POORE BROTHERS,THE INVENTURE GROUP, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.              Organization and Summary of Significant Accounting Policies:

Poore Brothers,The Inventure Group, Inc., (“the Company”) a Delaware corporation, was formed in 1995 as a holding company to acquire a potato chip manufacturing and distribution business, which had been founded by Donald and James Poore in 1986.

  The Company changed its name from Poore Brothers, Inc. to The Inventure Group, Inc. on April 10, 2006.

In December 1996, the Company completed an initial public offering of its Common Stock.  In November 1998, the Company acquired the business and certain assets (including the Bob’s Texas Style® potato chip brand) of Tejas Snacks, L.P. (“Tejas”), a Texas-based potato chip manufacturer.  In October 1999, the Company acquired Wabash Foods, LLC (“Wabash”) including the Tato Skins®, O’Boisies®, and Pizzarias® trademarks and the Bluffton, Indiana manufacturing operation and assumed all of Wabash Foods’ liabilities.  In June 2000, the Company acquired Boulder Natural Foods, Inc. (“Boulder”) and the Boulder Canyon Natural FoodsTM brand of totally natural potato chips.

In October 2000, the Company launched its T.G.I. Friday’s® brand salted snacks pursuant to a license agreement with TGI Friday’s Inc., which expires in 2014.

In June 2003, the Company launched its Crunch Toons® brand potato snacks, initially featuring characters pursuant to a multi-year license agreement with Warner Bros. Consumer Products.  The Company decided to discontinue the brand in June 2004 and ceased using its license agreements with Warner Bros. Consumer Products.  Future minimum payments remain related to this discontinuance, as disclosed in Note 5 “Brand Discontinuance”.

In April 2005, the Company launched its Cinnabon® brand pursuant to a license agreement with Cinnabon, Inc., the initial term of which expires in 2011. A renewal term for an additional five years exists at the end of the initial term. The Company plans to develop and sell a variety of snack products, including cookies, under the Cinnabon® brand.  However, the Cinnabon® brand hasproducts did not metmeet consumer demand expectations in many channels during its 2005 introduction and the Company is determining future prospects forconsidering terminating the brand.

agreement as disclosed in Note 9 “Special Events”.

In September 2005, the Company signed a licensing agreement with Panda Restaurant Group, Inc. for the development, manufacture and sale of snack food products under the Panda Express® brand name.  The Company is currently determining the viability of test marketing products under the Panda Express® brand name.

Business

The Company is engaged in the development, production, marketing and distribution of innovative snack food products that are sold primarily through grocery retailers, mass merchandisers, club stores, convenience stores and vend distributors across the United States.  The Company currently manufactures and sells nationally T.G.I. Friday’s® brand snacks under license from TGI Friday’s Inc., in addition to distributing Braids and sells nationally Cinnabon® brand snacks under license from Cinnabon, Inc., however, the Company is currently evaluating the Cinnabon® licensed products to determine their future prospects.pretzels.  The Company also currently (i) manufactures and sells regionally its own brands of snack food products, including Poore Brothers®, Bob’s Texas Style®, and Boulder Canyon Natural FoodsTM brand batch-fried potato chips and Tato Skins® brand potato snacks, (ii) manufactures private label potato chips for grocery retail chains in the southwest, and (iii) distributes in Arizona snack food products that are manufactured by others.  The Company sells its T.G.I. Friday’s® brand and Cinnabon® licensed products to mass merchandisers, grocery, club and drug stores directly and to convenience stores and vend operators through independent distributors.  The Company’s other brands are also sold through independent distributors.

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There were no restricted stock awards granted during the threesix months ended AprilJuly 1, 2006 and March 26,June 25, 2005.  All restricted stock awards vest three years from the date of grant. Share-based compensation expense related to restricted stock awards is recognized on the straight-line method over the requisite service period, which is approximately three years.

Future vesting of restricted stock is generally subject to continued employment with the Company. The following table summarizes restricted stock activity during the threesix months ended AprilJuly 1, 2006:

2.Accrued Liabilities:

Accrued liabilities consisted of the following as of AprilJuly 1, 2006 and December 31, 2005:

During the fourth quarter of 2005, the Company announced the departure of two executives and recorded charges consisting of severance and certain other personnel costs.  The amount owed on these two severance agreements was $343,000$204,678 and $491,000 at AprilJuly 1, 2006 and December 31, 2005, respectively, and is included in accrued payroll and payroll taxes above.

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3.              Inventories:

Inventories consisted of the following as of AprilJuly 1, 2006 and December 31, 2005:

During the first quarter of 2006 the Company reversed a $0.3 million pre-tax fourth quarter 2005 Cinnabon® branded product charge associated with slow-moving new product that was subsequently able to be sold in the first quarter of 2006.

4.              Long-Term Debt:

The Company’s Goodyear, Arizona manufacturing distribution and headquartersdistribution facility is subject to a $1.7 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 $16,825 are determined on a twenty-year amortization period.

The Company has a $5.0 million Line of Credit and had a $756,603 Term Loan with U.S. Bancorp (collectively, the “Credit Agreement”).  The Line of Credit bears interest at the prime rate less 0.5% (7.25%(7.75% at AprilJuly 1, 2006) and matures on June 30, 2007.  Interest is due monthly, with the outstanding principal balance due in full at the maturity date.  The Term Loan bears interest at the prime rate (7.75% at April 1, 2006) and matures onAt July 1, 2006. Monthly principal payments of $68,782 plus interest are due under the Term Loan. At April 1, 2006, there was no outstanding balance on the Line of Credit and $0.3 million outstanding on the Term Loan.

Loan was paid in full.

The Credit Agreement is secured by substantially all assets of the Company.  The Company’s obligations under the Credit Agreement are guaranteed by each of its subsidiaries.  The agreement requires the Company to maintain compliance with certain financial covenants, including a minimum tangible net worth, a minimum fixed charge coverage ratio and a minimum current ratio.  At AprilJuly 1, 2006, the Company was in compliance with all covenants of the financial covenants except for the minimum fixed charge coverage ratio.  U.S. Bancorp has waived the compliance shortfall on this ratio and is in the process of modifying the calculation of this ratio to provide a more accurate representation of the Company’s financial condition.  With this modification, the Company would be in compliance with the ratio.  At July 1, 2006, there was no outstanding balance on the Line of Credit or the Term Loan to U.S. Bancorp, therefore there were no payments that could be accelerated under the current U.S. Bancorp Credit Agreement.

12  The Company will be undergoing the process of obtaining a renewal on the line of credit that matures on June 30, 2007.

5.     Brand Discontinuance:             Brand Discontinuance:

On June 11, 2004, the Company discontinued its Crunch Toons® brand.  The Company negotiated amendments to its license agreements with Warner Bros. Consumer Products pursuant to which the Agreements will remain in effect, but will become non-exclusive.  However, because the Company ceased using the Crunch Toons® brand in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”, the Company recorded a liability for the estimated fair value of the remaining guaranteed future minimum payments under the agreements by computing the present value of the future cash payments.

The following table summarizes the activity of the accrued costs related to the brand discontinuance and other liabilities for the quarter ended AprilJuly 1, 2006:

(1)     These amounts are reflected in the Consolidated Balance Sheets as “Current and Non-current portions of accrued costs related to brand discontinuance and other exit cost accruals”.  In accordance with SFAS No. 146, interest accretion was recorded for the period and future royalty payments will be made in accordance with the amended agreements.

6.              Litigation:

The Company is periodically 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, individually and in the aggregate, will not have a material adverse effect on the Company’s financial position or results of operations.

On May 26, 2006, the Company received a Notice of Intent to Sue Under California Proposition 65 from the Environmental Law Foundation (ELF).  This notice was made to the California Attorney General and various other government officials, and to 24 companies including The Inventure Group, Inc. who ELF alleges manufactured, distributed or sold potato chips, crisps and strings that contain acrylamide without providing a clear and reasonable warning to consumers.  Other companies named in the notification include Albertsons, Safeway, Kroger, Costco, Birds Eye and Trader Joe’s. Under California law, proper notice must be made to the State and involved firms at least 60 days before any suit under Proposition 65 may be filed by private litigants like ELF.  The 60-day period expired on July 24, 2006.  On August 8, 2006, ELF filed a complaint against the Company and others in the Superior Court of California for the County of Los Angeles containing allegations similar to those contained in the notice.

7.              Business Segments:

The Company’s operations consist of two segments: manufactured products and distributed products.  The manufactured products segment produces potato chips, potato crisps and potato skins,snack food products, for sale primarily to snack food distributors and retailers.  The distributed products segment sells snack food products manufactured by other companies to the Company’s Arizona snack food distributors.  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 Canada and all of its assets are located in the United States.

The accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies included in Note 1 to the audited financial statements filed with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005.  The Company does not allocate assets, selling, general and administrative expenses, income taxes or other income and expense to its segments.

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The following table reconciles reportable segment gross profit to the Company’s consolidated income before income tax provision.

8.           Income Taxes:

The Company accounts for income taxes using a balance sheet approach whereby deferred tax assets and liabilities are determined based on the differences in financial reporting and income tax basis of assets and liabilities.  The differences are measured using the income tax rate in effect during the year of measurement.

The Company experienced significant net losses in prior fiscal years resulting in a net operating loss (“NOL”) carryforward for federal income tax purposes of approximately $2.3 million at December 31, 2005.  The Company’s NOL will begin to expire in varying amounts between 2010 and 2018.

Generally accepted accounting principles require that a valuation allowance be established when it is more likely than not that all or a portion of a deferred tax asset will not be realized.  Changes in valuation allowances from period to period are included in the tax provision in the period of change.  In determining whether a valuation allowance is required, the Company takes into account all positive and negative evidence with regard to the utilization of a deferred tax asset including our past earnings history, expected future earnings, the character and jurisdiction of such earnings, unsettled circumstances that, if unfavorably resolved, would adversely affect utilization of a deferred tax asset, carryback and carryforward periods, and tax strategies that could potentially enhance the likelihood of realization of a deferred tax asset.  The Company provides for income taxes at a rate equal to the combined federal and state effective rates, which approximated 44%40% under current tax rates.

In June 2006, the FASB issued FIN No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109.” This interpretation clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” This statement sets forth criteria to recognize, derecognize, and measure benefits related to income taxes and establishes disclosure requirements pertaining to uncertainty in income tax assets and liabilities. SFAS No. 109 becomes effective for the Company beginning January 1, 2007. We are still assessing the impact of the adoption of FIN No. 48. However, we do not expect FIN No. 48 to have a material effect on our consolidated financial statements.

149.        Special Events:

  The Company is considering terminating its agreement with Cinnabon®.  In April 2005, the Company launched its Cinnabon® brand pursuant to a license agreement with Cinnabon, Inc.  However, the Cinnabon® brand products did not meet consumer demand expectations in many channels.  Net revenues of Cinnabon® product were $0.5 million for the six months ended July 1, 2006, compared to last year’s second quarter Cinnabon® product net revenues of $2.5 million.  In addition, during 2006, a $0.3 million pre-tax reversal of a fourth quarter 2005 Cinnabon® branded product charge resulted.  This reversal was associated with identified slow-moving new product at 2005 that was subsequently able to be sold in the first quarter of 2006.

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q, 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 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, and Poore Brothers,The Inventure Group, 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 Quarterly Report on Form 10-Q, 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 Quarterly Report on Form 10-Q 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 possibility that the Company will need additional financing due to future 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 strategic acquisitions, potential difficulties resulting from the integration of acquired businesses with the Company’s business, other acquisition-related risks, lack of consumer acceptance of existing and future products, dependence upon key license agreements, dependence upon major customers, 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 SmallCapCapital Market if the Company fails to satisfy the applicable listing criteria (including a minimum share price) in the future and those other risks and uncertainties discussed herein and in the Company’s other periodic reports filed with the Securities and Exchange Commission, 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 Quarterly Report on Form 10-Q will in fact transpire or prove to be accurate.  Readers are cautioned to consider the specific risk factors described herein and in “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005, 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.

Results of Operations

Quarter ended AprilJuly 1, 2006 compared to the quarter ended March 26,June 25, 2005.

Net revenues for the firstsecond quarter of fiscal 2006 were $17.6$18.5 million, 6% abovecompared to last year’s firstsecond quarter net revenues of $16.6$23.1 million.  The Company’s net revenue growthdecline was primarily attributable to T.G.I. Friday’s^® snacks, Boulder Canyon Natural Foods™ snacksa major introductory promotional launch in April 2005 of Cinnabon® branded product.  The Cinnabon® cookie line proved to be unsuccessful and, Cinnabon^® cookies, offset by a slight decline from Poore Brothers® snacks. Overallas such, sales did not repeat in 2006 to the levels of 2005.  Additionally, T.G.I. Friday’s® brand salted snack net revenue, increased 2.3% versuscurrently representing 65% of total net revenue, declined 10% in the firstsecond quarter of 2005fiscal 2006 as compared to $11.6 million,2005.  We expected this decline, which resulted from our greater discipline on new product and trade promotion processes and our conscious decision to repair or 66%exit unprofitable customer relationships.  In the second half of total revenue. The Company’s2006 we anticipate test marketing several new T.G.I. Friday’s® snack brand products.  This focus on the quantity and quality of promotion activity coupled with exiting unprofitable customers also resulted in an overall net revenue decline for our potato chip brands overall rose 5.2% andof 9.5%.  Net revenue from distributed products, however, grew 11.5%4.6% over the prior year. Net revenue generated by our Tato Skins® brand net revenues declined 33.1%22.6% in the firstsecond quarter of 2005,2006 compared to last year’s second quarter net revenues, mostly because of continued cannibalization by the T.G.I. Friday’s® brand and less promotional activity on the brand.

Gross profit for the quarter ended AprilJuly 1, 2006 was $3.1$3.7 million (or 17.6%20.0% of net revenue) compared to $3.4$5.9 million (or 20.5%25.4% of net revenue), in the same quarter of 2005.  Cost of revenues increased from 81.9%74.6% of net revenues last year to 84.8%80.0% this year.  ThisIn last year’s second quarter, the Company’s Cinnabon® brand launch occurred.  Excluding the gross profit of approximately $1.3 million on the Company’s Cinnabon® brand launch in

2005, gross profit would have been approximately $4.6 million, or 22.4% of net revenue.  The remaining increase was duein cost of revenues is primarily to increased trade and promotional allowances, which are deducted from gross revenue, and increased freight expense due to higher fuelfreight costs.

Selling, general and administrative expenses for the quarter ended July 1, 2006 were $2.9 million, or 15.5% of net revenues for the second quarter of 2006 compared to $3.6 million, or 15.5% of net revenues in the same quarter of 2005 as a result of our selling, general and administrative cost reduction efforts.

Net interest income was $63,000 in the second quarter of 2006 compared to $24,000 in the second quarter of 2005 due to higher interest income earned on cash and cash equivalents and improved working capital.

Net income was $0.5 million, or $0.03 per basic and diluted share, compared to net income of $1.4 million, or $0.07 per basic and diluted share last year.

Six months ended July 1, 2006 compared to the six months ended June 25, 2005

For the six months ended July 1, 2006 net revenue decreased 9% to $36.1 million, compared with net revenue of $39.7 million in the first half of the previous year.  Most of the decrease came from factors described above regarding the Cinnabon® product launch, with the potato chip products decreasing 3%, and distributed products up 8%.  We are preparing to test market several new products in the second half of the year, including new T.G.I. Friday’s® brand products, new Boulder Canyon Natural Foods® products and new Poore Brothers® brand products, some of which will be “better-for-you” items.

Gross profit for the six months ended July 1, 2006 was $6.8 million, or 18.8% of net revenues, compared to $9.3 million, or 23.3% of net revenues for the six months ended June 25, 2005.  Excluding the gross profit of approximately $1.3 million on the Company’s Cinnabon® brand launch in 2005, gross profit margins would have been approximately 21.6% for the six months ended June 25, 2005. The remaining increase in cost of revenues is primarily due to higher freight costs offset by a $0.3 million pre-tax reversal of a fourth quarter 2005 Cinnabon® branded product charge associated with slow-moving new product that was subsequently able to be sold in the first quarter of 2006.

Selling, general and administrative expenses were relatively flat at $3.0decreased to $5.9 million, in the first quarter of 2006, as compared to 2005, and decreased from 18.4%or 16.3% of net revenues last year to 17.1% this yearfor the six months ended July 1, 2006 from $6.6 million, or 16.7% of net revenues, for the six months ended June 25, 2005 as a result of higher sales and from implementing selling, general and administrativeour concentrated efforts on cost reduction efforts.

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