial Officer,
                                     Treasurer, and Secretary
    Thomas G. Bigham      45       Vice President of Sales-Texas
    Wendell T. Jones      58       Vice President of Sales-Arizona
    Kevin M. Kohl         43       Vice President of Sales-Texas
    James M. Poore        52       Vice President
    Mark S. Howells       45       Chairman, Director
    James W. Myers        64       Director
    Robert C. Pearson     63       Director
    Aaron M. Shenkman     58       Director

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.

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.

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.

THOMAS G.  BIGHAM.  Mr.  Bigham has been Vice  President  of Sales - Texas since
November 1998.  From December 1996 to November 1998, Mr. Bigham was President of
Tejas,  whose  business  and  certain  assets were  purchased  by the Company in
November  1998.  From 1994 to December  1996,  Mr. Bigham was President of Eagle
Brands of Houston, Inc.

WENDELL T. JONES. Mr. Jones has been the Vice President of  Sales-Arizona  since
August 1998.  From February 1997 to August 1998, Mr. Jones served as Director of
Sales-Arizona.  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.

KEVIN M. KOHL.  Mr. Kohl has been Vice President of Sales - Texas since November
1998.  From July 1996 to November 1998, Mr. Kohl was Executive Vice President of
Tejas,  whose  business  and  certain  assets were  purchased  by the Company in
November  1998.  From July 1994 to June 1996,  Mr. Kohl was  President of Mighty
Eagle,  Inc.  d/b/a Atlanta  Eagle.  From June 1992 to July 1994, Mr. Kohl was a
Regional Director of Eagle Snacks, Inc.

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,

                                       19
<PAGE>
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.

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.  d/b/a  Puglisi  Howells & Co.,  a  registered
securities broker-dealer.

JAMES W. MYERS. Mr. Myers has served as a Director since January 1999. Mr. Myers
has been President of Myers Management & Capital Group,  Inc., a consulting firm
specializing in strategic,  organizational  and financial  advisory  services to
CEO's, since January 1996. From December 1989 to December 1995, Mr. Myers served
as  President  of Myers,  Craig,  Vallone & Francois,  Inc.,  a  management  and
corporate finance consulting firm. Previously, Mr. Myers was an executive with a
variety of consumer  goods  companies.  Mr. Myers is currently a director of ILX
Resorts, Inc., a publicly traded time-share sales and resort property company.

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  Capital"),  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.  Mr.  Pearson  is  currently  a  director  of  Tava
Technologies,  Inc. (a publicly traded information technology services company),
Dexterity Surgical,  Inc. (a publicly traded surgical  instruments  manufacturer
and distributor),  and Interscience Computer, Inc. (a distributor of consumables
for laser printers).

         Pursuant to the Debenture Loan Agreement, so long as the 9% Convertible
Debentures have not been fully converted into shares of Common Stock or redeemed
or paid by the  Company,  Renaissance  Capital  shall be entitled to designate a
nominee to the Company's Board of Directors subject to election by the Company's
stockholders.  Renaissance  Capital  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.

     Effective  December 31, 1998,  Jeffrey J. Puglisi resigned as a Director of
the Company.

INFORMATION REGARDING BOARD OF DIRECTORS AND COMMITTEES

     The Board of Directors  conducts its business through meetings of the Board
of Directors and through its standing  committees.  As of the date of this Proxy
Statement,  two  committees  have been  established,  an Audit  Committee  and a
Compensation  Committee.  The Board of Directors  does not  currently  utilize a
Nominating Committee or committee performing similar functions.

     The Audit Committee: (i) makes recommendations to the Board of Directors as
to the independent  accountants to be appointed by the Board of Directors;  (ii)
reviews with the independent accountants the scope of their examinations;  (iii)
receives the reports of the independent accountants for the purpose of reviewing
and considering  questions relating to their examination and such reports;  (iv)
reviews, either directly or indirectly or through independent  accountants,  the
internal accounting and auditing procedures of the Company;  (v) reviews related
party transactions; and (vi) performs such other functions as may be assigned to
it from time to time by the Board of Directors. The Audit Committee is comprised
of three members of the Board of Directors,  Messrs. Pearson, Howells and Myers.
The Chairman of the Audit  Committee is Mr.  Pearson.  The Audit  Committee  was
established on October 22, 1996.

     The  Compensation  Committee  reviews and  recommends the  compensation  of
executive officers and key employees. The Compensation Committee is comprised of
three members of the Board of Directors,  Messrs.  Howells,  Shenkman and Myers.

                                       20
<PAGE>
The Chairman of the  Compensation  Committee is Mr.  Shenkman.  The Compensation
Committee was established on June 12, 1997.

COMPENSATION OF DIRECTORS

     In May 1998, the Company  granted  options to purchase 10,000 shares of the
Company's  Common Stock to each person who was elected to the Board of Directors
at the 1998 Annual Meeting of Shareholders. Such options, which have an exercise
price of $1.3125  per share,  will vest on June 18, 1999 and have a term of five
years. In addition,  Mr. Myers,  who was newly elected to the Board of Directors
on January 12, 1999,  was granted an option to purchase  10,000 shares of Common
Stock at an exercise  price of $0.59375  per share with a term of five years and
exercisable on the date of grant.

     In the future,  in order to attract and retain highly competent  persons as
Directors and as compensation  for Directors'  service on the Board, the Company
may, from time to time, grant additional stock options or issue shares of Common
Stock to Directors.

     Directors are reimbursed for  out-of-pocket  expenses incurred in attending
meetings  of the Board of  Directors  and for other  expenses  incurred in their
capacity as directors.

                             EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

     The following table sets forth certain information  regarding  compensation
paid during each of the Company's last three fiscal years, as applicable, to the
Company's  Chief  Executive  Officer and those other  executive  officers of the
Company whose salary and bonuses,  if any,  exceeded  $100,000 for the Company's
fiscal year ended December 31, 1998.
<TABLE>
<CAPTION>
                           SUMMARY COMPENSATION TABLE
                                                                               LONG TERM
                                                   ANNUAL COMPENSATION        COMPENSATION
                                                   -------------------        ------------
                                                                                  AWARDS
          NAME AND                                            OTHER ANNUAL    STOCK OPTIONS    ALL OTHER
     PRINCIPAL POSITION        YEAR     SALARY      BONUS     COMPENSATION       GRANTED      COMPENSATION
     ------------------        ----    -------     -------    -------------   -------------   ------------
<S>                            <C>     <C>         <C>          <C>             <C>             <C>
Eric J. Kufel (1)              1998    $119,423         --      $6,975(4)       390,000(5)           --
  President, Chief Executive   1997    $ 99,519         --      $7,381(4)       350,000(5)           --
  Officer and Director         1996          --         --          --               --              --
Glen E. Flook (2)              1998    $ 98,654    $15,000      $  350(4)       130,000(5)           --
  Vice President-              1997    $ 74,904    $30,000          --          105,000(5)      $63,143(6)
  Manufacturing                1996          --         --          --               --              --
Thomas W. Freeze (3)
  Vice President,
  Chief Financial              1998    $109,038         --          --          195,000(5)           --
  Officer, Secretary and       1997    $ 71,481         --          --          155,000(5)           --
  Treasurer                    1996          --         --          --             --                --
</TABLE>
----------
(1)  Mr. Kufel has served as President,  Chief Executive  Officer and a Director
     of the Company since February 1997.
(2)  Mr. Flook has served as Vice President-Manufacturing since March 1997.
(3)  Mr. Freeze has served as Vice President, Chief Financial Officer, Secretary
     and Treasurer since April 1997.
(4)  Represents the value of company  automobiles  provided to Mr. Kufel and Mr.
     Flook for their exclusive use.
(5)  Stock  options to purchase  300,000,  75,000 and  125,000  shares of Common
     Stock were granted to Messrs.  Kufel,  Flook and Freeze,  respectively,  in
     September  1998 for the purpose of effecting a repricing  of stock  options
     for the same numbers of shares  granted to them by the Company in 1997.  In
     connection  therewith,  the 1997 stock options were cancelled.  See "OPTION
     GRANTS IN LAST FISCAL YEAR."
(6)  Represents  payments  made to, and expenses paid on behalf of, Mr. Flook in
     connection  with his relocation to Arizona upon obtaining  employment  with
     the Company.

                                       21
<PAGE>
     The following table sets forth information concerning stock options granted
during the fiscal year ended December 31, 1998 for the individuals  shown in the
Summary  Compensation  Table. No stock appreciation rights ("SARs") were granted
in connection  with any such stock options during the fiscal year ended December
31, 1998.
<TABLE>
<CAPTION>
                        OPTION GRANTS IN LAST FISCAL YEAR
                               (INDIVIDUAL GRANTS)

                     NUMBER OF SHARES OF     PERCENT OF TOTAL OPTIONS
                   COMMON STOCK UNDERLYING     GRANTED TO EMPLOYEES     EXERCISE PRICE
NAME                  OPTIONS GRANTED(1)        IN FISCAL YEAR (5)        PER SHARE      EXPIRATION DATE
----                  ------------------        ------------------        ---------      ---------------
<S>                       <C>                          <C>                <C>            <C>
Eric J. Kufel              90,000                      11.0%              $1.015625      January 28, 2003
                          300,000(2)                   36.8%              $1.25    (6)   September 14, 2003
Glen E. Flook              55,000                       6.8%              $1.105625      January 28, 2003
                           75,000(3)                    9.2%              $1.25    (6)   September 14, 2003
Thomas W. Freeze           70,000                       8.6%              $1.015625      January 28, 2003
                          125,000(4)                   15.3%              $1.25    (6)   September 14, 2003
</TABLE>
----------
(1)  All listed stock  options  vest over a  three-year  period from the date of
     grant.
(2)  Granted to Mr.  Kufel for the purpose of  effecting a repricing  of a stock
     option to purchase  300,000  shares of Common  Stock  granted to him by the
     Company in 1997.  In connection  therewith,  the 1997 stock option (with an
     exercise  price of $3.5625 per share) was  cancelled.  The new stock option
     vests  over a period  of three  years  from the date of grant in  September
     1998. See "REPRICING OF STOCK OPTIONS."
(3)  Granted to Mr.  Flook for the purpose of  effecting a repricing  of a stock
     option to  purchase  75,000  shares of Common  Stock  granted to him by the
     Company in 1997.  In connection  therewith,  the 1997 stock option (with an
     exercise  price of $3.9375 per share) was  cancelled.  The new stock option
     vests  over a period  of three  years  from the date of grant in  September
     1998. See "REPRICING OF STOCK OPTIONS."
(4)  Granted to Mr.  Freeze for the purpose of  effecting a repricing of a stock
     option to purchase  125,000  shares of Common  Stock  granted to him by the
     Company in 1997.  In connection  therewith,  the 1997 stock option (with an
     exercise  price of $2.8750 per share) was  cancelled.  The new stock option
     vests  over a period  of three  years  from the date of grant in  September
     1998. See "REPRICING OF STOCK OPTIONS."
(5)  For purposes of calculating these percentages, stock options to purchase an
     aggregate  of  40,000  shares  of  Common  Stock  granted  to  non-employee
     Directors  during fiscal 1998 were  excluded from Total Options  Granted to
     Employees  in Fiscal  Year.  
(6)  The average last sale price for the 30 consecutive trading days immediately
     prior to the grant date was $0.97 per share.

     The following table sets forth information  concerning the number and value
of unexercised  stock options at December 31, 1998 held by the individuals shown
in the  Summary  Compensation  Table.  None of such  persons  held  any  SARs at
December 31, 1998 or exercised any SARs during 1998.

               AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
                          FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
                   NUMBER OF    AGGREGATE      NUMBER OF SHARES OF COMMON          VALUE OF UNEXERCISED
                    SHARES        VALUE       STOCK UNDERLYING UNEXERCISED        IN-THE-MONEY OPTIONS AT
                   RECEIVED      REALIZED     OPTIONS AT DECEMBER 31, 1998         DECEMBER 31, 1998 (1)
                     UPON         UPON       -----------------------------    -----------------------------
    NAME           EXERCISE      EXERCISE    EXERCISABLE     UNEXERCISABLE    EXERCISABLE     UNEXERCISABLE
    ----           --------      --------    -----------     -------------    -----------     -------------
<S>                   <C>          <C>           <C>             <C>               <C>              <C>
Eric J. Kufel         --           --            16,667          423,333           --               --
Glen E. Flook         --           --            10,000          150,000           --               --
Thomas W. Freeze      --           --            10,000          215,000           --               --
</TABLE>
----------
(1)  Value is the  difference  between the market value of the Company's  Common
     Stock on December 31, 1998,  which was $0.59 per share (based upon the last
     sales price of the Common  Stock on the Nasdaq  SmallCap  Market),  and the
     exercise price.

                                       22
<PAGE>
STOCK OPTION PLAN

     The  Company's  1995 Poore  Brothers,  Inc.  Stock  Option Plan (the "Stock
Option  Plan") is  designed to attract and retain  highly  competent  persons as
directors,  officers and key  employees of the Company and its  subsidiaries  by
providing them with  opportunities  to acquire shares of Common Stock. The Stock
Option Plan is  administered  by the Company's Board of Directors or a committee
appointed  by the  Board,  which  determines  the  persons to whom  options  are
granted, and the number and terms of the options,  including the exercise price.
The Stock Option Plan is currently administered by the Board of Directors and no
stock option  committee has been  appointed to date.  Options  granted under the
Stock  Option  Plan have  such  vesting  and  exercise  periods  as the Board of
Directors may determine; provided that no option may be exercisable earlier than
six months after the date of grant and no option may have a term longer than ten
years.  1,500,000  shares of Common  Stock are  currently  reserved for issuance
under the Stock Option Plan. As of March 19,1999,  options to purchase 1,152,850
shares of Common Stock were granted and outstanding  under the Stock Option Plan
and a total of 206,817 remained eligible for future grants. The number of shares
underlying options granted under the Stock Option Plan are subject to adjustment
under certain circumstances.

STOCK OPTIONS GRANTED OUTSIDE THE STOCK OPTION PLAN

     In addition to stock  options  granted  under the Stock  Option  Plan,  the
Company has granted stock options to purchase an aggregate of 820,000  shares of
Common Stock to Mr.  Howells  (385,000),  a Director of the Company,  as well as
Messrs. Jeffrey J. Puglisi (385,000) and Parris H. Holmes, Jr. (50,000),  former
Directors of the Company.  The options vested on their respective dates of grant
and expire ten years from the dates of grant.

REPRICING OF STOCK OPTIONS

     Each of Messrs.  Kufel,  Freeze and Flook  joined the  Company in the first
half of 1997. Upon commencement of employment, each person was granted an option
(each,  an  "Employment  Agreement  Stock  Option")  to  purchase  shares of the
Company's  Common Stock pursuant to the 1995 Poore  Brothers,  Inc. Stock Option
Plan  (the  "Stock  Option  Plan")  pursuant  to the  terms  of  his  employment
agreement:  Mr. Kufel was granted an option to purchase 300,000 shares of Common
Stock at an  exercise  price of  $3.5625;  Mr.  Freeze was  granted an option to
purchase  125,000  shares of Common  Stock at an  exercise  price of $2.875  per
share;  and Mr. Flook was granted an option to purchase  75,000 shares of Common
Stock at an exercise price of $3.9375 per share.

     In 1997 and 1998,  during which the Company  implemented  and completed its
restructuring  program and  refocused  its efforts on  expanding  the  Company's
business,  the  market  value  of  the  Company's  Common  Stock  experienced  a
substantial  decline.  As a  result,  by the  latter  part of  1998,  all of the
Employment Agreement Stock Options were  "out-of-the-money"  (i.e., the exercise
prices of the options  were higher than the current  market  price of the Common
Stock), in each case by a large amount. At the same time, due to the strength of
the national and local economies, competition for qualified management and other
key employees intensified.

     In light of the  contributions  of Messrs.  Kufel,  Freeze and Flook to the
Company in  connection  with the  restructuring  and the  implementation  of the
Company's business plan, and in order to encourage each such person to remain in
the  employ  of the  Company,  on  September  14,  1998 the  Company's  Board of
Directors  (acting without Mr. Kufel)  authorized the Company to offer each such
person  the right to cancel  his  out-of-the-money  Employment  Agreement  Stock
Option in exchange for a replacement stock option to purchase the same number of
shares of Common  Stock with an exercise  price of $1.25 per share.  The average
last  sale  price  of the  Common  Stock  for the 30  consecutive  trading  days
immediately  prior to the grant date was $0.97 per share. In addition,  the term
and  exercisability  of  the  replacement  options  were  reset  such  that  the
measurement  periods  commenced  on the grant date of the  replacement  options.
Otherwise,  the  replacement  option terms remained the same as the terms of the
Employment Agreement Stock Options.

     Each of Messrs.  Kufel,  Freeze and Flook  elected  to  participate  in the
repricing.  The total  number of shares of Common Stock  subject to  outstanding
stock options was not impacted by the  repricing,  since the number of shares of
Common  Stock  underlying  the  Employment   Agreement  Stock  Options  and  the
replacement options was the same.

EMPLOYMENT AGREEMENTS

     Mr. Eric J. Kufel was  appointed as President and Chief  Executive  Officer
and elected to the Board of Directors of the Company effective February 3, 1997.
Mr. Kufel is employed under an "at will" employment agreement which provides for
a  base  salary  of  $115,000  per  year,  use  of  a  Company   automobile  and
participation  in  Company  bonus  plans,  the  terms  of  which  are  yet to be
determined.  Mr. Kufel's salary is subject to increases at the discretion of the
Company's Board of Directors.  Pursuant to his employment agreement,  on January
24, 1997 Mr.  Kufel was granted a stock  option to  purchase  300,000  shares of
Common  Stock at a price of $3.5625  per share.  In  September  1998,  the stock
option was  cancelled  and a new stock  option for the same number of shares was
issued to Mr.  Kufel in order to effect a repricing.  The exercise  price of the

                                       23
<PAGE>
new stock  option is $1.25 per share.  The stock  option vests over a three-year
period and expires five years from the date of grant. See "OPTION GRANTS IN LAST
FISCAL YEAR" and "REPRICING OF STOCK OPTIONS."  Mr. Kufel's employment agreement
contains a non-compete covenant.

     Mr. Glen E. Flook has served as Vice President-Manufacturing since March 3,
1997.  Mr.  Flook is  employed  under an "at  will"  employment  agreement  that
provides for a base salary of $95,000 per year and for  participation in Company
bonus plans, the terms of which are yet to be determined.  Mr. Flook's salary is
subject to increases at the  discretion  of the  Company's  Board of  Directors.
Pursuant to his employment agreement, on February 14, 1997 Mr. Flook was granted
a stock option to purchase  75,000  shares of Common Stock at a price of $3.9375
per share.  In September  1998,  the stock option was  cancelled and a new stock
option for the same number of shares was issued to Mr.  Flook in order to effect
a repricing.  The exercise price of the new stock option is $1.25 per share. The
stock option vests over a three-year period and expires five years from the date
of grant.  See  "OPTION  GRANTS IN LAST  FISCAL  YEAR" and  "REPRICING  OF STOCK
OPTIONS." In addition,  the Company made payments to and paid expenses on behalf
of Mr. Flook in 1997 in an aggregate amount of $63,143 for expenses  incurred by
him in connection  with his relocation to Arizona upon the  commencement  of his
employment  with the  Company.  Mr.  Flook's  employment  agreement  contains  a
non-compete covenant.

     Mr. Thomas W. Freeze has served as Vice President, Chief Financial Officer,
Secretary and Treasurer  since April 10, 1997.  Mr. Freeze is employed  under an
"at will"  employment  agreement that provides for a base salary of $105,000 per
year and for participation in Company bonus plans, the terms of which are yet to
be determined.  Mr. Freeze's salary is subject to increases at the discretion of
the Company's Board of Directors. Pursuant to his employment agreement, on April
10, 1997 Mr.  Freeze was granted a stock  option to purchase  125,000  shares of
Common Stock at a price of $2.875 per share. In September 1998, the stock option
was cancelled and a new stock option for the same number of shares was issued to
Mr. Freeze in order to effect a repricing.  The exercise  price of the new stock
option is $1.25 per share.  The stock option vests over a three-year  period and
expires  five years from the date of grant.  See  "OPTION  GRANTS IN LAST FISCAL
YEAR" and "REPRICING OF STOCK OPTIONS."

     In addition to Mr. Kufel, Mr. Flook and Mr. Freeze, certain other executive
officers  of the  Company  have  entered  into  employment  agreements  with the
Company.

                 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

     The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of the Record Date by (i) each person
known  by  the  Company  to be the  beneficial  owner  of  more  than  5% of the
outstanding  Common  Stock,  (ii) each  director and nominee for director of the
Company,  (iii) each  executive  officer of the  Company  listed in the  Summary
Compensation  Table set forth in "Executive  Compensation"  above,  and (iv) all
executive  officers and  directors  of the Company as a group,  as of the Record
Date.
<TABLE>
<CAPTION>
                                                       AMOUNT AND NATURE OF     PERCENT OF SHARES OF
                                                       BENEFICIAL OWNERSHIP         COMMON STOCK
      NAME AND ADDRESS OF BENEFICIAL OWNER              OF COMMON STOCK (1)    BENEFICIALLY OWNED (2)
      ------------------------------------             --------------------    ----------------------
<S>                                                      <C>                           <C>
Mark S. Howells.......................................     768,137 (3)                  9.3%
   2390 E. Camelback Road
   Suite 203
   Phoenix, AZ 85016
Eric J. Kufel.........................................      51,667 (4)                  0.7
   3500 S. La Cometa Drive
   Goodyear, AZ 85338
James W. Myers........................................      10,000 (5)                  0.1
   5050 N. 40th Street
   Suite 100
   Phoenix, AZ 85018
Robert C. Pearson.....................................      15,000 (6)                  0.2
   8080 North Central Expressway
   Suite 210/LB59
   Dallas, TX 75206
Aaron M. Shenkman.....................................      35,000 (7)                  0.4
   716 Gary Lane
   El Paso, TX 79922
</TABLE>

                                       24
<PAGE>
<TABLE>
<CAPTION>
<S>                                                      <C>                           <C>
Glen E. Flook.........................................      29,333 (8)                  0.4
   3500 S. La Cometa Drive
   Goodyear, AZ 85338
Thomas W. Freeze......................................      35,333 (9)                  0.4
   3500 S. La Cometa Drive
   Goodyear, AZ 85338
Jeffrey J. Puglisi....................................     825,001 (10)                10.0
   2390 E. Camelback Road
   Suite 203
   Phoenix, AZ 85016
Renaissance Capital Growth & Income Fund III, Inc.....   1,926,357 (11)                19.7
   8080 North Central Expressway
   Suite 210/LB59
   Dallas, TX 75206
Tejas Snacks, L.P. ...................................     400,000 (12)                 5.1
   Rt. 1, Box 66A
   Brookshire, TX 77423
Wells Fargo Small Business Investment Company, Inc....     511,020 (13)                 6.2
   One Montgomery Street
   West Tower, Suite 2530
   San Francisco, CA 94104
All executive officers and directors as
    a group (11 persons) (14).........................   1,398,303 (14)                17.4
</TABLE>
----------
(1)  Unless otherwise  indicated,  each of the persons named has sole voting and
     investment power with respect to the shares reported.
(2)  Shares of Common Stock which an  individual or group has a right to acquire
     within 60 days  pursuant to the  exercise of options or warrants are deemed
     to be outstanding for the purpose of computing the percentage  ownership of
     such  individual  or group,  but are not deemed to be  outstanding  for the
     purpose of computing the ownership  percentage of any other person shown in
     the table.  On the Record Date, the date as of which these  percentages are
     calculated,  there  were  7,832,997  shares  of  Common  Stock  issued  and
     outstanding.
(3)  Includes 400,000 shares of Common Stock issuable upon the exercise of stock
     options  (385,000 of which were granted outside of the Stock Option Plan by
     Mr. Howells that are exercisable within 60 days. Excludes (i) 40,000 shares
     of Common  Stock  held of record by trusts  with  Jeannie L.  Howells,  the
     former wife of Mr. Howells,  for the benefit of Mr. Howells' children,  and
     (ii) 10,000  shares of Common  Stock  issuable  upon the  exercise of stock
     options which have not yet vested and which are not  exercisable  within 60
     days.
(4)  Includes  46,667 shares of Common Stock issuable upon the exercise of stock
     options by Mr. Kufel that are exercisable within 60 days.  Excludes 393,333
     shares of Common Stock  issuable  upon the exercise of stock  options which
     have not yet vested and which are not exercisable within 60 days.
(5)  Includes  10,000 shares of Common Stock issuable upon the exercise of stock
     options by Mr. Myers that are exercisable within 60 days.
(6)  Includes  15,000 shares of Common Stock issuable upon the exercise of stock
     options by Mr. Pearson that are exercisable within 60 days. Excludes 10,000
     shares of Common Stock  issuable  upon the exercise of stock options by Mr.
     Pearson  which have not yet vested and that are not  exercisable  within 60
     days.
(7)  Includes  25,000 shares of Common Stock issuable upon the exercise of stock
     options  by Mr.  Shenkman  that are  exercisable  within 60 days.  Excludes
     10,000  shares of Common Stock  issuable upon the exercise of stock options
     by Mr.  Shenkman  which have not yet  vested  and that are not  exercisable
     within 60 days.
(8)  Includes  28,333 shares of Common Stock issuable upon the exercise of stock
     options by Mr. Flook that are exercisable within 60 days.  Excludes 131,667
     shares of Common Stock  issuable  upon the exercise of stock  options which
     have not yet vested and which are not exercisable within 60 days.
(9)  Includes  33,333 shares of Common Stock issuable upon the exercise of stock
     options by Mr. Freeze that are exercisable within 60 days. Excludes 191,667
     shares of Common Stock  issuable  upon the exercise of stock  options which
     have not yet vested and which are not exercisable within 60 days.
(10) Includes 400,000 shares of Common Stock issuable upon the exercise of stock
     options (385,000 of which were granted outside of the Stock Option Plan) by
     Mr. Puglisi that are exercisable within 60 days.
(11) Reflects  1,718,094  shares of Common  Stock that would be issued  upon the
     conversion of the 9% Convertible Debentures,  assuming that such conversion
     was effected at the  conversion  price;  25,000 shares of Common Stock that
     would be issued upon  exercise of a warrant;  and  183,263  shares  already
     issued by the Company in lieu of cash  interest for the period  November 1,

                                       25
<PAGE>
     1998 through October 31, 1999. Russell Cleveland exercises control over the
     9% Convertible Debenture owned by Renaissance.
(12) Reflects  shares of Common Stock issued by the Company in  connection  with
     the  acquisition of the Tejas Snacks,  L.P.  business and certain assets in
     November 1998. Thomas G. Bigham and Kevin M. Kohl are the beneficial owners
     of 210,000 and 86,000 shares, respectively.
(13) Reflects  511,020  shares of Common  Stock  that  would be issued  upon the
     conversion of the 9% Convertible Debentures,  assuming that such conversion
     was effected at the conversion price, and 7,143 shares of Common Stock that
     would  be  issued  upon  exercise  of a  warrant.  John  P.  Whaley  is the
     designated  representative  of Wells Fargo and, as such,  exercises control
     over the 9% Convertible Debenture held by Wells Fargo.
(14) Includes (i) 994,866  shares of Common  Stock which are  issuable  upon the
     exercise of stock options that are  exercisable  within 60 days (224,866 of
     which were  granted  pursuant to the Stock Option Plan and 770,000 of which
     were granted outside of the Stock Option Plan).  Excludes 733,134 shares of
     Common Stock issuable upon the exercise of stock options which have not yet
     vested and which are not exercisable within 60 days.

COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

     Paragraph  Section  16(a) of the Exchange Act requires  that the  Company's
directors, executive officers and persons who own more than 10% of the Company's
Common Stock, file with the Commission  initial reports of ownership and reports
of changes in  ownership  of Common  Stock and other  equity  securities  of the
Company.  Officers,  directors and greater than 10% shareholders are required by
Commission  regulation  to furnish the Company with copies of all Section  16(a)
reports they file.  To the  Company's  knowledge,  based solely on review of the
copies of such  reports  furnished  to the Company and written  representations,
during the fiscal  year ended  December  31,  1998,  all  Section  16(a)  filing
requirements  applicable  to  its  officers,  directors  and  greater  than  10%
beneficial  owners were complied with,  except that Renaissance  Capital did not
file in a timely  manner a report  pertaining to its receipt as of February 1998
of a warrant  to  purchase  25,000  shares of Common  Stock.  See  "MANAGEMENT'S
DISCUSSION  AND  ANALYSIS OF RESULTS OF  OPERATIONS  AND  FINANCIAL  CONDITION -
LIQUIDITY AND CAPITAL RESOURCES."

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     From February 1997 to October 1997, a construction company owned by Matthew
Howells, a brother of Mark S. Howells, provided construction management services
to the Company in connection with the Company's Arizona manufacturing  facility.
The Company paid $67,600 for these services.

     As of February 1998, the Company issued warrants to Renaissance Capital and
Wells  Fargo,   the  holders  of  the  Company's  9%   Convertible   Debentures,
representing  the right to  purchase  25,000 and 7,143  shares of the  Company's
Common  Stock,  respectively,  at an  exercise  price of $1.00 per  share.  Each
warrant  became  exercisable  upon  issuance  and  expires on July 1, 2002.  The
warrants were issued in consideration for the waiver by Renaissance  Capital and
Wells Fargo,  through June 30, 1999, of a financial covenant that the Company is
subject to so long as the 9% Convertible Debentures remain outstanding.

     In November 1998, the Company  purchased the business and certain assets of
Tejas. See "BUSINESS - COMPANY  HISTORY." Thomas G. Bigham and Kevin M. Kohl are
beneficial owners of Tejas and, upon the consummation of the transaction, became
executive  officers of the Company.  The Company issued 400,000 shares of Common
Stock to Tejas in  satisfaction  of a portion  of the  consideration  payable to
Tejas.

     In October 1998, Renaissance Capital agreed for the period November 1, 1998
through October 31, 1999, to waive all mandatory  principal  redemption payments
due under the 9%  Convertible  Debentures  held by  Renaissance  Capital  and to
accept 183,263  unregistered  shares of Common Stock in lieu of $154,628 of cash
interest payments.  In consideration for these changes,  the conversion price of
all outstanding 9% Convertible  Debentures was decreased from $1.09 to $1.00 per
share.

                                       26
<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:

EXHIBIT
NUMBER                              DESCRIPTION
------                              -----------
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 by and among
         the  Company,   Poore  Brothers  Arizona,   Inc.  ("PB  Arizona"),   PB
         Distributing,  PB Texas,  PB Southeast,  Renaissance  Capital and Wells
         Fargo. (2)
4.4      9.00%  Convertible  Debenture dated May 31, 1995, issued by the Company
         to Renaissance Capital. (1)
4.5      9.00%  Convertible  Debenture dated May 31, 1995, issued by the Company
         to Wells Fargo. (1)
4.6      Form of Warrant issued as of February 1998 to  Renaissance  Capital and
         Wells Fargo. (5)
4.7      Warrant dated November 4, 1998,  issued by the Company to Norwest.  (6)
10.1     Employment  Agreement dated May 31, 1995, by and between PB Arizona and
         James M. Poore. (1)
10.2     Employment Agreement dated May 20, 1996, by and between the Company and
         Wendell T. Jones. (1)
10.3     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)
10.4     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)
10.5     Non-Qualified  Stock  Option  Agreement  dated  August 1, 1995,  by and
         between the Company and Parris H. Holmes, Jr. (1)
10.6     Form  of  Security   Agreements  dated  May  31,  1995,  by  and  among
         Renaissance  Capital,  Wells Fargo and each of the Company, PB Arizona,
         PB Southeast, PB Texas and PB Distributing. (1)
10.7     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)
10.8     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)
10.9     Equipment  Lease  Agreement  dated December 12, 1995, by and between PB
         Arizona and FINOVA Capital Corporation. (1)
10.10    Guaranty  dated  December  12,  1995,  issued by the  Company to FINOVA
         Capital Corporation. (1)
10.11    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)
10.12    Purchase  Agreement  dated  February 1, 1996, by and between PB Arizona
         and LCA in connection with the LCA Lease Agreement. (1)
10.13    Corporate  Guaranty dated as of February 1, 1996, issued by the Company
         to LCA in connection with LCA Lease Agreement. (1)
10.14    Development  Agreement  dated May 14, 1996,  by and between the Company
         and the City of Goodyear, Arizona. (1)
10.15    Agreement  dated  August 29,  1996,  by and  between  the  Company  and
         Westminster Capital, Inc. ("Westminster"), as amended. (1)
10.16    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)
10.17    Form  of   Independent   Distributor   Agreement   by  and  between  PB
         Distributing and independent distributors. (1)
10.18    Amendment No. 1 dated October 14, 1996, to Warrant dated  September 11,
         1996, issued by the Company to Westminster. (2)
10.19    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)
10.20    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)
10.21    Non-Qualified  Stock Option  Agreement dated as of October 22, 1996, by
         and between the Company and Mark S. Howells. (2)
10.22    Letter  Agreement  dated as of  November  5, 1996,  by and  between the
         Company and Jeffrey J. Puglisi. (2)
10.23    Letter  Agreement  dated as of  November  5, 1996,  by and  between the
         Company and David J. Brennan. (2)
10.24    Stock  Option  Agreement  dated  October 22,  1996,  by and between the
         Company and David J. Brennan. (3)
10.25    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)

                                       27
<PAGE>
10.26    Letter Agreement dated December 4, 1996, by and between the Company and
         Jeffrey J. Puglisi, relating to stock options. (3)
10.27    Letter Agreement dated December 4, 1996, by and between the Company and
         Mark S. Howells, relating to stock options. (3)
10.28    Letter Agreement dated December 4, 1996, by and between the Company and
         Parris H. Holmes, Jr., relating to stock options. (3)
10.29    Letter Agreement dated December 4, 1996, by and between the Company and
         David J. Brennan, relating to stock options. (3)
10.30    Form of Underwriting Agreement entered into on December 6, 1996, by and
         between the Company,  Paradise  Valley  Securities,  Inc.,  Renaissance
         Capital 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.)
10.31    Employment Agreement dated January 24, 1997, by and between the Company
         and Eric J. Kufel. (4)
10.32    First Amendment to Employment  Agreement dated February 2, 1997, by and
         between the Company and David J. Brennan. (4)
10.33    Employment  Agreement  dated  February  14,  1997,  by and  between the
         Company and Glen E. Flook. (4)
10.34    Amendment dated January 28, 1997, amending Employment  Agreement by and
         between the Company and Wendell T. Jones. (4)
10.35    Commercial Real Estate Purchase  Contract and Receipt for Deposit dated
         January 22, 1997, by and between the Company and D.F. Properties,  Inc.
         (4)
10.36    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 three-month  period ended March
         31, 1997.)
10.37    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.)
10.38    Fixed  Rate  Note  dated  June  4,  1997,  by  and  between  La  Cometa
         Properties, Inc. and Morgan Guaranty Trust Company of New York. (5)
10.39    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)
10.40    Guaranty  Agreement  dated June 4, 1997, by and between the Company and
         Morgan Guaranty Trust Company of New York. (5)
10.41    Equipment Lease Agreement dated June 9, 1997, by and between PB Arizona
         and FINOVA Capital Corporation. (5)
10.42    Poore Brothers, Inc. 1995 Stock Option Plan, as amended. (5)
10.43    Separation  Agreement  and Release of All Claims dated August 14, 1998,
         by and between the Company and Scott D. Fullmer. (6)
10.44    Letter  Agreement dated August 18, 1998, by and between the Company and
         Everen. (6)
10.45    Credit and Security  Agreement  dated  October 23, 1998, by and between
         the Company (and certain of its subsidiaries) and Norwest. (6)
10.46    Patent and Trademark  Security Agreement dated October 23, 1998, by and
         between the Company (and certain of its subsidiaries) and Norwest. (6)
10.47    Agreement  for Purchase and Sale of Assets dated  October 29, 1998,  by
         and among the Company, Tejas, Kevin M. Kohl and Thomas G. Bigham. (6)
10.48    Employment  Agreement  dated November 12, 1998, by and between Tejas PB
         Distributing, Inc. and Thomas G. Bigham. (6)
10.49    Employment  Agreement  dated November 12, 1998, by and between Tejas PB
         Distributing, Inc. and Kevin M. Kohl. (6)
21.1     List of Subsidiaries of the Company. (7)
27.1     Financial Data Schedule for 1998. (7)
----------
(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.

                                       28
<PAGE>
(5)  Incorporated by reference to the Company's  Quarterly Report on Form 10-QSB
     for the three-month period ended June 30, 1997.
(6)  Incorporated by reference to the Company's  Quarterly Report on Form 10-QSB
     for the three-month period ended September 30, 1998.
(7)  Filed herewith.

     (b) Reports on Form 8-K.

     None.

                                       29
<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, 1999

                                        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.

          SIGNATURE                      TITLE                         DATE
          ---------                      -----                         ----

/s/ Eric J. Kufel             President, Chief Executive          March 30, 1999
------------------------      Officer, and Director
     Eric J. Kufel            (Principal Executive Officer)

/s/ Thomas W. Freeze          Vice President, Chief Financial     March 30, 1999
------------------------      Officer, Treasurer and Secretary
    Thomas W. Freeze          (Principal Financial Officer and
                              Principal Accounting Officer)


/s/ Mark S. Howells           Chairman, Director                  March 30, 1999
------------------------
    Mark S. Howells

/s/ James W. Myers            Director                            March 30, 1999
------------------------
    James W. Myers

/s/ Robert C. Pearson         Director                            March 30, 1999
------------------------
    Robert C. Pearson

/s/ Aaron M. Shenkman         Director                            March 30, 1999
------------------------
    Aaron M. Shenkman

                                       30
<PAGE>
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Poore Brothers, Inc.

We have audited the accompanying  consolidated balance sheets of Poore Brothers,
Inc. (a Delaware corporation) and subsidiaries as of December 31, 1998 and 1997,
and the related consolidated statements of operations, shareholders' equity, and
cash flows for the years 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 audits.

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

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


                                                        /s/  ARTHUR ANDERSEN LLP

                                                        ARTHUR ANDERSEN LLP

Phoenix, Arizona,
  February 18, 1999.

                                       31
<PAGE>
                      POORE BROTHERS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

                                                            DECEMBER 31,
                                                    ----------------------------
                                                        1998           1997
                                                        ----           ----
                                     ASSETS
 Current assets:
   Cash and cash equivalents ...................   $    270,295    $  1,622,751
   Accounts receivable, net of allowance of
     $24,000 in 1998 and $174,000 in 1997 ......      1,712,955       1,528,318
   Note receivable .............................             --          78,414
   Inventories .................................        465,038         473,025
   Other current assets ........................        281,994         175,274
                                                   ------------    ------------
     Total current assets ......................      2,730,282       3,877,782

 Property and equipment, net ...................      6,270,374       6,602,435
 Intangible assets, net ........................      3,723,906       2,294,324
 Other assets, net .............................        214,327         100,673
                                                   ------------    ------------
     Total assets ..............................   $ 12,938,889    $ 12,875,214
                                                   ============    ============

                      LIABILITIES AND SHAREHOLDERS' EQUITY
 Current liabilities:
   Accounts payable ............................   $    870,204    $    824,129
   Accrued liabilities .........................        439,404         502,793
   Current portion of long-term debt ...........        652,519       1,127,217
                                                   ------------    ------------
     Total current liabilities .................      1,962,127       2,454,139

 Long-term debt, less current portion ..........      5,720,247       5,017,724
                                                   ------------    ------------
     Total liabilities .........................      7,682,374       7,471,863
                                                   ------------    ------------
 Commitments and contingencies

Shareholders' equity:
 Preferred stock, $100 par value; 50,000
  shares authorized; no shares issued or
  outstanding at December 31, 1998 and
  1997, respectively ...........................             --              --
 Common stock, $.01 par value; 15,000,000
  shares authorized; 7,832,997 and 7,051,657
  shares issued and outstanding at
  December 31, 1998 and 1997, respectively .....         78,329          70,516
 Additional paid-in capital ....................     11,514,210      10,794,768
 Accumulated deficit ...........................     (6,336,024)     (5,461,933)
                                                   ------------    ------------
     Total shareholders' equity ................      5,256,515       5,403,351
                                                   ------------    ------------
     Total liabilities and shareholders'
       equity ..................................   $ 12,938,889    $ 12,875,214
                                                   ============    ============

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

                                       32
<PAGE>
                      POORE BROTHERS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS


                                                     YEARS ENDED DECEMBER 31,
                                                   -----------------------------
                                                        1998           1997
                                                        ----           ----

Net sales ......................................   $ 13,167,993    $ 15,731,796

Cost of sales ..................................      9,923,890      13,709,979
                                                   ------------    ------------

     Gross profit ..............................      3,244,103       2,021,817

Selling, general and administrative expenses ...      3,603,156       3,982,428

Closing of Tennessee manufacturing operation ...             --         581,492

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

     Operating loss ............................       (359,053)     (2,706,486)
                                                   ------------    ------------

Interest income ................................         46,371         128,205

Interest expense ...............................       (561,409)       (455,816)
                                                   ------------    ------------
                                                       (515,038)       (327,611)
                                                   ------------    ------------
     Net loss ..................................   $   (874,091)   $ (3,034,097)
                                                   ============    ============

Net loss per common share:
    Basic ......................................   $      (0.12)   $      (0.43)
                                                   ============    ============
    Diluted ....................................   $      (0.12)   $      (0.43)
                                                   ============    ============

Weighted average number of common shares:
    Basic ......................................      7,210,810       7,018,324
                                                   ============    ============
    Diluted ....................................      7,210,810       7,018,324
                                                   ============    ============

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

                                       33
<PAGE>
                      POORE BROTHERS, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>

                                         COMMON STOCK       ADDITIONAL
                                     -------------------     PAID-IN     ACCUMULATED
                                       SHARES    AMOUNT      CAPITAL       DEFICIT         TOTAL
                                       ------    ------      -------       -------         -----
<S>                                  <C>         <C>       <C>           <C>            <C>
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
  Exercise of common stock 
   options .......................      75,000       750        80,366            --         81,116
  Issuance of financing warrants .          --        --        48,703            --         48,703
  Issuance of common stock .......     706,340     7,063       590,373            --        597,436
  Net loss .......................          --        --            --      (874,091)      (874,091)
                                     ---------   -------   -----------   -----------    -----------
Balance, December 31, 1998 .......   7,832,997   $78,329   $11,514,210   $(6,336,024)   $ 5,256,515
                                     =========   =======   ===========   ===========    ===========
</TABLE>

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

                                       34
<PAGE>
                      POORE BROTHERS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                       YEARS ENDED DECEMBER 31,
                                                     ---------------------------
                                                         1998           1997
                                                         ----           ----
CASH FLOWS USED IN OPERATING ACTIVITIES:
 Net loss ........................................   $  (874,091)   $(3,034,097)
 Adjustments to reconcile net loss to net
  cash used in operating activities:
   Depreciation ..................................       580,674        409,962
   Amortization ..................................       248,490        175,907
   Bad debt expense ..............................        79,000         72,489
   Loss on disposition of businesses .............            --        478,377
   Change in operating assets and liabilities,
    net of effect of business acquired:
     Accounts receivable .........................      (263,637)       253,718
     Note receivable .............................        78,414             --
     Inventories .................................        37,790        233,456
     Other assets and liabilities ................        22,067        (37,518)
     Accounts payable and accrued liabilities ....       (17,314)      (616,580)
                                                     -----------    -----------
       Net cash used in operating activities .....      (108,607)    (2,064,286)
                                                     -----------    -----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
 Proceeds from sale of equipment and property ....        27,267        773,309
 Purchase of property and equipment ..............      (225,780)    (2,950,812)
 Acquisition of Tejas Snacks assets ..............    (1,251,564)            --
 Sale of Texas distribution business .............            --         78,414
                                                     -----------    -----------
   Net cash used in investing activities .........    (1,450,077)    (2,099,089)
                                                     -----------    -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
 Proceeds from issuance of common stock ..........        81,116      1,253,431
 Stock and debt issuance costs ...................      (102,713)      (157,575)
 Proceeds from issuance of debt ..................       500,000      1,734,627
 Sale of restricted certificate of deposit .......            --      1,250,000
 Payments made on long-term debt .................      (533,091)    (2,133,034)
 Net increase in working capital line of credit ..       260,916        234,827
                                                     -----------    -----------
   Net cash provided by financing activities .....       206,228      2,182,276
                                                     -----------    -----------

   Net decrease in cash and cash equivalents .....    (1,352,456)    (1,981,099)
   Cash and cash equivalents at beginning of year      1,622,751      3,603,850
                                                     -----------    -----------
   Cash and cash equivalents at end of year ......   $   270,295    $ 1,622,751
                                                     ===========    ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 Cash paid during the year for interest,
   net of amounts capitalized ....................   $   539,843    $   474,648
 Summary of noncash investing and financing
   activities:
     Financing warrants issued ...................        48,703             --
     Common stock issued for acquisition
       of Tejas Snacks assets ....................       450,000             --
     Common stock issued in lieu of interest
       payments ..................................       154,629             --
     Capital lease obligation incurred -
       equipment acquisition .....................            --        100,077
     Construction loan for new facility ..........            --        998,746
     Mortgage impounds for interest, taxes
       and insurance .............................            --         35,990
     Note received for sale of Texas distribution
       business ..................................            --         78,414

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

                                       35
<PAGE>
                      POORE BROTHERS, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED 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.  The exchange transaction with PB Southeast was 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
also  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").  Subsequently,  the Company acquired the remaining
20% equity interest in PB Texas.  These  businesses had no common ownership with
the Company and therefore these  acquisitions were accounted for as purchases in
accordance with Accounting Principals Board ("APB") Opinion No. 16. Accordingly,
only the  results  of their  operations  subsequent  to  acquisition  have  been
included in the Company's results.

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

     On November 5, 1998,  the Company  acquired the business and certain assets
(including the Bob's Texas Style(TM)  potato chips brand) of Tejas Snacks,  L.P.
("Tejas"), a Texas-based potato chip manufacturer. See Note 2.

BUSINESS OBJECTIVES, RISKS AND PLANS

     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 brands of batch-cooked
potato chips under the Poore  Brothers(R) and Bob's Texas Style(TM) potato chips
brand names,  manufactures  private label potato chips for grocery store chains,
and distributes and  merchandises  snack food products that are  manufactured by
others.   The  Company's   business  objective  is  to  be  a  leading  regional
manufacturer,  marketer and  distributor  of premium  branded and private  label
potato chips and other salty snack foods by providing  high quality  products at
competitive prices that are superior in taste, texture, flavor variety and brand
personality to comparable  products.  The Company's  philosophy is to compete in
the market niches not served by the dominant national  competition.  The Company
plans to achieve growth in  manufactured  product sales by acquiring other snack
food brands and increasing sales of existing products. In addition,  the Company
plans to increase  distribution  and  merchandising  revenues,  and  continue to
improve its manufacturing capacity utilization.

     Although  certain of the Company's  subsidiaries  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 the Company's unprofitable
distribution   business  in  Texas,   closure  of  its  unprofitable   Tennessee
manufacturing  operation (see Note 3) and the consolidation of all manufacturing
operations into its newly  constructed  modern  manufacturing  facility with new
processing and packaging equipment to improve manufacturing efficiencies.  These
actions 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 the  Company's  Texas
distribution business.

     The acquisition of the Bob's Texas Style(TM) brand potato chips business in
November  1998 and the  addition  of that  production  volume  has  assisted  in
lowering unit costs of the Company's  manufactured  products. As a result of the
1997 restructuring  actions and the 1998 acquisition,  management  believes that
the Company will  generate  positive cash flow from  operations in 1999,  which,
along with its existing working capital and borrowing facilities,  should enable
the Company to meet its operating cash requirements through 1999.

                                       36
<PAGE>
                      POORE BROTHERS, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED 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  wholly  owned  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,  1998  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.

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, 1998 and
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.

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 of the Company's  Goodyear,  Arizona facility in 1997,
the Company  capitalized  interest in  accordance  with  Statement  of Financial
Accounting   Standards  (SFAS)  No.  34,   "Capitalization  of  Interest  Cost."
Capitalized  interest totaled $30,492 during 1997. Total interest costs incurred
were $561,409 and $486,308 during 1998 and 1997, respectively.

INTANGIBLE ASSETS

     Organization  costs  are  recorded  at cost  and are  amortized  using  the
straight-line  method over a five-year period.  Total  organizational  costs are
$257,051 at December 31, 1998 and 1997. Accumulated amortization is $185,420 and
$133,988  at  December  31,  1998 and 1997,  respectively.  In  accordance  with
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities," the
unamortized portion of organizational costs totaling $71,631 must be expensed in
the first quarter of 1999.

                                       37
<PAGE>
                      POORE BROTHERS, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

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

INTANGIBLE ASSETS (CONTINUED)

     Goodwill is recorded at cost and amortized using the  straight-line  method
over a twenty-year  period.  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 flows. Total goodwill was $2,608,742 and $2,487,080 at
December 31, 1998 and 1997,  respectively,  including $121,662 from the November
1998 Tejas acquisition (see Note 2).  Accumulated  amortization was $445,356 and
$315,819 at December 31, 1998 and 1997, respectively.

     Trademarks are recorded at cost and are amortized  using the  straight-line
method over a fifteen-year period. The Company allocated $1,500,000 of the Tejas
purchase price to trademarks.  Accumulated  amortization was $11,111 at December
31, 1998.

REVENUE RECOGNITION

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

ADVERTISING COSTS

     The Company  expenses  production  costs of advertising  the first time the
advertising  takes place,  except for  cooperative  advertising  costs which are
accrued and expensed when the related  sales are  recognized.  Costs  associated
with obtaining shelf space (i.e.,  "slotting  fees") are expensed in the year in
which  such  costs  are  incurred  by the  Company.  Advertising  expenses  were
approximately $469,000 and $345,000 in 1998 and 1997, respectively.

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

     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 to be exercised for purposes of calculating  diluted
earning  per  share  for  the  years  1998  and  1997,   as  their   effect  was
anti-dilutive.

                                                    YEARS ENDED DECEMBER 31,
                                                 -----------------------------
                                                    1998             1997
                                                    ----             ----
Basic loss per share:
  Loss available to common shareholders ....     $  (874,091)     $(3,034,097)
  Weighted average common shares ...........       7,210,810        7,018,324
                                                 -----------      -----------
     Loss per share - basic ................     $     (0.12)     $     (0.43)
                                                 ===========      ===========
Diluted loss per share:
  Loss available to common shareholders ....     $  (874,091)     $(3,034,097)
  Weighted average common shares ...........       7,210,810        7,018,324
  Common stock equivalents .................              --               --
                                                 -----------      -----------
     Loss per share - diluted ..............     $     (0.12)     $     (0.43)
                                                 ===========      ===========

                                       38
<PAGE>
                      POORE BROTHERS, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

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

NEW ACCOUNTING PRONOUNCEMENTS

     SFAS No.  133,  "Accounting  for  Derivative  Instruments  and for  Hedging
Activities",  was issued in July 1998 and is effective for years beginning after
June 15, 1999.  SFAS No. 133 requires  that a company  must  formally  document,
designate  and assess the  effectiveness  of  transactions  that  receive  hedge
accounting.  Upon  adoption in the first  quarter of 2000,  the Company  expects
there will be no impact on its financial condition or results of operations.

2. ACQUISITION

     On November 5, 1998,  the Company  acquired the business and certain assets
of Tejas Snacks,  L. P., a  Texas-based  potato chip  manufacturer.  The assets,
which were  acquired  through a newly  formed  wholly  owned  subsidiary  of the
Company, Tejas PB Distributing,  Inc., included the Bob's Texas Style(TM) potato
chips  trademark,  inventories  and certain capital  equipment.  In exchange for
these assets,  the Company  issued 523,077  unregistered  shares of Common Stock
with a fair  value  of  $450,000  and paid  $1.25  million  in cash,  or a total
purchase price of $1.7 million.  The Company utilized  available cash as well as
funds  available  pursuant to the Norwest  Credit  Agreement to satisfy the cash
portion of the consideration.  Tejas had sales of approximately $2.8 million for
the nine months ended  September 30, 1998. In connection  with the  acquisition,
the Company  transferred  production of the Bob's Texas  Style(TM)  brand potato
chips to its Arizona  facility.  The  acquisition  was  accounted  for using the
purchase   method  of  accounting  in  accordance   with  APB  Opinion  No.  16.
Accordingly,  only the results of operations  subsequent to the acquisition date
have been included in the Company's results. In connection with the acquisition,
the  Company  recorded  goodwill  of  $121,662,  which is being  amortized  on a
straight-line basis over a twenty-year period.

3. RESTRUCTURING ACTIONS

     Effective June 1, 1997, the Company sold its Texas distribution business to
Mr.  David  Hecht  ("Hecht"),  pursuant  to an  Asset  Purchase,  Licensing  and
Distribution  Agreement (the "Agreement").  Under the Agreement,  Hecht 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 Hecht in cash at the closing and 50% of which was to be
paid  pursuant to a one year,  non-interest  bearing  promissory  note issued by
Hecht to the Company (paid in May 1998). As a result,  the PB Texas distribution
operation  has been  dissolved.  The  Company  incurred  one-time  restructuring
charges of approximately $164,000 related to the sale, including 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 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 the 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 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  represented  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, a $162,000 State of Tennessee Commercial  Development
Block Grant was paid off using working capital in January 1998.

     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.

                                       39
<PAGE>
                      POORE BROTHERS, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

4. RESTRUCTURING ACTIONS: (CONTINUED)

                       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)
                                                    ===========     ===========
4. 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
$106,165 and $542,957 at December 31, 1998 and 1997, 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.  The Company buys back trade accounts
receivable of  Arizona-based  retailers from its  distributors  in settlement of
their obligations to the Company.

5. INVENTORIES:

     Inventories consisted of the following:

                                                         DECEMBER 31,
                                                 --------------------------
                                                   1998              1997
                                                   ----              ----
     Finished goods .........................    $193,624          $226,298
     Raw materials ..........................     271,414           246,727
                                                 --------          --------
                                                 $465,038          $473,025
                                                 ========          ========
6. PROPERTY AND EQUIPMENT:

     Property and equipment consisted of the following:

                                                         DECEMBER 31,
                                               -----------------------------
                                                   1998              1997
                                                   ----              ----
     Buildings and improvements ............   $ 3,430,572       $ 3,378,988
     Equipment .............................     3,490,140         3,296,134
     Land ..................................       272,006           272,006
     Vehicles ..............................        75,376            81,333
     Furniture and office equipment ........       204,432           207,242
                                               -----------       -----------
                                                 7,472,526         7,235,703
                                               -----------       -----------
     Less accumulated depreciation
       and amortization ....................    (1,202,152)         (633,268)
                                               -----------       -----------
                                               $ 6,270,374       $ 6,602,435
                                               ===========       ===========

     Depreciation   expense  was   $580,674  and  $409,962  in  1998  and  1997,
respectively.

                                       40
<PAGE>
                      POORE BROTHERS, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

6. PROPERTY AND EQUIPMENT: (CONTINUED)

     Included in equipment are assets held under capital leases with an original
cost of $1,315,657 at December 31, 1998 and 1997 and accumulated amortization of
$407,756 and $162,126 at December 31, 1998 and 1997, respectively.

     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.

7. LONG-TERM DEBT:

     Long-term debt consisted of the following:

                                                             DECEMBER 31,
                                                      -------------------------
                                                       1998            1997
                                                       ----            ----
     Convertible Debentures due in monthly
       installments through July 1, 2002; interest
       at 9%; collateralized by land, buildings,
       equipment and intangibles .................... $ 2,229,114   $ 2,299,591
     Term loan due in monthly installments
       through May 1, 2000; interest at prime
       rate plus 3% (10.75% at December 31, 1998);
       collateralized by accounts receivable,
       inventories, equipment and general
       intangibles ..................................     472,222            --
     Working capital line of credit due November 4,
       2001; interest at prime rate plus 1.50%
       (9.25% at December 31, 1998); collateralized
       by accounts receivable, inventories, equipment
       and general intangibles ......................     847,013            --
     Working capital line of credit; paid in full
       in 1998 ......................................          --       586,097
     Notes payable; paid in full in 1998 ............          --       162,201
     Mortgage loan due in monthly installments
       through July 2012; interest at 9.03%;
       collateralized by land and building ..........   1,965,921     1,989,147
     Capital lease obligations due in monthly
       installments through 2002; interest rates
       ranging from 8.19% to 11.3%; collateralized
       by equipment .................................     858,496     1,107,905
                                                      -----------   -----------
                                                        6,372,766     6,144,941
     Less current portion ...........................    (652,519)   (1,127,217)
                                                      -----------   -----------
                                                      $ 5,720,247   $ 5,017,724
                                                      ===========   ===========

    Annual maturities of long-term debt are as follows:

                                                           DECEMBER 31, 1998
                                                           -----------------
              1999...................................         $   652,519
              2000...................................             650,984
              2001...................................           1,310,475
              2002...................................           1,909,790
              2003...................................              36,419
              Thereafter.............................           1,812,579
                                                              -----------
                                                              $ 6,372,766
                                                              ===========

     On June 4, 1997,  the Company  refinanced  the balance of the  construction
loan ($998,746) for its Goodyear, Arizona facility with permanent financing. The
permanent financing, provided by Morgan Guaranty Trust Company of New York, is a
$2.0 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 8).

                                       41
<PAGE>
                      POORE BROTHERS, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

7. LONG-TERM DEBT: (CONTINUED)

     At December 31, 1998, the Company had outstanding 9% Convertible Debentures
due July 1, 2002 in the  principal  amount  of  $2,229,114.  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 November 1999 through June 2002. For the period November 1,
1998 through October 31, 1999,  Renaissance Capital (the holder of $1,718,094 of
9% Convertible  Debentures) agreed to waive all mandatory  principal  redemption
payments and to accept 183,263 unregistered shares of the Company's Common Stock
in lieu of cash interest payments.  As of December 31, 1998, 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 1.0:1(actual of .92:1).  However,  the holders of the
9% Convertible Debentures had previously granted the Company a waiver as to such
financial  ratio  effective  through June 30,  1999.  As  consideration  for the
granting of such  waiver,  as of February  1998 the Company  issued  warrants to
Renaissance  Capital  and  Wells  Fargo,  the  holders  of  the  9%  Convertible
Debentures,  representing  the right to purchase  25,000 and 7,143 shares of the
Company's Common Stock,  respectively,  at an exercise price of $1.00 per share.
Each warrant  became  exercisable  upon issuance and expires on July 1, 2002. In
the 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 Company is currently
in compliance with the other financial  ratios,  including working capital of at
least  $500,000;  a minimum of $4,500,000  shareholders'  equity;  and a current
ratio at the end of any fiscal  quarter of at least 1.1:1.  Management  believes
that the  achievement  of the  Company's  plans and  objectives  will enable the
Company to attain a sufficient  level of  profitability to be in compliance with
the financial ratios. 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.  Any  acceleration  under the 9% Convertible
Debentures prior to their maturity on July 1, 2002 could have a material adverse
effect upon the Company.

     On November 4, 1998, the Company signed the new $2.5 million Norwest Credit
Agreement  which  includes a $2.0  million  working  capital line of credit (the
"Norwest  Line of  Credit")  and a $0.5  million  term loan (the  "Norwest  Term
Loan").  Borrowings under the Norwest Credit Agreement have been used to pay off
borrowings  under the Company's  $1,000,000  Line of Credit with First Community
Financial  Corporation,  to finance a portion of the  consideration  paid by the
Company  in  connection  with the Tejas  acquisition,  and for  general  working
capital  needs.  The Norwest Line of Credit bears  interest at an annual rate of
prime plus 1.5% and matures in November  2001 while the Norwest  Term Loan bears
interest  at an annual  rate of prime  plus 3% and  requires  monthly  principal
payments of approximately $28,000, plus interest, until maturity on May 1, 2000.
The Norwest Line of Credit is secured by receivables, inventories, equipment and
general  intangibles.  Borrowings  under the Norwest Line of Credit are based on
85% of eligible receivables and 60% of eligible inventories.  As of December 31,
1998, the Company had a borrowing  base of  approximately  $1,374,000  under the
Norwest Line of Credit.  The Norwest Credit Agreement requires the Company to be
in compliance with certain  financial  performance  criteria,  including minimum
debt service coverage ratio, minimum quarterly and annual operating results, and
minimum  quarterly and annual  changes in book net worth.  At December 31, 1998,
the Company was not in compliance  with a maximum  quarterly net loss limitation
of $50,000  (actual net loss of $146,366)  and a minimum  debt service  coverage
ratio  requirement  of not less than  0.50 to 1 (actual  of 0.30 to 1) under the
Norwest Credit  Agreement.  Such  non-compliance  has not to date resulted in an
event of default under the Norwest Credit Agreement  because Norwest granted the
Company a waiver for the period ended December 31, 1998 and agreed to modify the
financial ratio  requirements for future periods.  Management  believes that the
fulfillment  of the Company's  plans and  objectives  will enable the Company to
attain  a  sufficient  level  of  profitability  to be in  compliance  with  the
financial  performance  criteria;  however,  there can be no assurance  that the
Company will attain any such profitability or be in compliance. Any acceleration
under the Norwest Credit Agreement could have a material adverse effect upon the
Company.  As of December 31, 1998, there was an outstanding  balance of $847,013
on the Norwest Line of Credit and $472,222 on the Norwest Term Loan. On November
4, 1998,  pursuant to the terms of the  Norwest  Credit  Agreement,  the Company
issued to Norwest a warrant (the "Norwest Warrant") to purchase 50,000 shares of
Common Stock for an exercise price of $0.93375 per share. The Norwest Warrant is
exercisable  until  November  3, 2003,  the date of  termination  of the Norwest
Warrant,   and  provides  the  holder  thereof   certain  demand  and  piggyback
registration rights.

     The  Company's  $1.0  million  working  capital  line of credit  from First
Community  Financial  Corporation was renewed as of May 31, 1998 for a six-month
period.  In November 1998, the outstanding  balance was paid off from borrowings
under the Norwest Credit Agreement.

                                       42
<PAGE>
                      POORE BROTHERS, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

8. COMMITMENTS AND CONTINGENCIES:

    Rental expense under operating leases was $34,632 for each of the years 1998
and 1997.  Minimum future rental commitments under  non-cancelable  leases as of
December 31, 1998 are as follows:

                                         CAPITAL     OPERATING
                                         LEASES       LEASES        TOTAL
                                         ------       ------        -----
     1999 ............................  $ 328,862     $34,632    $  363,494
     2000 ............................    307,410      25,974       333,384
     2001 ............................    230,837          --       230,837
     2002 ............................    131,309          --       131,309
                                          -------     -------    ----------
     Total ...........................    998,418     $60,606    $1,059,024
                                                      =======    ==========
     Less amount representing 
       interest.......................   (139,922)
                                        ---------
     Present value ...................  $ 858,496
                                        =========

9. CAPITAL STOCK:.

     In January 1997,  the Company sold 337,500  shares of Common Stock pursuant
to an  over-allotment  option  granted to the  underwriter of its initial public
offering in December 1996. 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.

     The Company's 9% Convertible  Debentures (see Note 7) are convertible  into
2,229,114  shares  of Common  Stock at a  conversion  price of $1.00 per  share,
subject to anti-dilution adjustments.

     In connection with the Company's  facility  construction  loan in September
1996,  an  independent  investor  provided  collateral.   As  consideration  for
providing the 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.  Certain other
warrants have been issued in connection with financings (see Note 7).

     As of August 19, 1998, the Company  issued a warrant to Everen  Securities,
Inc, the Company's acquisitions and financial advisor, representing the right to
purchase  296,155  unregistered  shares of Common Stock at an exercise  price of
$.875 per share and  expiring in August  2003.  The warrant  provides the holder
thereof certain anti-dilution and piggyback  registration rights. The warrant is
exercisable  as to 50% of the shares when the  Company's  pro forma annual sales
reach $50  million  and as to the  remaining  50% when the  Company's  pro forma
annual sales reach $100 million.

10. 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 years.  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. At December 31,
1998,  outstanding  options have exercise prices ranging from $1.08 to $3.94 per
share.

                                       43
<PAGE>
                      POORE BROTHERS, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

10. STOCK OPTIONS: (CONTINUED)

     During 1997 and 1998, 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, 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
           Granted...................    855,400          1.18             --
           Canceled..................   (625,334)         3.20             --
           Exercised.................    (75,000)         1.08             --
                                       ---------                      -------
      Balance, December 31, 1998.....  1,222,684          1.66        820,000           1.18
                                       =========                      =======
</TABLE>
     At December 31, 1998,  outstanding Plan options had exercise prices ranging
from $1.01 to $3.88 and a weighted  average  remaining  term of 4.0 years.  Plan
options  that were  exercisable  at December  31, 1998  totaled  330,650  with a
weighted  average  exercise price per share of $2.47.  All Non-Plan options were
exercisable at December 31, 1998 and had an average remaining term of 6.5 years.

     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.

     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  1998
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:

                                              YEARS ENDED DECEMBER 31,
                                              ------------------------
                                                1998          1997
                                                ----          ----
     Net loss - as reported .............   $  (874,091)   $(3,034,097)
     Net loss - pro forma ...............    (1,163,000)    (3,438,253)
     Basic net loss per share of
       common stock - as reported .......         (0.12)         (0.43)
     Basic net loss per share of
       common stock - pro forma .........         (0.16)         (0.49)

     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  121%  and  72%;
risk-free  interest rate of 4.93% and 6.20%;  and expected  lives of 3 years for
1998 and 1997, respectively.  Under this method, the weighted average fair value
of the  options  granted  was  $.72  and  $1.68  per  share  in 1998  and  1997,
respectively.

                                       44
<PAGE>
                      POORE BROTHERS, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

11. INCOME TAXES:

     There was no current or  deferred  benefit  for income  taxes for the years
ended December 31, 1998 and 1997. 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,
                                              ----------------------------
                                                 1998              1997
                                                 ----              ----
     Benefit at statutory rate ........       $ 297,191        $ 1,031,593
     State income tax, net ............          47,809            158,407
     Valuation allowance ..............        (345,000)        (1,190,000)
                                              =========        ===========
                                              $       0        $         0
                                              =========        ===========

     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,
                                              ----------------------------
                                                 1998              1997
                                                 ----              ----
     Net operating loss carryforward ....     $ 2,215,000      $ 1,830,000
     Bad debt expense ...................          10,000           70,000
     Accrued liabilities ................          30,000           10,000
                                              -----------      -----------
                                                2,255,000        1,910,000
     Valuation allowance ................      (2,255,000)      (1,910,000)
                                              -----------      -----------
          Net deferred tax assets .......     $         0      $         0
                                              ===========      ===========

     At December 31, 1998,  the Company had net operating  losses  available for
federal  and state  income  taxes of  approximately  $5,510,000.  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 No. 109. The Company's  accumulated  net  operating  losses
expire in varying amounts between 2010 and 2018.

12. BUSINESS SEGMENTS AND SIGNIFICANT CUSTOMERS:

     For the year ended December 31, 1998, one Arizona grocery chain customer of
the Company accounted for $2,067,000,  or 16% of the Company's  consolidated net
sales.  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 for the year ended December 31, 1997.

     The Company's operations consist of two segments: manufactured products and
distributed  products.  The manufactured  products segment produces potato chips
for sale to snack food  distributors.  The  distributed  products  segment sells
other snack food  products  manufactured  by other  companies  to the  Company's
Arizona snack food  distributors  and also  merchandises in Texas for a fee, but
does not  purchase  and  resell,  snack food  products  for  manufacturers.  The
Company's reportable segments offer different products and services.  All of the
Company's  revenues are attributable to external  customers in the United States
and all of its assets are located in the United  States.  The  Company  does not
allocate assets based on its reportable segments.

     The accounting  policies of the segments are the same as those described in
the Summary of  Significant  Accounting  Policies (Note 1). The Company does not
allocate selling, general and administrative  expenses,  income taxes or unusual
items to segments and has no significant  non-cash items other than depreciation
and amortization.

                                       45
<PAGE>
                      POORE BROTHERS, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

12. BUSINESS SEGMENTS AND SIGNIFICANT CUSTOMERS: (CONTINUED)

                                         MANUFACTURED  DISTRIBUTED
                                           PRODUCTS     PRODUCTS    CONSOLIDATED
                                           --------     --------    ------------
1998                                                   
----                                                   
Revenues from external customers ......  $10,285,805    $2,882,188   $13,167,993
Depreciation and amortization                          
  included in segment gross profit ....      577,413            --       577,413
Segment gross profit ..................    2,897,374       346,729     3,244,103
                                                       
1997                                                   
----                                                   
Revenues from external customers ......   11,221,088     4,510,709    15,731,797
Depreciation and amortization                          
  included in segment gross profit ....      363,385            --       363,385
Segment gross profit ..................    1,723,547       298,270     2,021,817
                                                     
     The following table reconciles  reportable  segment profit to the Company's
consolidated loss before income taxes:

                                                        1998           1997
                                                        ----           ----
     Segment gross profit .........................  $ 3,244,103    $ 2,021,817
     Unallocated amounts:
       Selling, general and administrative expenses    3,603,156      3,982,428
       Loss on disposition of businesses ..........           --        745,875
       Interest expense, net ......................      515,038        327,611
                                                     -----------    -----------
     Loss before income taxes .....................  $  (874,091)   $(3,034,097)
                                                     ===========    ===========

13. LITIGATION:

     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.  Messrs. Howells and Puglisi and PB Southeast filed a
counterclaim  against Mr. Gossett  alleging various acts of  nonperformance  and
breaches of fiduciary  duty on the part of Mr.  Gossett.  In November  1998, the
lawsuits  were  settled and all claims  dismissed  with  prejudice.  The Company
incurred no expense in the settlement other than its own legal fees.

     In September 1997, a lawsuit was commenced against PB Distributing by Chris
Ivey  and  his  company,  Shelby  and  Associates  (collectively,  "Ivey").  The
complaint alleged,  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 suffered damages of at least
$390,000.  In July 1998,  the Company  settled  the  litigation  with Ivey.  The
$13,000  settlement  included the release of all claims and the dismissal of 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.

14. RELATED PARTIES:

     The  Company  paid  $67,600  to a company  owned by the  brother of Mark S.
Howells, the Company's Chairman, for construction management services related to
the Company's  Goodyear,  Arizona  manufacturing  facility from February 1997 to
October 1997.

                                       46
<PAGE>
                                  EXHIBIT INDEX

21.1   List of subsidiaries of Poore Brothers, Inc.
27.1   Financial Data Schedule for 1998

                                       47